Good morning, everyone. Thank you for joining us this morning as we have a string of restaurant companies presenting this morning. Very excited to have our next presenting company, Dine Brands, with us this morning. From their California headquarters, we have Dine Brands CEO, Steve Joyce, and CFO, Tom Song, who will walk through their formal presentation. For those not familiar, Dine is effectively a 100% franchised casual dining portfolio with 3,700 restaurants worldwide, including approximately 1,900 Applebee's and 1,800 IHOP units. Importantly, specific to comps, which gets lots of attention, the system has now delivered low- to mid-single-digit comp growth in each quarter of 2018. This has been a tremendous turnaround for the portfolio. Again, this follows two years in negative territory and represents the strongest result for them since 2014.
Ultimately, the long-term annual growth algorithm calls for high teen EPS growth, reaching at least $10 by 2022, along with the current yield approaching 3% for a total shareholder return of 20% + annually. With that as a backdrop, I'm going to invite Steve Joyce, the CEO, up first. He's going to be joined by Tom Song, the CFO, and then we will have time for Q&A, at which point a mic will be coming around. With that said, it's my pleasure to introduce Dine Brands CEO, Steve Joyce.
Thanks, Jeff.
Thank you.
Good morning. I wanted to talk a little bit this morning about Dine Brands and discuss our plans in terms of long-term growth for each of our two category-leading brands. Let's begin with an overview of the business. Dine is an incredibly strong company that still has very much untapped potential. We already have a lot of compelling things going for us, as this slide shows, and I'll highlight a few of those. We have two incredibly iconic brands with very high brand awareness, both of which are number one in their categories and have been for the last 11 consecutive years. That is quite an achievement, especially given the highly competitive nature of the categories we operate in. Not only do Applebee's and IHOP have significant presence and high consumer awareness domestically, our restaurants also have strong brand equity outside of the U.S.
With nearly 3,700 restaurants globally, we are one of the largest full-service restaurant companies in the world. Additionally, we are continuing to expand our international presence. Although international currently accounts for a relatively small piece of our business, we view it as an important growth vehicle going forward. In fact, we recently announced plans to continue our expansion in South America through an agreement with a new franchisee, bringing the IHOP brand to Ecuador. We have a highly enviable 100% franchised asset-light business model, which generates substantial and very stable free cash flow, of which we return a significant amount to our shareholders while continuing to invest in the long-term growth of our brands. Returning capital to shareholders is our number one priority, and it always will be. We'll talk a little bit about this later on.
Lastly, the stability of our business model has allowed us to maintain robust EBITDA margins relative to our highly franchised peers. Alongside our franchisees, we are committed to succeeding and transitioning Dine back to a growth company. We've established high goals we believe are very attainable in a performance-based environment. With that said, we have implemented a new and comprehensive strategy to significantly improve performance at IHOP and Applebee's. I'm pleased to say that we've seen positive momentum at both brands over the last few quarters and remain confident that we can build and importantly sustain this trajectory. We're also focused on working with franchisees to pursue our cost optimization opportunities, which we believe will drive franchise profitability as well as overall health of both brands.
We've taken steps to further strengthen our business and ensure that each brand has the resources and structure in place to quickly respond to unique opportunities in the competitive landscape. We are also focused on creating best-in-class consumer insights and analytics capabilities. These are critical to providing the necessary consumer and guest information to supporting our decision-making. We believe this plan will result in generating substantial adjusted free cash flow and improve our earnings potential going forward. These are just a few of the many initiatives we've implemented across the organization to better position Dine and our brands. We are confident in our ability to return to a growth company and continue to create meaningful value for our shareholders and for our franchisees. Let's talk a little bit about some of the investment highlights.
We have significant scale, robust EBITDA margins, and we generate substantial cash flow through this 100% franchise model. We are the leader in family and casual dining. We have a history of buying back shares and paying a healthy dividend, and we will continue to do that. We have a new strategy, a new culture and philosophy, which is a performance-based organization that is going to do great things. We have incredibly favorable guest dynamics. Just take a look. One of the things that people talk a lot about is the death of casual dining and family dining. That is not true in our case. In IHOP, half the guests are under the age of 34, and in Applebee's, 45% and growing are under the age of 34. This is very different than you'll see from any other restaurant company.
