Earnings Call: Q3 2019

Oct 30, 2019

Hello, and welcome to the Q3 2019 Dine Brands Global Earnings Conference Call. My name is Sheryl, and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer Please note that this conference call is being recorded. I will now turn the call over to Ken Dipte. Sir, you may begin. Good morning, and welcome to Dine Brands' 3rd quarter conference call. I'm joined by Steve Joyce, CEO Tom Song, CFO Jay Zhang, President of IHOP and John Cywinski, President of Applebee's. Before I turn the call over to Steve, please remember our safe harbor regarding forward looking information. During the call, management may discuss information that is forward looking and involves known and unknown risks, uncertainties and other factors, which can cause the actual results to be different than those expressed or implied. Please evaluate the forward looking information in the context of these factors, which are detailed in today's press release and 10 Q filing. The forward looking statements are as of today and assumes no obligation to update or supplement these statements. We may also refer to certain non GAAP financial measures, which are described in our press release and also available on Dine Brands IR website. With that, I'll turn the call over to Steve. Thank you, Ken. Good morning, everyone, and thank you for joining today's call. I am pleased to report that we've achieved several business and strategic objectives during a challenging quarter for the industry. IHOP's comp sales were slightly positive in the 3rd quarter, while AlphaBees performed in line with the revised expectations that we communicated last quarter. Both brands cycled over strong promotions in Q3 of 2018. Notably, IHOP launched our Ultimate Steakburgers platform last year with a single tweet to imply that we were changing the brand's name to IHOB, and this went viral worldwide. At Applebee's, we brought back our popular all you can eat riblets and chicken tenders and introduced our new 3 course meal, which contributed to the brand's highest quarterly comparative sales increase in over 2 decades. As others have noted, the industry continued to face difficult comparisons, coupled with challenging traffic trends during the quarter this year. Both Jay and John will provide details on the performance of their respective brands a little later. We are pleased to have announced the largest multi unit development deal in IHOP's history. We have plans to develop nearly 100 IHOP restaurants with TravelCenters of America headquartered in Westlake, Ohio, which conducts businesses in 43 states and Canada. Jay will provide further details on this exciting new partnership. Turning to our financial results, adjusted EPS improved compared to the same quarter of 2018. We also continue to see improvement in consolidated adjusted EBITDA, which reflects the stability of our asset light model. Another compelling attribute of our business model is the ability to generate substantial adjusted free cash flow. In the 1st 9 months of 2019, we generated approximately $100,000,000 in free cash flow. G and A, which is an important lever for us, declined approximately 4% compared to the Q3 of last year. We will continue to closely manage our G and A. Since joining Dine Brands as CEO in 2017, we've executed against a multi pronged strategy focused on returning to a growth company. To that end, we've maintained a disciplined focus on those strategies which will drive sustainable positive sales and traffic. These include investing in data analytics and consumer insights to understand our guests better and develop a greater assessment of the competitive landscape operations excellence in our restaurants, which contributed to achieving higher overall guest satisfaction scores between 2017 2019 culinary and menu innovation to provide our guests with a broad array of craveable food at attractive pricing remodel programs, which create a warm and inviting atmosphere in our restaurants strategic development initiatives to expand our domestic footprint in high impact locations growing our off premise business to accommodate the ever changing dining preferences of consumers. We are also leveraging technology enhancements to improve how guests engage with our brands, either in restaurants or off premise. While our progress has produced positive results, we are not complacent. We are committed to working even harder to build insurmountable leads in the categories in which we operate, while strengthening our brands. I would like to highlight that for the 12th consecutive year, IHOP was ranked the number 1 in family dining by Nation's Restaurant News based on domestic system wide sales for 2018. Applebee's also has a long track record of being one of the top ranked casual dining chains. Now let's turn briefly to our Apopeeze franchisees. We've improved the brand's franchisee financial health over the past 2 years, while focusing on enhancing brand relevance and attracting new top tier operators to the system. In fact, 2 of these franchisees currently rank among the top performers in the domestic system. This is a testament to our strategy of evolving the franchise's portfolio by adding highly experienced franchisees. This approach contributed to the overall improvement in comp sales between 2017 and today. As a result, Dine Brands recorded a significantly lower amount of bad debt by the end of the Q3 of 2019 compared to 2 years ago. We continue to closely monitor the health of our franchisees, and we're pleased with the progress that they've made. Tom will provide more color on franchisee financial performance. To close, our franchise model continues to produce strong adjusted free cash flows, and our industry leading brands are well positioned to gain share in a competitive environment. With that, I'll now turn the call over to Tom to discuss the financial we delivered year over year improvements in adjusted EPS and adjusted EBITDA. For the Q3 of 2019, adjusted EPS was $1.55 compared to $1.53 for the same