Earnings Call: Q4 2018

Feb 21, 2019

Welcome to the 4th Quarter 2018 Dine Brands Global Incorporated Earnings Conference Call. My name is Paulette, 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 is being recorded. I will now turn the call over to Ken Dipte, Executive Director of Investor Relations. You may begin. Good morning, and welcome to Dine Brands 4th quarter and fiscal 2018 conference call. I'm joined by Steve Joyce, CEO Tom Sohn, CFO Darren Revellas, President of IHOP Sean Cywinski, President of Applebee's and Greg Calvin, our Corporate Controller, will be available during Q and A as well. 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 may 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 ks filing. The forward looking statements are as of today and assumes no obligation to update these statements. We may also refer to certain non GAAP financial measures, which are described in our press release and available on our website. With that, I'll now turn the call over to Steve. Thanks, Ken. Good morning, everyone, and thank you for participating today. In our press release issued this morning, you saw that we finished a strong year with a very solid 4th quarter result. We continue to deliver year over year double digit growth across key metrics, including total revenues, gross profit, adjusted EPS as well as adjusted EBITDA. My initial full year as CEO of Dine Brands was a transformative year for the company. We stayed the course and executed against a multipronged strategy focused on returning Dine Brands to a growth company. With a performance driven value based culture firmly in place, I am very confident in our go forward plans. Following our transitional period in 2017, this year was dedicated to enhancing brand relevance and building momentum at Applebee's and IHOP while driving growth. To that end, I am pleased to report that both brands achieved positive comp sales growth for 2018, and this momentum continued into January. And while Darren and John will go into more brand specific details a little later, I'd like to highlight several of our notable achievements this past year. First of all, we returned to nurturing a winning leadership team and trusted franchisees. We increased investments in research and consumer insight. We are enhancing guest and team member engagement through consumer facing technology and CRM. We have a focus on traffic generating menu innovation and abundant value and giving everyone a reason to visit our restaurants. We're accelerating restaurant unit growth, and are also accelerating in big numbers our all premises business. On the Applebee's front, there was a marked improvement in overall Applebee's franchisee financial health and nearly all Applebee's franchisees agreed to temporarily increase their advertising contribution rate by 75 basis points to 4.25%. Additionally, Applebee's achieved the highest quarterly comp sales increase in 14 years in the Q3, posting growth of 7.7%. Turning to IHOP, our franchisees and area licensees developed 34 net new unit domestic restaurants, marking at least a decade of consecutive net development growth. IHOP returned to positive comp sales in 2018 and ended the year with a very, very solid quarter. The brand also took innovation to the next level, creating the most buzzworthy media campaign in its history with the ultimate steakburger launch. Additionally, both Applebee's and IHOP reached all time highs in their overall guest satisfaction scores. And lastly, both brands experienced strong growth in their off premise business. Regarding Dine overall, our highly franchised model produced stable and robust adjusted EBITDA margins of approximately 45%, excluding advertising revenues. There was a substantial year over year decline in bad debt expense compared to 2017, and we significantly upsized our VFN to $225,000,000 from $100,000,000 which gives us much more financial flexibility. These accomplishments, to name a few, have helped to better position us for long term success and provide a very solid foundation for us to build on. We have a plan in place, which we believe will sustain our current trajectory. Looking forward, we are very encouraged about 2019 and the years ahead. Importantly, this year, we'll provide a better picture of our untapped potential as it reflects a cleaner slate for several reasons. Let me add a little bit of color. Notably, the $30,000,000 contribution that we made to Applebee's National Advertising Fund was completed in the first half of last year and it is non recurring. We have improved visibility into royalty collections. Additionally, we reached a favorable settlement in December with one of our largest Applebee's franchisees. The terms, among other things, required the franchisee to pay us approximately $12,500,000 for past due royalties and advertising fees in total. This plus the other resolutions have essentially resolved all of our franchisees' issues for Applebee's. With the positive momentum of both brands, we are in an even better position to drive accelerated profitable growth with the continued strong support from our franchisees. We will focus on growth platforms, which are gaining traction. These include exploring significant opportunities to develop in urban and rural areas, as well as leveraging nontraditional and small formats to penetrate higher cost trade areas and further embracing technology to enhance the guest experience. We believe our off premise businesses at both brands can produce continued strong growth. For 2018, Applebee's and IHOP's off premise comp sales increased by approximately 32% 30% respectively, driven mainly by double digit traffic growth. We also view our international operations as a potential growth engine. Approximately 7% of our restaurants are outside of the U. S. The interest in our brands internationally remains healthy, primarily on the IHOP side. Most recently, the brand expanded its presence into Thailand and announced plans to grow its footprint in South America under separate franchise agreements to build 25 restaurants in Peru and 12 restaurants in Ecuador. With that, I'm going to turn the call over to Tom to provide a little more detail on the numbers. Great. Thank you, Steve. Good morning, everyone. Our highly franchised business model continued to produce impressive results. I'll provide a brief