What this means is that we have a long runway with these brands. Family and casual dining are not at all dead. They are thriving. They are the largest categories in the restaurant business. They are oversupplied, which is beginning to correct itself, and they are stable. We are the dominant player in those categories, and we will continue to be so. 100% franchise model. There is an announcement out that we will take over a few restaurants, roughly 69 restaurants in the Carolinas. That is to fix one of the last remaining problems that we have as a result of the Applebee's turnaround. We will stabilize those properties over time, we will return them to a franchise scenario.
At this point, though, we are the most highly franchised company in the business, and we will continue to do so as we think this model is what optimizes our company. Talk a little bit about IHOP. Number 1 in system sales, 11 years running. Let's go to the next. One of the nice things about IHOP is it has continued to grow significantly over the last several years, and as a matter of fact, the last two years, they've had a record level of new units added, both domestically and internationally. We also see a significant amount of development opportunity internationally. We see a significant amount of development opportunity in non-traditional and small format. We also see a great opportunity for us with a different model in urban areas where we're under-penetrated.
Historically versus its peers, obviously a significant premium in terms of system sales growth, which is fed by positive comp sales as well as unit growth. You can see that net unit growth at a very healthy close to 2%, and that has been very consistent over the last several years. One of the big opportunities in both brands is the growth of off-premise. There are two things that occur in off-premise, and that is both takeout and to-go. One is we get a significantly higher average check, and that is because on the online ordering system versus the call-in, the online ordering system upsells perfectly every single time. We're also going to gain that advantage as we bring tablets into the restaurants.
In terms of off-premise sales, we are seeing in both brands growth rates in the 30%-40% range, which is being driven by the technology we put into place, which is not only the online ordering system and the app that we put in place about a year ago. We also did something very important, which we thought we needed to do for the product integrity, and that was we spent a lot of time designing the carrier of our product. The containers that that food goes in, whether it's a stack of pancakes with eggs and bacon, where they're separated with a vented lift in the IHOP case, or separate compartments with strong insulation capabilities. The product remains intact for 45 minutes, which is important in the to-go business because, particularly in delivery, it can take up to that amount of time.
Takeout obviously is based on the distance from the restaurant to the home. We are seeing significant growth in these areas, and we think that's going to be a big opportunity going forward for us as well. We also see catering as a significant upside. Talk a little bit about Applebee's. Applebee's had some well-publicized struggles. It was a combination of a strategic choice that was not necessary. Basically, Applebee's went to chase upscale millennials at a time when they already had a significant millennial population. We have simply reversed where we've always been, which is Eatin' Good in the Neighborhood. Look, in both of our brands, they are comfort foods. 65% of the American public say when they're stressed, they want comfort food. 90% of Americans say they have never been more stressed than today. Our restaurants are serving a purpose.
Our customers tell us when they come into our restaurant for an hour, an hour and a half, it is an oasis in the storm. We are going to continue to build on that and be the welcoming group of restaurants in the country where people know, regardless of where they come from or their background, they will be welcomed with hospitalities. We see ourselves as uniting communities over memorable dining experiences and great food. That is our purpose, that's the purpose we serve, and our customers tell us they need it from us. We are not going to be the foodie's choice. We're very comfortable with that. As a matter of fact, our customers like where we are. We're obviously well-positioned with millennials, so the rumor that millennials aren't going to go to casual dining with family is not real.
We believe we've got significant upside, both from a growth standpoint of in the restaurants with profitability increasing. You'll hear a lot probably today about labor costs, and labor costs are a problem, particularly in the city. Tip credit is going to be an issue for us. We have a program underway where we believe we're going to deliver an additional 350 basis points of margin based on efficiencies in the restaurant, based on food buying prowess, that will allow us to continue to grow margins even in the face of stiff labor costs. Applebee's comp sales improvement, obviously, pretty rapid turnaround. 7.7%, by the way, was the best, not in our category, but in the restaurant business. Better than Domino's. I don't know that we'll be better than Domino's next quarter, but it's fun to say at least for one quarter.