quarter of 2018. The increase in adjusted EPS was due to relative earnings stability and the result of our commitment to return capital to shareholders through share repurchases. I'll provide more color on capital allocation a little later. Turning to our franchise operations, gross profit declined 2.5%, primarily due to a decrease in Applebee's franchise revenues due to fewer effective franchise restaurants, which includes the impact of our acquisition of 69 units, resulting in franchise royalty being replaced with company operated sales. Additionally, a decrease in domestic franchise restaurant comp sales and a decrease in revenue recognized upon cash collection, which did not recur this year, also contributed to the decline in franchise revenue. This decrease was partially offset by growth in IHOP franchise fees. In fact, when looking at Q3 revenue mix, exclude advertising fees and company operated sales, IHOP revenues now constitute 68% of Dine's profit generating revenues. At this time, I would like to provide some insights into franchisee financials. In doing so, I would also emphasize the data that I'm citing does not represent the financial data for Dine. It is primarily based on our comprehensive surveys and data submissions from franchisees, which have not been subjected to independent verification. For Applebee's, we've been tracking both 4 wall and franchisee entity level financial performance. Let's start with 4 wall. When looking at our trends from 2017 to 2018, not surprisingly, we saw an improvement in margins, which were significantly driven by the 5% increase in comps. While cost of goods remained flat approximately 25% for the system, total operating expenses including labor cost decreased slightly for all core wall profits that average starting the low double digit margin range. Importantly, for 2019 performance, AUVs on stores remaining open are slightly stronger than system wide comp performance, up over 1% in the 1st 6 months of 2019 compared to the same period in 2018. Food costs improved slightly in the first half of twenty nineteen versus the same period of last year. However, 4 wall EBITDA margins during this period were down 1% caused almost entirely by the increase in delivery service provider fees paid, but EBITDA margin was still in the low double digit range. As John will note, we have addressed this issue with new contracts with delivery service providers that are designed to make delivery fully profitable for franchisees. Importantly, the market basket for Applebee's cost of goods is expected to be favorable by approximately 2.9% for 2019. With respect to franchisee entity debt leverage, we have seen dramatic improvements since 2017. Looking back, the system averaged 3 times debt to EBITDA historically, but then had significant variability in 2017 and then returned to a more normal range in 2018 with approximately 3.5x average leverage. With respect to IHOP, we have seen very stable four wall profits over the past few years with lower food and lower labor costs when compared to either Applebee's or other full service restaurants. When comparing the first half of twenty nineteen to the same period of 2018, IHOP franchisees actually had higher margins in 2019. The market basket for IHOP's cost of goods is expected to be favorable by approximately 90 basis points for 2019. We continue to work with our franchisees in improving 4 wall profitability, including improving comp sales. Finally, I want to highlight that an industry leading study across all brands shows similar data as our own and when compared to other brands, Applebee's 4 wall profits at the franchisee level are consistent with other national publicly traded brand franchisee margins and IHOP franchisee profits significantly exceed their competitive set of Family Dine franchise brands. Regarding G and A, now back to Dine's own financials. As Steve mentioned, G and A is an important lever for us. Our G and A for the Q3 was 38,900,000 dollars compared to $40,800,000 for the same period last year. The decline year over year was primarily due to lower compensation costs and lower T and E expenses. We will continue to diligently manage our G and A and expect modest growth over the long term consistent with the rate of inflation. Regarding our tax rate, our GAAP effective tax rate for the Q3 of 2019 was 24.6%, flat compared to the same period of last year. Turning to our cash flow statement, one of the advantages of our highly franchised model is the ability to generate stable and strong adjusted free cash flow. For the 1st 9 months of 2019, adjusted free cash flow was $101,000,000 compared to $63,000,000 for the same period of 2018. Consolidated adjusted EBITDA for the Q3 of 2019 was $63,400,000 compared to $62,200,000 for the same quarter of last year. Excluding advertising revenue and company operated results, our adjusted EBITDA margins in the Q3 of 2019 improved to 52.6% from 50.5% for the same quarter of last year. Returning capital to our shareholders remains a top priority. We returned a combined total of $55,000,000 in the 3rd quarter. This was comprised of $12,000,000 of quarterly cash dividend and the repurchase of approximately 524 1,000 shares of our common stock at a total cost of $42,700,000 This amount in the 3rd quarter alone exceeds the $35,000,000 we repurchased in the entirety of 2018. Switching gears to our 2019 financial performance guidance. I would like to highlight some revisions. These updates reflect among other factors, our performance as it evolved during the Q3 and our overall outlook for the Q4 of 2019. Please see our press release for complete details. We now expect Applebee's domestic system wide comparable restaurant sales performance to range between 0% and negative 1%. This compares to previous expectations of between 0% and positive 1.5%. We now expect IHOP's domestic system wide comparable same restaurant sales performance to range between positive 1% and positive 2%. This compares to previous expectations of between positive 