review of the highlights for the Q4 and full year. But before I do, I'd like to provide you with my perspective on our performance. Dine Brands finished very strong in 2018 with our adjusted EPS results exceeding the high end of our guidance by $0.12 per share. We have both brands performing at the top of their categories and near the top of the industry. We have prioritized the return of capital to shareholders, while our leverage has decreased. Later, I will review our guidance for 2019, which reflects the strong finish to 2018 and our continued confidence in our company. I'll start with the notable changes on the income statement. For the 4th quarter, adjusted EPS was 1 point $0.48 for the same quarter of 2017. The increase was primarily due to a 46% increase in franchise segment profit, which is mainly driven by comp sales growth at both brands, a decline in bad debt expense compared to the Q4 of 2017, the collection of previously unrecognized royalties. For fiscal 2018, adjusted EPS was $5.37 compared to $4.09 in 2017. The increase was mainly due to lower income tax expense and higher franchise segment profit, which is primarily due to the higher comp sales at both brands and the favorable resolution of certain franchisee financial health issues, which resulted in lower bad debt expense and cash collections of previously unrecognized royalty revenues. I'm pleased to report that bad debt declined by approximately $13,000,000 for 2018 compared to the prior year due to the marked improvement in Applebee's performance and the favorable resolution of these franchisees financial health issues just discussed. Importantly, for we anticipate that bad debt will now return to historical levels, which is a not meaningful level. Turning to G and A. Our G and A for the Q4 of 2018 was approximately $45,300,000 compared to approximately $40,000,000 for the same period of last year. The increase was primarily due to higher personnel related costs, costs related to the acquisition of 69 Applebee's Restaurants announced in December and increased legal expenses. The increase in personnel related costs were related to performance based incentive compensation. G and A for fiscal 2018 was approximately $167,000,000 compared to approximately $166,000,000 in 2017. As a reminder, there were some reprioritization of technology projects during 2018 that also contributed to higher G and A. These items were offset by declines in severance costs and professional services costs. Regarding our tax rate, our GAAP effective tax rate for fiscal 2018 was 27.4% compared to 20% for fiscal 2017. During 2018, we increased our tax provision by approximately 5,100,000 dollars related to adjustments resulting from IRS audits for tax years 2011 through 2013. This action increased our effective tax rate from what would have been an estimated combined federal and state tax rate of approximately 25%. Turning to cash flow statement. Our highly franchised model generated strong adjusted free cash flow for 2018 of approximately $141,000,000 compared to approximately $66,000,000 for 2017. The favorable variance was due to the increase in cash from operations due to higher net income, favorable changes in working capital and an increase in receipts from notes and equipment contracts receivable compared to 2017. Consolidated adjusted EBITDA for 2018 was 230,600,000 compared to 200 and $21,300,000 for 2017. The increase was primarily due to higher franchise revenues and gross profit in 2018 compared to 2017. I would like to highlight that both brands contributed to solid performance in 2018. The return of capital to our shareholders remains a top priority. In 2018, we returned combined total of over $84,000,000 to shareholders. To provide some color, we paid $51,000,000 in quarterly cash dividends and repurchased nearly 479,000 shares of our common stock at a total cost of approximately $34,900,000 As you saw in our press release today, we increased our quarterly cash dividend by 10% to $0.69 per common share. The increase further reflects confidence in our business model, which generates stable and predictable cash flow. Additionally, our Board of Directors approved replacing our existing share repurchase authorization with a new authorization of up to $200,000,000 Now I would like to briefly comment on the implementation of ASC 8 42 regarding new lease accounting guidance. We are required to adopt the new guidance effective in 2019. As a result, we'll have to put up a liability and an offsetting asset on the balance sheet. There will not be any net changes on the P and L and we do not anticipate any geography changes. Please see the press release we issued today for complete details on our guidance. Please see the press release we issued today for complete details on our guidance. We expect comp sales at Applebee's to range positive between 2% and positive 4%. At IHOP, we expect comp sales to be between 2% and positive 4%. Our comp sales guidance for both brands reflects the continued implementation of sales and traffic driving initiatives to drive continued momentum. Total segment profit, which excludes the company restaurant segment is expected to be between approximately $373,000,000 and $394,000,000 Consolidated EBITDA is expected to be approximately between $268,000,000 $277,000,000 inclusive of company restaurant segment EBITDA, which is expected to be a range between approximately $9,000,000 $11,000,000 We expect net closures of between 2030 Applebee's Restaurants globally, the majority of which were expected to be domestic closures. Please note that these closures are part of our system wide analysis to continue to improve the health of our franchise system. At IHOP, we expect our franchisees to continue to have development appetite with projected net openings to range between 3555 new restaurants globally, the majority of which are expected to be domestic openings. G and A is expected to range between approximately $165,000,000 $170,000,000 including non cash stock based compensation expense and depreciation of approximately $40,000,000 I would like to highlight that this range is inclusive of approximately $6,000,000 of G and A related to the company restaurant segment. Lastly, adjusted earnings per share per diluted share for 2019 is expected to be between $6.90 $7.20 To close, 2018 was a very solid year for our