What happened here was we had a strategy that didn't work. We went back to what did work, we implemented some new things that have really helped significantly. Last September when I started, we were very negative. We had a franchisee who was doing something in the bar area that was driving traffic. In October, we launched something called the Dollarita. It was a margarita for $1. It drove a significant amount of traffic, and we had roughly a 12-point turnaround in comp sales performance. We went from a negative 6.5, I think, to a positive 5.5 or something like that. We have continued that model where we do what we call the Neighborhood Drink Appreciation with a compelling food offering every month. That has created a significant amount of buzz. People are wondering what we're going to do next month.
We get a lot of social media buzz for both brands, actually. I'll talk about IHOb in a minute. These brands are buzz-worthy, and we're doing fun things that people like to pay attention to. Right now, there is the Dollar Jolly, which is both a red and a green drink. I don't recommend them unless you like Kool-Aid for your alcohol. They come with a Jolly Rancher, and they're very popular. In October, we did something called the Zombie, and it actually had a floating brain in it. People like this stuff. We continue to do it. It continues to drive. By the way, you see people from all ages drinking these things. The important thing about the drink promotion is 93% of the people that come in to buy that drink, eat food. They are profitable customers.
As a result, the franchisees are very supportive of the program. We're going to continue to innovate. We introduced pastas in the month of October. We brought back riblets in January to a great success. You'll see that again next year, and you'll see some more innovation from us, both on the menu side as well as in the restaurants. A lot of things changed, but it basically was getting back to what Applebee's has already been known for, which is abundant value. We have I think enhanced the appeal, and the buzz worthiness of the brand. We have dramatically improved the restaurants, actually in both brands, with guest satisfaction scores. We are continuing to press for growth in off-premise. It is now 10% of Applebee's business and 7% of IHOP's. We believe on the Applebee's side, it can grow to 20%.
We think that the combination of the menu that we've got with takeout often and delivery is going to be a significant component of profitability for the restaurants. As you can see, the to-go comp sales growth is at 37% from. We launched the app and the online ordering in Q3 of 2017. That has had a significant impact to both the revenues and the profitability for our guests and for our franchisees. This is the Neighborhood Drink Appreciation program. The thing about this is not so much we break even on the drink typically, but it drives traffic because it's interesting and people like talking about it, and they talk about it in social media. In both brands, we're roughly half of the social media discussion in those categories.
If you saw a little something called IHOb, where we changed or said we thought we might change the name from IHOP to IHOb, what did the B stand for? One tweet created 44 billion impressions, 22,000 news articles. We got death threats. I said, "I love that passion. We should send them a gift card." They go, "They didn't sign the death threat, Steve." I said, "Okay. Well." The relative interest in that brand is enormous worldwide. The reaction to the burger promotion, and they're great burgers, by the way. We like the fact that we got a lot of hits, but we like even more that at that point, burger sales quadrupled. We got a significant increase in both lunch and dinner day part, which is something that we're pushing for. This month, we are aligned with "The Grinch" movie.
We have Grinch pancakes. We have a Roast Beast Omelet, we have Grinch hot chocolate. What else do we have? Oh, we have Crêpes, right? Yeah. We're seeing significant push from that as well, the movie's very popular, the Grinch tie-in is doing really well. From the standpoint of conditioning, we've got a strong asset base in Applebee's. We got almost all the restaurants remodeled by 2015. We'll obviously start a new program shortly. We spent a lot of time over the last two years closing restaurants that were not viable, we expect to begin development next year. By the end of 2019, we expect to be on a positive development mode. We believe that we're going to end up with a much stronger asset base of much more profitable restaurants.
Tom, you want to walk them through the financials?
Good morning. Jeff, I promise I'll go quickly here. All right?
Fine with me.