1% and positive 3%. We currently expect IHOP franchisees to develop between 10 to 20 net new restaurants globally, the majority of which are expected to be domestic openings. This compares to previous expectations of between 2030. For Applebee's, we now expect net closures to be between 30 40 restaurants globally, the majority of which are expected to be domestic. This compares to previous expectations of between 20 30 units. We now expect adjusted earnings per diluted share to range from $6.75 per share to $7 per share. This compares to previous expectations for a range from $6.80 per share to $7.05 per share. To close, we have led our business through a competitive period in our very own difficult same restaurant sales comparisons. I'm pleased that we've been able to maintain cost and margin discipline with EBITDA guidance remaining unchanged through the course of the year. With that, I'll now turn the call over to John. Thanks, Tom, and good morning, everyone. In line with our expectations, Applebee's posted a 1.6% comp sales decline in Q3 as we lapped our record setting 7.7% increase from last year, the highest comp sales result reported by any restaurant brand in Q3 of 2018. After significantly outperforming the casual dining category on comp sales last year, our 2019 year to date performance is identical to the category average through Q3. With that said, we are expecting a challenging Q4 given our very positive 2017 2018 Q4 comparisons. For context, our Q4 2 year hurdle of +4.8 percent is the highest we've seen since early 2012. These expectations are now reflected in the full year Applebee's guidance that Tom just outlined for you. Now, looking forward, there are 3 important milestones I'd like to highlight for the Apopis brand. First, 2019 marks the completion of our 3 year strategic initiative to close approximately 200 underperforming low volume restaurants With the current base of 1667 U. S. Restaurants, 2020 will bring a normalized closure rate of less than 1% of this base, while we return to selective new unit development towards the end of 2020 and certainly into 2021. Additionally, we've completed 8 franchisee transactions over the past 2 years, representing about 170 restaurants. This portfolio evolution has resulted in the exit of several underperforming operators, while introducing new and deeply experienced franchisees to the Applebee's system, as well as creating growth opportunities for several existing franchisees. Perhaps most importantly, for the first time in 3 years, we have no material royalty predictable income stream as well as a fully funded 4.25 percent marketing plan are coming up here in 2020. These very tangible milestones bode well for our future. It means the Applebee's brand is stronger than it's been in quite some time without the constraints challenges we've had to navigate over the past few years. This optimism was evident in last month's annual franchise conference where we aligned with our partners around our 2020 strategic plan. This plan included our focus on guest satisfaction, value and innovation, off premise excellence and restaurant P and L cost reduction. On the guest satisfaction front, we continue to see consistent progress on core brand attributes such as brand affinity, likely to recommend and likely to visit. We also track the percentage of our guests experiencing a problem. And our franchisees are very proud of the fact that we reduced this important metric from a high of 8.1% at the start of 2017 to an all time low currently of 4.3% very little variability across the system. While value for the money perceptions continue to hold steady for Applebee's, this was a central point of discussion with our franchise partners and you'll see a renewed commitment as I mentioned on our last call to value in our tactical plans moving forward. On the off premise front, Q3 sales were up 13.7% on top of last year's 36.6% increase. Off premise continues to be an important growth engine for Applebee's as we believe we're the best positioned brand in CDR given our youthful demographic profile, our menu variety, value orientation and the fact that we have more locations than anyone else in the category. To Go is currently about 70% of our off premise mix and our franchisees continue to improve restaurant execution around our top two priorities, order accuracy and the order being ready when promised. Delivery represents the balance of our off premise mix with more than 1400 restaurants now offering Applebee's delivery through our website as well as 3rd party delivery through multiple partners. We've also successfully refined our 3rd party delivery contracts to ensure sustainable margins for our franchise partners moving forward. In total, approximately 65% of Applebee's off premise orders are now placed digitally. As I've mentioned previously, catering has been activated nationally as the 3rd component of our off premise business. While currently in its infancy, we believe catering represents a significant incremental sales layer for Applebee's and we plan to begin leveraging this opportunity aggressively in 2020. Shifting to technology. We believe we can meaningfully enhance our test experience by introducing server tablets beginning in 2020 as well. We've been very deliberate and methodical in refining this initiative over time as we established the business case for implementation and partnership with our franchisees. From a guest perspective, there are very clear benefits around speed, attentiveness and engagement. From a server perspective, there are benefits in terms of ease of ordering, enhanced tips and satisfaction. And from an operator perspective, there are meaningful labor savings associated with proper deployment as well as kitchen efficiencies due to a more balanced point of sale order flow. And we've also experienced revenue benefits as all orders, particularly beverages are far more likely to be captured and data entered with server tablets. Bottom line, this is a very contemporary cue for the brand