brands. Looking ahead, we will continue to focus on the execution of several strategies to deliver top line and bottom line growth, operating value through our growth initiatives and return of capital to shareholders. So with that, I'll now turn the call over to John. Thanks, Tom, and good morning, everyone. We are certainly very pleased with Applebee's momentum as Q4 represented our 5th consecutive quarter of positive comp sales growth. Applebee's plus 3.5 percent performance on top of our prior year's plus 1.3% performance resulted in a healthy plus 4.8% 2 year comp sales increase for Q4. Once again according to Black Box, Applebee's has outperformed every category of the restaurant industry on comp sales including QSR, fast casual, family dining, casual dining, up scale casual and fine dining. From my perspective, this is yet another indicator that Applebee's business model is stable, predictable and very capable of lapping prior year successes. Most notably, 2018 was a milestone year for Applebee's as our plus 5% full year comp sales increase represented the best annual performance Applebee's has posted in 25 years. This result can be attributed to our truly exceptional franchise partners and our very talented and committed Applebee's team. Together, we've reestablished Applebee's as a vibrant and innovative brand with clear strategic vision and a commitment to sustained growth. Without question, Eat'n Good in the Neighborhood remains the centerpiece of our success. This brand position is both differentiating and relevant as it embodies who we are and what we stand for at Applebee's and its authenticity clearly resonates with all of our guests. Most importantly, Eat'n Good drives our strategy, drives our strategy around operations, culinary, beverage, off premise, neighborhood activation and of course our advertising which we continue to believe is best in class in the restaurant industry. I'm also proud of our restaurant excellence as we continue to surprise and delight our guests with a consistently great experience. This is evident in all key operating metrics from guest satisfaction to value for the money. Our culinary strategy remains focused on abundant and indulgent value with a focus on mainstream recipes and flavors that our restaurant teams can execute at a consistently high level. Innovation here will be smart, selective and fully validated as was the case with our very successful pasta and breadsticks introduction in Q4. Now beverage and off premise continue to be meaningful drivers of innovation and results. Each business segment represents a a distinct occasion for us with very specific guest profiles and need states that we leverage in our messaging and our execution. While not yet fully optimized, we view beverage and off premise as incremental growth engines for the brand. And Applebee's advertising continues to connect emotionally with our guests. There's no better example of this engagement than our very relatable run around Sue, our most recent to go ad, which I hope you've had a chance to see on air over the past few weeks. Applebee's to go business grew at a rate of approximately 30% in 2018, substantially outperforming casual dining, again according to Black Box. While to go remains our top off premise priority or focus in 2019, We continue to optimize and expand both delivery and catering. Now on the portfolio front, as Steve highlighted, we acquired 69 restaurants, franchise restaurants in North and South Carolina in mid December. We've been ready for this company owned operation for a while now and we're very encouraged with the team's early leadership and execution. At present, this geography is currently outpacing the system from a comp sales perspective. In fact, this is a trend we see at Applebee's as our new franchisees and new owners now rank number 1, 2 and 3 in year to date comp sales performance across the system. And after only 2 months of ownership, we remain confident in achieving all business goals related to this portfolio and we'll certainly keep you informed as we progress here. Turning to our full U. S. Restaurant base as previously outlined, Applebee's closures will slow in 2019 as we approach a normalized closure rate of approximately 1% in 2020 beyond. Another important sign, very important sign of brand health is that ad fund and royalty delinquencies, which represented a significant challenge in 2017 2018 have essentially disappeared here in 2019. Finally, we simply love our position in this market. We set a bold goal to become the most improved restaurant brand in America in 2018 and we absolutely delivered on that goal. Applebee's business fundamentals are now sound. Our restaurant execution is significantly enhanced, our franchise partnership is stronger than ever and we remain confident in our ability to sustain this momentum moving forward. With that, I'll turn it to Darren. All right. Thanks, John. Good morning, everyone. Over the last year at IHOP, we focused on executing against a broad strategy underpinned with specific measurable actions intended to generate immediate results and to fuel future growth. Serving as our roadmap, the strategy includes 4 key pillars: significantly enhancing the guest experience, running great restaurants, driving traffic and being where the guest is. The significant work done under each pillar has played an integral role in the success we're experiencing today and has addressed all aspects of the guest experience both in our restaurants and off premise. I'm very pleased to report that this holistic approach has produced another outstanding quarter for the brand and our best in 2018. IHOP's comp sales for the Q4 rose a solid 3% which represents a 4th consecutive quarter of positive comp sales growth. Not only was this our top quarter of the year, but it was our highest quarterly comp sales increase since the Q3 of 2015. This also marks the 4th consecutive quarter that IHOP outperformed the family dining category based on comp sales. On a full year basis comp sales grew 1.5% and total revenue grew 3.9% both of which were the brand's best performance since 20 15. This is quite an accomplishment and clearly demonstrates the strength of our strategic plan and the love people have for our iconic brand. I couldn't be prouder of our team members and franchisees for everything they've done to achieve these results. Thanks in large part to these efforts from the past year, we believe there are several drivers that will contribute to sustainable positive sales. First, we successfully changed the narrative regarding lunch and dinner occasions at IHOP which were the strongest dayparts for both the Q4 and full year. With abundant value and variety on our menu, we've proven that we can attract guests any time of the day. While breakfast will always be our focus, the PM Day parts continue to represent largely untapped white space for us to grow in. Consistent with that theme, our ultimate steak burger platform continues to help drive positive results. Burger sales remained strong in the Q4 and are still more than double the levels we had before the burger launch. 