As Steve mentioned earlier, Dine does have a franchise business model. This is very important for us. In fact, we're the most asset-light business model in the casual and family dining space. On the left, you can see that we have a 50% EBITDA margin, which represents a 5% increase as compared to the previous year's quarter. We're also illustrating a comparison when you're looking at other highly franchised restaurant companies. We outperform on EBITDA margins there, and obviously, when compared to the family and casual dining peer group, we far exceed. There's an important point here, which is really for every 50 new restaurants that we add to the system, we only add one headcount. That's a pretty important point to just keep in mind. That's the real benefit of being as highly franchised as we are. Being asset light, Dine generates substantial cash flow.
Our priority, as Steve mentioned, is returning capital to shareholders through dividends and share repurchases. We do have some minimal CapEx, and this minimal CapEx is focused on technology, which is oftentimes guest-facing technology, digital engagement, as well as franchisee efficiency-oriented technology, which provides a nice offset towards labor costs at the franchisee level. Nowhere is this CapEx near where you might find CapEx for, again, a company-operated business model. Those peers of ours tend to spend roughly about 1/3 of EBITDA on CapEx. I'll also point out that our 2018 guidance for adjusted free cash flow of $106 million-$121 million includes an expense that we had earlier this year, which is a $30 million ad fund contribution. We've had a very solid history of returning capital to shareholders, and our current cash dividend yields 2.8%.
We've been averaging approximately $100 million per year of capital return since 2013, and this totals $568 million that we've returned through the third quarter of this year over this period of time. Earlier this year, we provided long-term view going forward and our growth expectations for Dine. What we believe is this creation of significant shareholder value is the result of this adjusted free cash flow or adjusted EPS growth in the high teens and a dividend yield approaching 3%. That gives us this expected total shareholder return in excess of 20%. In summary, we believe these goals are very attainable in our performance-driven culture and strategy. With that, I'll turn it back to Steve for his closing comments.
I think if you look forward for the company, we have a commitment to fulfill the potential of this company by driving the kind of numbers that Tom just shared with you. We're implementing a plan to return growth at both brands, as well as we're looking for other growth opportunities. We see significant cost optimization opportunities. We will continue to generate substantial cash flow. You'll see a significant jump in 2019 from 2018 as that $30 million ad fund contribution goes away and will not be replicated. We are obviously committed to making the right investments that we need to strengthen the business for long term, and we believe we've got a very exciting and relevant future for not only our franchisees, for our company, but also most importantly for our shareholders. With that, we'll open it up.
Maybe I'll kick it off and then turn it to the audience. Clearly, your comp trends in 2018 were very strong, as you noted. It seems like the industry in whole seems to have seen an accelerating trend, albeit not to the same degree. Whether it was attributed to consumer tax reform or easy compares or loyalty, digital delivery, which you talked about. How would you describe the sustainability of the trends you saw in 2018? Obviously, we saw the 2017-2018 short. It seemed like a mirror of 2017 was disappointing, 2018 was strong. How should we think about the comp drivers that you expect to sustain, presumably your expectations for positive comp momentum into 2019 and beyond?
We're in a really good position from the standpoint of this current economy and the employment picture. Our average household income is about $70,000. If you look at that's who's going back to work. As those people go back to work, we are looking at, I think, an additional push to our comp sales growth. Because if people have jobs and they feel confident, which is where people are sitting right now, they're going to go out and dine. We've had a number of positives behind this. We've had, obviously, the tax reform, we think, was a big push. The other is we're pushing value in both brands. You'll see a lot of price pointing from our standpoint. You see a lot of significant abundant type offerings in our advertising. We are going to reach much more into digital.
We think we've got the right formula. Look, we're not immune from the economy, but I haven't seen anyone. Well, the projections are always 18 months out, which means they don't know. I would suspect 2019 is going to be a pretty solid year. I think we're going to look to deliver similar results. We think the upside, though, is we are now at a point where we're adding customers at a much more profitable level because, particularly in Applebee's, we hit a point where covering the fixed cost basis was one of the issues the franchisees had in terms of profitability. With the dramatic growth in traffic and sales and to-go business, I think we're looking at a much more robust restaurant environment. The folks working in the restaurants are happier because they're making more money.