and when we plan to deploy in sequenced fashion throughout 2020 2021 with high cost labor markets first in line to receive. Finally, I'd like to publicly recognize The Rose Group out of Philadelphia for being awarded Applebee's Franchisee of the Year as well as the Doherty Enterprises out of New Jersey and Long Island for being awarded Applebee's Neighbor of the Year. So well deserved. And with that, I'd like to turn it to Jay. Thank you, John. Good morning, everyone. IHOP delivered slightly positive comp sales for the Q3 of 2019, marking the brand's 7th consecutive quarter of positive sales growth. I'm very pleased with this achievement as we are rolling over the very successful launch of Ultimate Steakburger's platform in 2018. The Q3 represents our longest sustained positive sales performance in 3 years and is a direct reflection of the work we've done against our strategy to defend and grow our brand. As stated on prior calls, IHOP has an aggressive growth plan that will continue to build upon for the foreseeable future. Our 4 strategic initiatives continue to serve as our roadmap, each playing a critical role in defending and growing the brand. As a reminder, these are running great restaurants, driving traffic, being where the guest is and reinventing the guest experience. While each strategic initiative is important to IHOP's success, 2 of the 4 are the most critical priorities given the categories, traffic trends and labor challenges that are facing franchisees. Now let me provide some color on the 2 foundational priorities to drive profitable growth. The first is running great restaurants. This encompasses defending our core business. A sharpened focus on operations helps us keep our current guests, drive frequency and attract new guests. At the end of the day, best in class operations comes down to having great talent in our restaurants. Best in class manager training is essential, which is why we rolled out a new certified leader program this year. Through this program, we'll certify more than 2,000 managers by the end of next year. Equally important is simplifying the core menu and our recipes to greatly improve execution in both the front and the back of the house, while also enhancing the experience for our guests, every guest, every day. Finally, we're taking corrective steps to address underperforming restaurants, franchisees and or markets to sustain IHOP's long term viability. Defending our core business is only half of the strategy though. In order to grow the brand, we need to be on the guests' minds and in their path. Everything we do in both the long and short term is about our 2nd foundational priority, driving traffic. There are more than 60,000,000,000 meals up for grabs and we believe there is substantial opportunity to steal share from the competition both within and outside the category. This is an and proposition, which looks to grow traffic both in our restaurants and off premise. One way we plan to do this by having a strong multifaceted value proposition. Abundant value is already a strength for IHOP and that's not going to change. However, we need more. We're continuing to test multiple approaches such as price points and deals during non peak hours to see what resonates with our guests and that are profitable for our franchisees. As part of our continued daypart expansion strategy, we introduced a new Buttermilk Chicken Crispy Chicken menu. For a limited time, we offered a Crispy Chicken and Pancakes Combo for 6.99 dollars This pairing, which gave our guests the ideal combination of abundance and value, boosted chicken sales by over 3 times at our peak and sustained item incidents at double the amount of chicken sold prior to the new menu launch. The brand also marked another song with the introduction of new gluten friendly pancakes along with gluten friendly waffles and a gluten friendly bun for items like our ultimate steak burgers. Gluten friendly menu items are one of the most requested innovations for IHOP and we believe the addition of these new items allow us to reach both current and new guests looking for great tasting quality menu items made without gluten. Switching gears to convenience for our guests. We continue to see solid growth in our to go business in the Q3. This is a key area for continued traffic and sales growth. Off premise comp sales increased approximately 24% in the 3rd quarter, primarily driven by traffic. Today, off premise makes up a little more than 9% of our total sales, an improvement of over 200 basis points compared to the Q3 of 2018. Our immediate goal is to grow our to go business to 15% of sales. Delivery accounts for roughly 1 third of the total off premise sales. We'll also continue to ramp up the number of restaurants offering delivery. Currently that stands over 1400 restaurants participating with at least one delivery service provider. This reflects an increase of 4 times the number of participating restaurants just in the last year. Expanding our sales channels creates additional opportunities to drive traffic, steal share and grow our business. At the very end of Q3, we rolled out IHOP catering in nearly 700 restaurants with another 200 restaurants expected to participate by the end of this year. Learning from the initial launch will continue to refine and grow the platform in 2020. Although it's still in its early stages, we're very optimistic about the potential for this business and provide additional updates in due course as progress is made. Keeping IHOP top of mind for our guests is imperative to drive traffic. Our MyHOP email platform consistently showcases new food and offers to our guests and now includes exclusive experiences. In partnership with A&E Network, we created a tiny IHOP restaurant and offered up a once in a lifetime dining experience for MyHOP members only. We'll continue to find fun, creative ways to drive sign ups for our e mail club, while also deepening our engagement with our current subscribers. More IHOPs in more places is the final push