2nd, we're seeing solid growth in our off premise business which is primarily driven by traffic. For the Q4, to go comp sales increased by a strong 23% and to go comp traffic rose by approximately 13%. Online orders represent significant opportunity for us as the average check for online orders is approximately 31% higher than all other to go orders. With the increasing relevance of online ordering, we believe there is significant upside potential. Our online ordering system, enhanced website and new mobile app have all created a complete omnichannel experience for our guests. And best of all, online ordering isn't just more efficient, it's more profitable. To address the convenience needs of our guests, we launched our initial nationwide delivery program in partnership with DoorDash last July. In just 6 months, we've tripled the number of participating IHOP restaurants on DoorDash bringing our total to more than 1,000 restaurants currently and another 300 restaurants expected to be added to the DoorDash platform by the end of the year. This year our focus will be on expanding our relationships with other leading delivery service providers as well as increasing marketing efforts aimed specifically at building awareness around our IOP and Go program and driving new and repeat off premise business. We believe delivery will provide even further upside to our already strong to go business, which accounts for 8% of overall sales, an increase of 200 basis points from the Q4 last year. Another component to being where the guest is, is putting more IHOP restaurants where our guests want them. I'm happy to report that we had another strong year with new restaurant development. We ended the year with a net increase of 34 IHOP restaurants domestically and another 11 internationally. This is in stark contrast with the rest of the industry and we expect this positive development trend to continue for IHOP in 2019. Turning to the 3rd driver, the remodel program, which plays an important part in shaping guest perceptions of the brand. Our guests wanted a modern comfortable restaurant that exceeds their expectations and we gave it to them with our Rise and Shine remodel. We're currently testing the 2nd iteration of the Rise and Shine remodel which includes new guest facing technology that enhances the overall dining experience such as our No Way tool to provide more accurate wait times, server tablets to increase order efficiency and accuracy and wireless credit card devices to allow guests to easily pay while retaining possession of the credit card. This year we completed another 275 remodels bringing the total number of restaurants with the Rise and Shine image to over 1,000 when combined with new restaurant openings. 4th, we sharpened our focus on all aspects of the guest experience and operational improvements. We achieved the highest scores among our peer group for overall guest satisfaction and revisit intent, thanks to our renewed focus on our I Hospitality service program. In fact, we achieved an all time high overall guest satisfaction score in October, which indicates our guests are seeing the tangible efforts of our results. Lastly, our strong brand equity with consumers enables us to leverage enticing promotions to drive guests into our restaurants such as our popular all you can eat pancakes with any breakfast combo and our award winning Grinch limited time offer which paired the universally beloved entertainment property with Wow worthy menu items and a KidZy free value offer. To close, we have a lot to be excited about at IHOP. We're heading into the new year with a lot of great momentum and our efforts around menu innovation, daypart expansion, off premise initiatives and development have helped accelerate our growth by continuing to focus on our broad based plan and delivering against our 4 key pillars. We'll continue to expand our lead in family dining. It was an incredible year for IHOP with several notable highlights including our 60th anniversary, creating a media buzz with the IHOP name change campaign to launch our ultimate steak burger platform and opening our 1700th domestic IHOP. I'm confident that 2019 will be yet another successful year for the brand. And with that, I'll turn the call back over to Steve for his closing comments. Steve? Thanks, Darren. To recap, we had a strong year and we continue to make significant progress in returning Dine Brands to a growth company. While we've done a great deal of heavy lifting to get to this point, we still have a lot of work ahead of us. We have the right plans in place and we're executing on a multipronged strategy that has produced positive results. With the headwinds of 2017 behind us, we are in a significantly stronger position headed into 2019. We have a lot of compelling attributes such as robust adjusted EBITDA margins and an attractive adjusted free cash flow profile due to our highly franchised model, which, and I will continue to repeat, our number one priority is return of capital to shareholders. Now, we'd be pleased to open up the call for questions. Operator? Thank you. We will now begin the question and answer session. And our first question comes from Michael Gallo from CLK. Please go ahead. Hi. Good morning and congratulations on a good quarter year. Good morning, Michael. Steve, you've been there a year now. And I guess question for John as well. Obviously, there was some low hanging fruit in getting the Applebee's you start to think about Applebee's, think about the potential, the potential, analyze data or things that you haven't really