You just feel a different energy around it. We think 2019 should be a really solid year. After that, we think we will lead the industry. We think what we're doing is more competitive and more relevant, we will innovate more and be more aggressive than others. As long as we've got a healthy environment to work in, we think we're going to deliver these kind of results. In our plan, we put in a, call it a low single-digit comp sales growth. Think 2%-3%. That was our view of what we could probably do in and out. That leads to a 20%+ compounded total shareholder return, which is what our goal is. I think we're in a good position.
I just add quick comment here that if you look at the comp sales recovery here, it's not just one lever, right? It's a combination of return to value and abundance. It's a combination of some buzz-worthy promotions in both brands, whether it's Dollaritas and monthly drink specials on the Applebee's side or The Grinch engagement with customers on that front. It's also this digital engagement, which then yields the off-premise business as well. It's all three things equally contributing to the strong comp sales.
I know you clearly have two of the industry-leading brands in their respective categories, and there's often talk about opportunity to leverage scale further, whether it be growing those two brands or adding 1/3 or beyond. How do you think about the M&A strategy over the next couple of years in the portfolio?
We've got a stated objective to add more brands. Tom and I worked together at Choice Hotels. That's where I came from. When I started Choice, we had nine brands. When I left, we had 13. 4,700 hotels to 7,000. Scale matters in this business, the more scale we have, the more profit we have, the more ability we have to leverage product costs to help our franchisees be more profitable. You're starting to see that model in the restaurant business a little bit more. It's typical in the hotel business. Our view is we have the opportunity to add some additional brands. You'll see us start out relatively small. It's not something that's a core expertise of the company at this point. We will build that expertise. You should expect to see us looking in categories that we're not in.
Fast casual, QSR, ethnic, healthy, kind of the filters we're looking through. We don't have anything to announce, but we're in active discussions on lots of different opportunities. We also like adjacent businesses. You'll see a combination of opportunities that we think will grow the cash flow line for us that will be immediately accretive, which is one of our rules, that will not be bet the ranch type activities, which is not the way that we think is the best opportunity for the company. You'll see us doing that going forward. However, I will tell you that our number one priority is returning capital, either through buyback shares or dividend. You will see us being aggressive in that category first beyond any of the other activities.
When you think about M&A, I mean, the fact that you already have two brands with close to 2,000 stores each, I mean, the size of acquisition you're talking about, I know you said start small, but I'm assuming something small would not necessarily be a very meaningful contributor if it's 100% franchise, which I'm assuming is probably the strategy.
Yeah. I think you should think regional brand is 70 to 100 units. We're not going to buy anything we can't grow to 1,000. It's got to have scale over time. Our view is we want to get into a situation where we're talking about supply growth in the low single digits from the existing brands plus other brands we add. I think you'll see us look at different opportunities that we think will grow rapidly. They've got to move the needle within five years, otherwise it's a waste of time. I think my general view of this business is it's incredibly overpriced, I don't like any of the pricing I've seen. I'm willing to overpay for 70 restaurants. I'm not willing to overpay for 500. I think the pricing's wacky.
If it calms down, maybe I'll feel differently, but I just think the pricing is not attractive. You can't start a brand because that takes way too long, but you can take a brand that has 70 to 100 units and grow it 50 to 75 units in a relative short period of time. That's sort of the model we're looking for, and that's what we've done historically.
Can maybe talk a little bit, I know as a franchise system, one of the beautiful things about it is you're not necessarily buying the food or paying the labor, so you're somewhat insulated from volatility. As you talk to your franchisees, and I know you don't have that many of them, so they're in a pretty strong financial position. How are they talking about labor inflation, which just seems like it's potentially devastating to the industry over the next few years? I know you mentioned maybe some offsets of other costs. How do we think specifically, or what's the feedback you're getting on labor?