to grow the brand and drive traffic. As Steve mentioned, today we announced a deal with Travel Centers of America to open almost 100 IHOP restaurants and travel centers across the U. S. Over the next 5 years. Guests on the go visiting a TA center will be able to enjoy IHOP's full menu of made to order items in a full service restaurant. The deal with TravelCenters of America marks the single largest IHOP development deal in the brand's 61 year history and supports our larger development plan. To wrap up, I'm pleased with our overall performance. We're executing against our key strategy, our key strategic initiatives, has served as a roadmap for IHOP's growth. The cornerstone of our plan is creating fun, freshly made foods and beverages that delight our guests. Our limited time and core menu innovations paired with strategic value offers are meant to entice guests to enjoy more IHOP more often. Having the right food served in a great environment by outstanding operators is the best way we can defend the brand. To grow the brand, we're focused on significantly improving our lunch, dinner and overnight business, expanding our to go business and building new restaurants. All of this is supported with technology that improves the guest experience and maximizes restaurant efficiency. We are confident in this approach as stated. We are already seeing great results. And with that, I'm going to turn it back over to Steve for closing comments. Thanks, Jade. To recap, we continue to deliver year over year improvement in adjusted EPS and adjusted EBITDA in a challenging environment. Our asset light business model generated significant growth in free cash flow during the 1st 9 months of 2019 compared to the same period last year. This enabled us to return over $125,000,000 to our shareholders through quarterly cash dividend and share repurchases year to date. Both brands remain well positioned to gain share as we execute against multi pronged strategies, which are underpinned by strong value propositions. I couldn't be more confident in the long term plans we have in place to deliver value to our shareholders. Now, we'd be pleased to open up the call for any questions. Operator? Thank you. We will now begin the question and answer Our first question comes from Nick Sinton from Wedbush. Your line is now open. Thank you. And thank you for all the color around the franchisee profitability. I guess, probably the number one question on everyone's mind is, how do we stabilize the comp and improve the comp trend from October? And I guess what are some of the learnings from this year that you could apply to next year to ensure a stable comp in 2020 at Applebee's? Hey Nick, this is John. I referenced a bit of this on our last call. When we met with our franchisees recently in the past few months, we zeroed in on value perceptions and very specifically aggressive value tactics engineered to be profitable, but those that would drive that value seeker to incremental traffic and sales. We're aligned on that moving forward. As I also mentioned, we've kind of pruned up the system. So our underperforming restaurants are out. Our ad fund is whole. Our bad debt is essentially non existent. And you may see in the market a current example of that kind of tactical approach. It's a short term burst here, but our $0.25 win programs would be one example of the program we aligned upon a few months ago with our franchisees. I think on the eye of the side of the business to answer that question, we really as we stated, we want to fill our seats where we have opportunistically areas lunch, dinner, overnight. We're very strong at breakfast. We want to continue that. We'll keep working on breakfast innovation and bringing great new family fun items in our pipeline. And we've got to work on value. And I think value especially to help us fill seats during off peak periods. Was advertising spend at Applebee's up year over year? Because when I kind of do the 3.5% at IHOP and I back into the advertising spend at Applebee's, it seems like year over year it may have been down. And then what's the expectation in Q4 and what's the expectation around ad spend in 2020 relative to 2019? Nick, John again. Q4 is favorable versus year ago. And our kind of back half is a little more favorable than the front half. And so I mentioned we get to a more predictable run rate and operating model here by virtue of the absence of bad debt, the commitment to 4.25% moving forward. You'll see a very balanced quarter to quarter flow of dollars and TRPs in 2020. Hey Nick, this is Tom. Just a couple of details as well. You mentioned the ad fund comparison. While at Applebee's, you did have a 4.25% ad fund rate both last year and this year for Q3. What I want to remind everyone is that in 2018, you had some prior quarter collections for Q3 and Q4 that boosted up both franchise revenues as well as ad fund collections. And so, yes, that was a little bit offset. So you have fewer effective restaurants open. So a couple of puts and takes there. Got it. And then just lastly, what's the plan with the company owned stores going forward? And also when you add back the D and A, what was the 4 wall EBITDA margin in Q3 versus the operating margin that you guys disclosed? Well, let's start with the expected longevity of the ownership. As we said when we bought it, our view was we didn't want to wait and allow those restaurants to continue to deteriorate any further than they had. So we stepped in and quickly bought them and now have moved them up towards the top end of the performance of the system. So our view is, obviously, we're not a long term owner of restaurants. And so as we feel that we've begun to stabilize and those restaurants are in the right position, we'll begin looking for an exit strategy. But the exit strategy would fit with our ongoing reformation of the franchise system, and that is we would want to bring in hopefully high performing new franchisees that are interested in growing with us. So Nick, you can look at