done in the past and really kind of progress the brand forward over the next few years. I'm not sure if there's a new remodel package or things that you look at, but again, if you could just speak to some of the longer term opportunities as you kind of get through the low hanging fruit? Thanks. Yes. So I'll direct this mostly to John, but let me just to head it off. Our view is we are we have righted the ship. We have moved back into a very profitable area for our franchisees. We are very excited about the traffic growth that we've seen. We're excited about expanded opportunities both in off premise as well as returning to growth. We're looking at starting to add new units by hopefully the end of the year. We're starting to have conversations with our franchisees as we speak. And so what we've got is a robust brand, which is has been around for a while, but as you've seen our demographics has high 40% and climbing 34 and under customers in our restaurants. So not only do we think we've got a brand with a history that people love and we've returned to its roots, which what people wanted us to do. But we've also got a strong, youth component to our demographics that leads to a very favorable long term future. And we think we've got lots of opportunities to grow brand, both domestically and internationally. On the domestic side, we expect to start seeing some real development. I just came back from a large franchisee investment conference out here in California, and the interest in our brand was remarkable. I get up at the end of the conference to speak, but 3 people from previous panels had already talked about Applebee's in such glowing terms. There was really nothing left for me to say. So we're pretty excited about that opportunity. John, why don't you fill in with the color? Sure. Thanks, Steve. Michael, I think the look, let's call 2017 a foundational year or transitional year. 2018 was the return to relevance and growth. And it was critically important we demonstrate our ability to consistently and predictably generate results. We're in that position right now. And so as I look at the brand, I feel we have an extraordinarily unique partnership and business model with our franchisees. We have 32 partners. They are large operators with deep experience and significant know how in the restaurant industry in particular casual dining. That partnership unlocks strategic opportunities. We have healthy debate back in 2017 and partially in 2018. We put a new team in place of exceptional leaders. Their partnership with the franchisees works well. We meet on an every other month basis. We're now dealing as we look at 2019 with kind of a full deck. We closed our underperforming restaurants. We leveraged with some really great insight our consumer teams. So we were occasion based marketers. We take distinct occasions. We look at need states. We understand drivers and motivations and we market accordingly. We're very selective and disciplined in our innovation both on the culinary front and the beverage front. We'll continue to see that selectively from the team. Our off premise business has 3 components. We are primarily focused on to go call it 11 plus percent of our business today. It will get up to 20% or so over the next 3 years. But there are 2 other emerging components, catering and delivery. While secondary priorities at the moment, we've got a footprint of about 1100 restaurants who have activated delivery either nationally or locally And catering remains very low hanging fruit for a brand that is fundamentally a value and variety based brand. So we think we're positioned well. You add all that up with probably the most significant business opportunity and that is restaurant excellence and we're very well positioned. Our team under the leadership of Kevin Carroll and our franchisees have really made tremendous progress. The variability has narrowed and our guests are experiencing probably what they did experience from Applebee's in our heyday, a terrific hour, hour and a half experience and the to go experience is equally satisfying. So you add all that up Michael, we are well positioned in 'nineteen and beyond and we are candidly very excited about our future. Thanks very much. Our next question comes from Brian Vaccaro from Raymond James. Please go ahead. Thanks. Just a couple of quick clarifications and a follow-up question. John, I think you just mentioned delivery in covering 1100 Applebee's units. I was working through the K a few minutes ago, and I think I saw a little under 800. So I guess that it implies that you rolled another 300 quarter to date. Am I interpreting that correctly? Yes, Brian. And including that both national providers where we have a formal contract as well as local providers. We have a handful of local providers as well. But yes, I anticipate eventually getting up to 1500 units there from a delivery perspective. Okay, that's great. And circling back to the improvements that you've made at Applebee's to the in restaurant experience, can you provide a little more color on where you've seen the most improvement in the last 3 to 6 months and where you see opportunities for further improvement into 2019? From a restaurant operations perspective, Brian? Yes. Number 1 would be variability, meaning when I stepped in 2017, the variability between our bottom performers and our top performers was large. And so that's been heightened dramatically. Our percentage of guests experiencing a problem that which we quantify on a daily basis has moved dramatically south to the point where it's at about 4%, which is a very low defect rate, if you will. And then we placed a significant premium on guest satisfaction and value for the money. And those are 2 that are both very strongly correlated. Our accelerated performance is tightly correlated to overall comp sales improvements. And frankly, we have very tough standards. We hold our franchisees accountable. And interestingly, they want to be held accountable. They applauded the actions that we've taken over the past few years to encourage underperforming units and underperforming operators to exit the system. And so, those are a few highlights and that's where we're focused operationally. And I would also add that we're pleased with the unit economic progress in the individual restaurant profitability. Both brands have a