Obviously, if you're in a market where they're pushing fair wages, when you're talking $15, which if you look at very few of our restaurants pay minimum wage, right? It's the margin over minimum that if it goes up, that they're going to have to meet, and then tip credit is obviously a big deal as well. We talk a lot about labor costs, but they are confident in their profitability future because of the work we're doing around other things. We had a PwC study where they have now identified, we think, close to 350 basis points of margin improvement, which should more than offset the labor hike. The labor hike is a two-edged sword. Yeah, it's hard to find quality folks to work in the restaurants, but our franchisees are good employers, and they tend to hold onto theirs better than the industry averages.
The other way to think about it is a lot of those people going back to work are going to eat in our restaurants. It is making it tough, and we've got to make sure that we're doing everything we can to make every other part of the restaurant as efficient as possible.
Yeah. We're not sitting still on that front. Obviously, to go takeaway, that channel obviously provides a bit of an offset on labor. We're introducing server tablets, which are the waitstaff is carrying around tablets to make the ordering and service and payment process a lot more efficient. Obviously, Steve's mentioned before that we are testing BYOD, bring your own device, which enables a customer to come into a restaurant. We've had transactions on this with test restaurants already. Again, all these things are being introduced in the effort of making both front of house and back of house in the restaurant operating environment more efficient.
We're simplifying the kitchen. We're trying to find more produced product that's as good or better. We're not hand-cutting steaks anymore. We've added a number of products that take less prep in the kitchen. It's a combination. There's no silver bullet. The list of margin improvements is 300 items long.
Yeah.
We're an incredibly efficient buyer. We have a co-op that buys for everyone. We're buying billions of dollars worth of product. The interesting thing on the cost side, food costs are probably going down next year. Not by a lot, but probably some, at least for us. We're a big user of protein. As long as those tariffs stay in place and the inventories continue to build, it helps with cost. We actually believe we'll have a small but lower cost of product next year. We had a marginal increase this year, but it was very low, and that's a big help.
Love to open it up to the audience if there are any questions. Oh, there you go.
Thank you for your time today. Just curious, with RMH and I guess it would probably be Apple Gold Group in the Carolinas, how long are you guys planning to take to resolve those issues? If you do take over operations, how long would you target to take them over?
That was almost 50 minutes. The answer is they're both resolved, okay? I don't want to spend a lot of time talking about it, but there is an agreement on RMH that we have. It's filed with the court, so it's public. Provided that that holds, that's a step one in a resolution of a situation that we'd like to see long-term restructured in a way that is not the current format. Look, we had a franchisee that was sitting on a lot of money not paying us. That doesn't work for me. We had several conversations. We waited several months. It was clear they were not going to pay us. We forced them into bankruptcy. Now they're coming out of bankruptcy. We're getting everything we're supposed to get. If you look at the agreement, we're getting everything, plus.
Gold will close on the restaurants shortly. It's 69 in the Carolinas. One of the great things about what happened was it allows us to restructure a number of entities that weren't very healthy. We brought in five new franchisees?
Yep.
Sold off portions of the Applebee's system, from my perspective, is too concentrated. It's 1,600-some restaurants with 33 franchisees.
What's good to see is that the new franchisees in the Applebee's systems represent some of the highest performing franchisees that we have in that entire system in their first year of operation. You can kind of see that when you have that ownership change and a culture change within that ownership level, it does flow through to performance at those restaurants. We're obviously interested in continuing that progress of having and facilitating ownership change when it's warranted.
The encouraging thing is there's a lot of appetite for Applebee's restaurants. We had several bidders on lots of portfolios that we put into play. There were several bidders on the Apple Gold. It just wasn't moving fast enough for us. I wanted to resolve it because I wanted to see them all resolved, and that's where we are now. With one small exception, Wisconsin, which will get resolved, we think, relatively quickly, there is no more bad debt. Everyone is paying, and everyone is on a healthy footing from a franchise health standpoint, and that's improving every month.
I think we're formally out of time, but I wanted to thank Dine Brands, and specifically Steve and Tom for joining us this morning. They're around for much of the day if there's any follow-up questions. Thank you very much.
Great. Thanks.
Thank you.