our guidance with respect to margins. So what we said was that the EBITDA contribution would be approximately $10,000,000 for the entirety of the year, for the full year. And then G and A was running approximately $6,000,000 above restaurant. And so that kind of implies a profitability a 4 wall profitability that's pretty consistent with the system. And if you kind of think of last year being very tail end of the year, so we're literally talking about December was when the portfolio was acquired by Dine. I think we've been all pleasantly surprised by how quickly we were able to stabilize. The team has done a great job of stabilizing the portfolio, and so our guidance remains unchanged on that front. Thank you. Our next question comes from Brian Vaccaro from Raymond James. Your line is now open. Good afternoon. Thanks for taking the questions. I want to start out with Applebee's and the Q3 comps and seems to be a few data points from various sources floating around. And I thought it might be helpful if you could set the record straight on what the system saw from a comp cadence perspective through the quarter. And then as it relates sticking with the comps, as it relates to your updated comp guidance for Applebee's, it seems a pretty wide range just 1 quarter to go. Would you be willing to tighten that range on your 4th quarter comp and any assumptions that are embedded within that guidance? Hey, Brian, it's John. Let's start with your question on Q3. I'm going to resist providing any kind of sequential movement within the quarter. It's fairly balanced rolling over as you know some unprecedented performance from prior year and our guidance remains as is. It's a 0 minus 1. You can model that based upon 3 quarters of data. And I don't wouldn't anticipate narrowing that guidance at all here as we move forward. Okay. And I guess can you remind us as we move through Q4 and the monthly cadence last year, I think you talked about tapping the brakes, if you will, on the marketing spend in December. Do you view your comparisons as getting easier? Are they similar as we move through the Q4? Brian, as I mentioned with Nick's question, we sit in a favorable year over year Q4 position from a TRP kind of a media delivery perspective. It's balanced within the quarter, but it is favorable versus year ago, whereas perhaps our prior quarters were not. So I'd like our position. We like our tactical flow of activity that we have planned. And with that said, we're rolling over 2 years of very favorable positive performance from Q4 2017 as well as Q4 2018. And again, that's reflected in our guidance. Okay. Thinking about the tactical shift at Applebee's towards value, can you give us a sense expectation? And also on this $0.25 Bonus Swing promotion, did you test that in certain markets or in the past? And can you give us any sense of how that impact and then really resonated with that value seeking guest you've been seeking to reengage? Sure. We'll start with pasta and grilled combos. I resist providing too much color on any tactical event other than to say that event delivered on abundant value, which is kind of front and center for the brand, and we're pleased with that outcome. The $0.25 was tested. It was tested approximately 2 months ago and very much delivered on that value seeker guest segment that I've referenced in the past, Brian. And so we have meaningful insights and data albeit based upon small sample size and test and we've applied that here as we speak. That's helpful. And Tom, circling back to the question on the Applebee's company units, our math would suggest that the profitability flattened out this quarter. Was there something one time in that, maybe that was seasonality and that was expected, but any color on that? Yes. No, that's a great question. You'll see that in the MD and A commentary of our I'll give some further color though, which is in talking to the leadership team, there were some non recurring items in Q3 that will have improved profitability in Q4. Okay. In the MD and A section, does it have the details of that or would you could you comment on that? No, it just cites Brian, it just cites the segment profit contribution. Okay. All right. And then last one for me back to I too appreciate the franchisee profitability question. You talked about 4 wall margins being down. I just want to make sure I heard correctly. 4 wall margins down 100 basis points year on year in the first half of the year, but the 4 wall EBITDA margins are still in the low double digits. Did I hear that correctly? That is correct. Okay. And you called out 100 bps roughly, you talked about the 100 basis points being related to the delivery cost associated with the delivery build. With this renegotiated agreement, do the franchisees get back half of that, more than half of that? Any color on that? Again, a lot more than half back. So it puts them back in the position of almost equivalent profitability, whether it's carryout in restaurant or delivery. All right. Fantastic. Thank you. Our next question comes from Jeffrey Bernstein from Barclays. Your line is now open. Great. Thank you very much. A couple of questions. One just on the unit growth side of things, seemingly you reduced openings or perhaps noted more closures at both brands with 1 quarter remaining. I'm just wondering if you think there's any underlying long term concern, whether it's franchise engagement or interest in accelerating growth going forward. I think on the Upli side, you said maybe late 2020 or into 2021 where we might see that growth. But the fact that both brands were taken down, just wondering whether there's any short term hesitation in terms of net unit growth? Let me start and then I'll let other people contribute. So on the IHOP side, as we've mentioned based on this deal and based on some other things that you'll hear in the future, we are very bullish on IHOP's growth and believe that it's going to accelerate in the future. On the Applebee's side, we believe we're going to start returning