restaurant profitability improvement initiative underway. We captured substantial savings in 'eighteen, anticipate doing so in 'nineteen and 'twenty, probably on a perpetual basis. And then just one if I could Tom, walking through the 10 ks a little bit, just a numbers question. On the Applebee's franchise segment, you obviously put the annual numbers in sort of back into the Q4. And just had two questions. On the Applebee's franchise revenue, I wanted to just confirm that that I think it was around $49,000,000 if my footing is right. That includes that $6,000,000 of collection of past due royalties within that $49,000,000 if you could confirm that. And then on the expense side, it looks like it was in the mid $4,000,000 range on franchise expense. Can you walk through the puts and takes? I think bad debt expense was down, but just walk through the puts and takes of that franchise expense fund in Q4, please? Sure. Tom, why don't you start with that? Yes. Sure. So on the Applebee's franchise segment revenue, you're right, it does include the collection at the end of the year. So hopefully that answers that question. With respect to expenses, just again, are you speaking specifically to Applebee's franchise segment? So you're can you clarify that? Yes. Yes. I'm speaking specifically to the Applebee's franchise segment, which looks to be about $4,500,000 for the quarter. And I'm just trying to kind of put the I know there's movements. We can follow-up offline on it, absolutely. But just bad debt, I think, was down $3,000,000 but we can follow-up offline if it makes better sense to do that. Yes. You have some so you have if you recall, for the year, you have about a little over $3,000,000 of bad debt expenses in there. And that's the bulk of it, Brian. So that gets you it's about $3,200,000 actually. Okay. All right. And I guess as you think about 2019, the Applebee's franchise segment profitability, it seems the message is we'll see a normal normal royalty collection rate going forward and bad debt I'm sorry, the franchise expense line, we should expect something a normal run rate of something a couple of $1,000,000 a quarter going forward, sort of the volatility dampens going forward? Yes, that's absolutely right. So you're going to have both brands back to the norms with respect to bad debt expense. All right. Very helpful. Thank you. Our next question comes from Nick Setyan from Wedbush Securities. Please go ahead. Good morning. Congrats on a great year and a great quarter. The guidance obviously is phenomenal above anyone's expectations. That begs the question, what drives that confidence in terms of the 2% to 4% comp at both brands? And any commentary quarter to date would be extremely helpful maybe at least have some kind of foundation from which we can start in terms of how to think about that comp? Yes. So I think if you start with the brand performance and the comp numbers, it really and they and both Brian or Darren and John have spoken to this, it really gets to a multipronged strategy. So there are several different pieces we're employing. Obviously, one of the big ones is providing growth, which we think will provide growth for the next couple of years is off premise. So we've talked a lot about it. We've put a lot of investment into technology. We've got, we think, leading ways of delivering our product with integrity into people's homes and offices and catering and other opportunities, because we invested in the containers that we ship it in. So our product not only is being available electronically, it's also available in a way that you could receive it in store, in any restaurant. And so I think people are recognizing that. We've even we haven't even really scratched the surface of the catering opportunity in both brands. So we just think that's a big opportunity for us. Secondly, on the technology side, we're investing significant dollars in lots of things that are customer friction points or restaurant profitability enhancing options. So we've talked about it, the no wait options, the bring your own device options, the server tablet options, the approach that we're taking to the kitchen to simplify, but also innovate the menu. So it is a we're in categories that are healthy. We've got the leadership position in growth in 11 years running. And I think as long as we continue to lead, these numbers are possible. Now what that assumes is we've got a healthy environment that we're operating. So if you don't believe in consumer confidence last through the year, those numbers could change a little. But we're simply looking at what our trajectory is, the things that we know we have in store for this year, which on both brands are incredibly exciting and probably the most I've been involved with this company since 2012. It's the best plan that we've had ever from the standpoint of things that we're going to do to excite guests, to give them reasons to come into the restaurants, to provide a wider variety of options, both healthy, both sensitive to people's needs, sensitive to advocacy groups, as well as exciting menu options just to turn people on to come to our restaurants. So we gave a pretty wide range, and because we wanted there we obviously are not immune to the operating environment. But right now, we think we've really hit the sweet spot in both brands in terms of putting things out to drive traffic, exciting kind of things. Neighborhood drink promotion is 1, but the food options that we're bringing to Applebee's, there's going to be several big surprises this year. They're going to be really fun. On the IHOP side, we're following we followed the burger campaign with the Panchizza campaign, which we took over at National Pizza Day. And I think people are seeing that we're having fun with this. And I think it makes us an interesting set of brands. And I think people feel an affinity for these brands. There's a strong loyalty on both sides. And I think we're now delivering on that, but in a way that's fun. It's a little edgy at times, but it's always innovative and we don't take ourselves too seriously. And I think that's resonating with the 99% of the American public that we represent. In both brands, we have 60,000,000 visitors come to our restaurants every year. The more we know about them, the more we tap into that, the more that we're able to market to