to growth of units in '20 and that will have moderate growth going past that into 'twenty one. And so the real question is on the development side, we are currently in discussions with the franchisees about restarting the development process and with the groups that they have in place. But we're also going to use the opportunity to bring in new franchisees with new territories. Good example of that, Steve, is we're seeing some growth opportunities not only with IHOP, so we've spoken of international being predominantly IHOP, but there are some international franchisee interest in Applebee's as well. And if I look at the closure rate, just to nail that down, we don't see anything out of line here. So if I look at Q1, Q2, Q3, and again, this is in some of the details of our financials, there's no real change here. This has been pretty consistent. The only thing to add is some of those decreases are dry international. Okay. And then just following up on an earlier question, you talked about how at least at Applebee's, it's going to be a tough Q4 from a comp perspective. The fact that you have, I guess, 100 basis point range in terms of your full year comp guidance would imply you got a 400 basis point potential swing in the 4th quarter, which again to the earlier question seems rather wide considering the relative stability that you see on a 2 3 year basis. So I'm just wondering if you'd offer any color in terms of what October brings or whether you're tracking on the higher or lower end of that very wide range? Jeff, no color on October, but keep in mind we're month end. And so the reason you see the range that we provided is we have 2 months remaining. And so we're being prudent. Okay. And then lastly, Steve, you mentioned being proud of the growth in both EBITDA and EPS for 2019. As we look to 2020 and I know you're not giving any formal guidance yet, but any directional thoughts on whether it's EPS or EBITDA growth? I know your long term guidance is for high single digit EBITDA and high teens EPS. Just wondering whether that's a realm of possibility for 2020 or maybe you can offer some color in terms of sensitivity to the comps so we can back to that. We don't want to talk about actual performance in 2020, but we have not come off our long term view of this comp. Okay. And that's inclusive of the 2% to 3% comp longer term seems still viable at both brands? Yes. Great. Thank you. Our next question comes from Brett Levi from MKM Partners. Your line is now open. Great. Thank you all for taking the call. I guess if we could start off just a little bit on where are you seeing these new franchisees coming from? What's been the general makeup of people that are looking to get into the system? Brett, I'll speak first regarding Applebee's. We see meaningful demand for the Applebee's brand externally. And we're very specific. We're looking for deeply experienced operators in the restaurant industry could come from multiple categories, well capitalized. We're not looking necessarily for purely financially oriented entities. And we've stated that we will evolve the portfolio 7 or 8 transactions over the past 2 years. And you can expect additional transactions as we move forward. And those are very high caliber, highly qualified prospective franchisees that allow us to be very selective as we enter into transactions moving forward. But it's interesting, we have it's a combination of backgrounds of the new franchisees coming back in. They're all obviously in the restaurant business, but we've had some that are interested that are coming from a QSR background, some coming from fast casual and some coming from casual diners. On the IHOP side, a lot of the franchisees, potential franchisees we've spoken to, especially you think about a concept like ours that is a family dining, a lot of breakfast, etcetera. A lot of those potential franchisees they talk about, they're rounding out their portfolio. They don't have the family dining concept. And one of the things they look to do is not compete against themselves. And I think the final point that I'll make on the Applebee's side is as we transact moving forward depending on the geographies, we would expect that some of those transactions come with development opportunities as well. Great. If we could turn to delivery and off premise for a second. You've obviously had a lot of success and you've been producing outsized returns. But we're hearing we're obviously hearing a lot more on the competitive front about more companies going after it and just with the law of large numbers, at some point, we're going to start to see slowing rates of growth. How are you thinking about that both from a competitive but also from how you can get to that next level, how you can get from the 9s and the low double digits to the mid or the high teen rates of mix? Thank you. Brett, on the Applebee's side, we accomplished one of our objectives, as Steve Brett, on the Applebee's side, we accomplished one of our objectives, as Steve referenced, by passing along those 3rd party delivery fees to we did that with both brands through the guest. And so we want our franchisees to be margin whole, if you will, whether that is a dining experience, to go experience or a delivery experience. And then we let the guests decide. We have a very clear demographic profile of our off premise users. They tend to be very heavy Applebee's guests. They use dine in as well as off premise. We make it easy for them. We've enhanced packaging. We've certainly enhanced our operating experience. We're getting better at accuracy and delivering that food on time. And so this is not a fully optimized segment of the business. It is highly incremental and we love our position. I think from the IHOP standpoint, the way we look at it is that first of all, you got to be in the game. You don't want to concede off premise to all the competitors who are doing it. So we're in the game. We're doing really well. We're growing the business. We're still at very high growth rates. I