them, the more valuable this company becomes. But we're starting from such an incredible advantage of not only our demographics, but also the size of these brands that franchise business scale matters. Our job here is to grow that scale so that we improve profitability for the franchisees, for the company and we also provide a more interesting and innovative restaurant on both the IHOP and the Applebee's side going forward. But we've built the right teams. They're doing the right things. Everybody's having fun, including our guests. The restaurants have never been run better. We've never had a better group of franchisees. There's never been a better working relationship. It's just we're just we're hitting on all cylinders. I've been in this business for a long time, almost 40 years. And this is as good a situation that I've seen. And so we our job is to make sure we continue to build on that, that we accelerate the growth of these brands as well as potentially others, we accelerate international growth, which is with a great year. We signed over 70 restaurant deals last year. So that's a great start. But we just think the opportunity is huge and we're now in a position where the foundation is in place, we're putting the tools that we need, we're learning more about our customers every day and we think this is ours for the take. You mentioned the trajectory for a bit there. Even the low end of the comp guidance implies a significant uptick in 2 year trends, which we have already been seeing. And so, I mean, does the current trajectory, at least in terms of what you've seen in Q1 kind of indicate that we will continue to see this acceleration on a 2 year basis? Well, last year was a remarkable year for Applebee's. IHOP had a great year. So you can expect that the trajectory that we are on fits into the guidance we gave. Perfect. The other question I want to ask is on free cash flow. It looks like the annual adjusted free cash flow exceeded the guidance that I'd seen out there by about $30,000,000 I think we're at $151 plus in terms of adjusted free cash flow. First, is that correct? And second, how should we think about free cash flow in 2019? So I think it is correct. But remember that a lot of that is coming from the we're not making another $30,000,000 contribution to the Applebee's NAV, NAV Advertising Fund. So that's a lot of that increase. So but yes, so we're returning to what will be a robust cash flow position, which as you think about this business model, it's a cash machine, right? The franchise system, particularly with more scale, provides incredible margins, will provide enormous amount of cash flow. With the difference between EBITDA and cash flow is the same, right? So we're going to continue to do that. And then as I mentioned at the end of the call, our primary goal is return of capital to shareholders. So you saw it this quarter, you saw what we're doing with the dividend. Now the dividend increase, quite frankly, we're not going to increase 10% every year. We want to be we've set our guidance is somewhere between 30% 45% of free cash flow. That increase gets us to right above 30% of free cash flow. So we're very comfortable with the dividend. Obviously, we believe investing in our stock is good investment. You'll continue to see that from us. But it also brings us other opportunities to invest in the brands and look potentially for new brands to add. Nick, I'll just add that if you really think about our business model, flow through from EBITDA to free cash flow is very, very strong. Typically, our CapEx figure is well south of 10% of EBITDA. And so that's in sharp contrast to other business models that are predominantly or more significantly company operated. Just to follow-up, are there were there any one time things in 2018 or towards the tail end of 2018 aside from the ad fund. So I mean, if I think about the ad fund contribution, that should be on top of this $150,000,000 in 2019. Is that correct or am I wrong on that? And then were there any kind of anything one time in nature in 2018 that we should think about when we're thinking about the 2019 cash flow? Yes. So one thing just to highlight is on with respect to G and A, I think on the last earnings call, I had mentioned that we did have a little bit of an increase on G and A with respect to a few different items. One was and this continued in Q4, One was with respect to employee compensation. There was very specifically performance related incentive compensation that drove the number up a little bit. The second piece was increased litigation costs, which is expected. We obviously came to a favorable resolution on a significant litigation case. And so that number went up a little bit. And then finally, I'd mentioned that there was some reallocation of dollars as we headed into the final half of the year and continued in Q4 with respect to IT. Some of the development activity was reprioritized and hence became G and A dollars. And so that's again just a function of some movement that we have in IT towards agile development. As the year progresses, they make better decisions on how they're allocating those IT dollars. Perfect. On the unit growth at Applebee's, is it still first half we should get sort of Q1, Q2 something like 20 plus closures? And then in the back half, I guess that implies positive net unit growth in the second half of twenty nineteen at Applebee's? I wouldn't say the second half. I would say we're going to we believe that we're we will hopefully be on a course to be starting to open up units towards the end of the year. So those conversations are just starting with our franchisees, obviously, because we were focused on making sure that the brand had both a performance and a prototype that was compelling for franchisees to build. We believe we're going to do that this start that this year and that it will start bearing fruit towards the end of the year. And I think the way to think about it is probably you'll see a lot more signings than you'll actually see openings. But it will be a combination because one of the things we're going to encourage franchisees to do, given that we've got a lot of struggling brands in this category, is conversions are very attractive for us to grow as well. And our number of franchisees are already doing looking at options for that. So we just think that we