said about 25%. We think there's still more opportunities. We're only at 1400 plus restaurants that are doing it. We still got more restaurants we can add on. We have more delivery service providers within the restaurants we already have that you can expand service providers because some guests are use one instead of the other. They use DoorDash but not Uber Eats. So if you get more providers, you can actually expand your ability to capture more guests. We just rolled out catering to expand that business. So those all have kind of a of time that we think we can get great growth in the next few years. You're right, at some point, there's going to be a point where, okay, maybe there's not a lot more growth within the industry. We don't think we're anywhere near that right now. And then we're just going to have to execute everybody and becomes a share war at some point at the end, but we're far from the end. But in response to your question about what's going to take us to the next level, for both brands, we see catering as the major opportunity, because we think that space has been underserved and that both our brands can relate very well to a catering operation. So we are both we prepared as we always did the packaging and everything else we needed. We're going to target both residential catering for families and family get togethers and social occasions. But we're also going to go after business catering as well because we believe in a lot of cases, our product would be more desired than some of the other ones that own that business today. And we just need to get out and have the franchisees be able to execute well on the catering front. And I guess if I could sneak in one more. As you've lowered the outlook for the Q4, how much of what you're seeing do you think is internal, whether missteps or just not achieving as high a rate of usage on your menu and your offerings versus what you're seeing externally across the competitive landscape? And then I'll throw it back to the queue. Brett, Aivit, this is John. I've acknowledged this I think I acknowledged it in the past on our Q2 call. Some of this is self inflicted with Applebee's. I would use stajitas again as a good example where we have a product that is exceptionally well received by our guests. Our failure to launch that product with a trial incentive or a starting at price point from the data that we see led to a misstep. We didn't secure the value seekers. Trust me when I say we've applied that learning to our tactical plans moving forward. So as we normalize here and we reduced bad debt and we've closed our restaurants, honestly, for the first time in 3 years, I feel like I don't have a hand tied behind my back And the brand is poised for predictable stable growth. And we won't have those missteps with respect to value as we turn the corner on 2020. I mean, on the IHOP side, I fully expect that we will outperform the industry. So there are headwinds for the industry. Clearly, there's traffic challenges across the industry and I think there's a cycle that takes place here where there's minimum wage pressure on franchisees to take price, etcetera, not just in our business. So you look across the entire industry, there is margin pressures. People overcome margin pressures by taking price. You take too much price, you drop traffic. There is a cycle that goes on here. And we think through having the right offerings and the right products and the right experience that we'll be able to overcome that and perform better than the industry. So we're confident in our plan and confident in the direction we're going right now. But in both conferences, just so you know, we showed the franchisees the cost of taking pricing in excess of where the consumer expects the price increase to go. And so and we could definitely show a correlation between those who are more moderate in price and their ability to hold traffic and perform better. And so on both brands, that was a major part of the discussion, because some of the performance issues that are internal are based on taking price. I would also say though that in general, it's a pretty tough competitive operating environment. And in both cases, our expectation is we're going to outrun the competition. In Jay's case, they are. In John's case, they're kind of added. And so but our stated goal is we want to lead the industry. Our final question comes from Brian Vaccaro from Raymond James. Your line is now open. Yes. Just had a quick follow-up. On the IHOP side, the updated guidance would seem to suggest a pretty nice acceleration in comps versus what you just reported in the Q3. That's despite lapping more difficult comparisons. Could you help us understand what's driving that acceleration, whether that be a successful product launch? Is it daypart specific? Any color you could provide? Well, I don't want to get into how the quarter breaks down and those exact trends, etcetera. So, if you just look at our guidance, I mean, all we really changed was we tightened it a little bit. We lowered the high end down. But if you we were 1.1 at the year to date number, our guidance is 1% to 2%. So we're still I think we're comfortable with where our guidance is and where we're going to end up, but don't think there's this huge acceleration implied in any of that. But we have but having said that, and not to get into numbers, but we believe we've got strong programs in place for the remainder of the year, and we'll just have to see how well they perform, keeping in mind that the Grinch was a very successful program for us last year. Yes, understood. All right, thank you. That completes our question and answer session. At this time, I would like to turn the call back to Steve Joyce for closing comments. Okay. Thank you again for your time. We'll look forward to speaking with you again on our Q4 call and the progress we've made. Have a good day. Thank you, ladies and gentlemen. This concludes our conference call for today. Thank you for your participation. You may now disconnect.