think that the performance of the brand combined with the opportunity for potentially restaurant space that is at a lease level that's very affordable for a conversion opportunity and quite frankly for greenfield newbuilds as well. But we think there'll be a combination of those opportunities in our franchisees and we are beginning that dialogue as well as there is strong demand from folks that are not franchisees that want to buy into this system and build new restaurants with us. Got it. And then last question, if you gave us some numbers around the franchisee profitability at Applebee's. I'm sure that's a question you guys often get, but any kind of reminder on where the franchisee profitability at Apple Visa would be very helpful. Yes. So we obviously monitor that closely, and we're very focused on their profitability. But I think the way to think about it is, at an average unit volume of about 2.5%. The probability can vary obviously from where they're operating labor costs and all this. The interesting thing though is we believe and our franchisees are proving this out that we're actually even in the face of fairly steep labor cost increases, we're seeing in most cases margin improvement and that's because of the changes our franchisees are making in their ops model as well as a lot of the work that we're doing with them in the kitchen. We're actually expecting our product costs to decline slightly this year, which will be a real boost for us. We've talked before about we've done an internal study and now made it permanent in terms of looking at ways to reduce costs and improve operations, both in the kitchen and in front of the house that are bearing fruit. We think that could be worth over the next several years up to 300 basis points in potential profitability improvement. And we're going to need that to offset labor costs at this point because the markets obviously are tight. Now as we talk about here, we do represent the 99%. So it's a 2 edged sword for us. Those people going back to work are our customers. So there is benefit as well as cost in the higher labor pressure. And obviously is exacerbated in some markets versus others. But we think in general, where they are now is getting close to where they were in 2016, which is it can range on an average unit volume, as I mentioned, at 2.5. It's you're in the double digits and it can range into the high teens depending on how intense the revenues are. And that's after royalties, that's after the app fund contribution? Yes. Perfect. Thank you. Our next question comes from Stephen Anderson from Maxim Group. Please go ahead. Yes. A couple of quick follow-up questions. First, in your EPS guidance, what can you quantify the impact from the ownership of the 69 locations? And I have a follow-up. Tom? Yes. So, if you think about it, we expect this so we gave, obviously, consolidated adjusted EBITDA guidance that and when you take the component, the contribution of the company restaurants, which is about $10,000,000 for the year, it flows through to be slightly accretive, but we're talking about a relatively modest number, Stephen. Well, and I think the real answer is we're just getting into the restaurants. We are we obviously did some due diligence before we made the acquisition, but we think there's significant upside to them. And we're in the process of sort of pulling all of that together, optimizing the structure. We're very happy with the performance to date on the revenue side. We think there's upside on revenues. We think the cost picture will obviously shake out over the next 30 to 60 days. We'll share more about it in the Q1 call. But it's immediately accretive, and we think that will grow. Okay. And my follow-up question is, I know you can talk about the 3rd concept on this call, but I just want to see if you've had any problems with that and if you discuss this with any of your franchisees? I'm sorry, can you repeat that? The 3rd restaurant concept. Oh, 3rd, yes. So let's so I've said now within the next 18 months, so at some point I'll be right. So we're looking for something very specific, okay? We are not looking for a major acquisition. You're not going to see a big purchase by us. We're looking for a tuck in acquisition, call it sub $100,000,000 So think about what that means. That means a restaurant concept with 40 to 80 units, that's a regional concept for the most part that we can grow nationally. And there are several key components to that. One is, it's got to be immediately accretive. So we're not going to do transactions that's not. 2, it has to come with a management team that is self contained, because we are not going to distract from our major brands to bring in a new brand. So we needed a founder and a team that's coming in that wants to grow their concept nationally with us. What we provide is franchising expertise, capital and obviously franchisees. So the other part of that picture is we're only going to look at a brand that our franchisees want to build. So we've got a built in audience. Franchise business is all about scale. The more we can add to this scale, the better off we'll be, the better our margins will be, the better our franchisees' margins will be because our procurement will be better. So it's so but we're looking for a very specific set of circumstances. We don't have anything to report at this point, but I can tell you we're looking at lots of things. And but when we announce something, it will fit those criteria or we will not announce. All right. Thank you. Our next question comes from Brian Vaccaro with Raymond James. Please go ahead. Yes. Sorry, just one more quick clarification. On the acquired units, you clearly mentioned $9,000,000 to $11,000,000 in the press release. The question is, is that burdened with the $6,000,000 of G and A? So that's a sort of a true clear EBITDA number or is that before the G and A allocation? Thank you. That is burden. All right. That's all for me. Thanks. We'd like to say enhanced rather than value add. Thank you. I will now turn the call back over to Steve Joyce, CEO, for closing comments. Okay. Well, thanks again for your time today. We're scheduled to report results for the Q1 on May 1, and we look forward to speaking with you then. Have a great day. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participation. You may now disconnect.