Welcome to the third quarter 2017 DineEquity Inc. earnings conference call. My name is Sylvia and I'll be operating for today's call. At this time, all participants are in a listen only mode. Later today, we will conduct a question and answer session. To ask a question in the answer session, if you have a question, please press star then one on your touch-tone phone. Please note that this conference is being recorded. I will now turn the call over to Ken Diptee. Ken, you may begin.
Good morning, and welcome to DineEquity's third quarter 2017 conference call. I'm joined by Steve Joyce, CEO, Greg Kalvin, Interim CFO and Corporate Controller, Darren Rebelez, 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, involves known and unknown risks, uncertainties, and other factors which may cause the actual results to be different than those expressed or implied. We caution you to evaluate such 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 our investor relations website.
With that, I'll turn the call over to Steve.
Thanks, Ken. Good morning, everyone. I appreciate your interest and participation in today's call. First, I'd like to say that I'm truly honored and very excited about the opportunity to lead this tremendous company, which has such great potential. I assumed the role of CEO two months ago, but I've also been a member of DineEquity's Board of Directors for the past five years. During this time, I had developed a deep understanding of the company, the business, and most importantly, our two incredibly strong brands. I've come to realize many of the strengths, weaknesses, and opportunities before us, and as a board member, I also have insight into what has worked and what has not. I've almost 40 years of experience in the hospitality and food and beverage industries, combined as well with international development.
With over 30 years of working with franchisees, I've developed a deep understanding of what makes a successful franchisor-franchisee relationship. I'm looking forward to working further with my talented senior management team to strengthen the efforts already underway to build on the partnership with our franchisees. When I became CEO, I knew that positioning Applebee's and IHOP for long-term growth would require some heavy lifting. I also know that we have dedicated franchisees and committed team members that are up to that challenge. I am extremely optimistic about our future and realizing this company's full potential and long-term success. I will judge this success by one measure, and that is total shareholder return generated over the next several years. Our first priority will always be the most efficient return of capital to shareholders. Realizing our full potential will not happen overnight.
It is certainly achievable with a change in our philosophy of what DineEquity, Inc. is. We are no longer a brand company that oversees two great brands, but a holding company whose attention and committed team members will be focused on supporting the success of the brands as well, and in particular, our franchisees. From my experience, you need a strong culture to succeed. With that, I want to talk a little bit about our strategic priorities to achieve our goal and evolve our future. One, we will establish a performance-driven culture here at Dine. Two, we will drive sustainable, positive sales at Applebee's and IHOP. Three, we will return Dine to a growth company. Regarding developing a robust performance-based culture, we'll place an emphasis on agility and innovation that will create opportunities for Dine and our franchisees.
In turn, I believe this approach will drive the maximum value for our shareholders. A shift in culture is very important to fostering greater collaboration, both internally and externally, being bolder, taking risks, and moving forward. I am bringing this focus to Dine and making certain that our iconic brands remain strong and that our franchise system benefits from relevant brands that lead their respective categories. Our success is driven by the success of our franchisees. Our second and equally important priority is to drive positive, sustainable sales at both brands. Industry conditions remain challenging and highly competitive. In this environment, our brands must continue to be nimble and able to respond to the ever-changing needs of consumers. We are executing on several initiatives at both Applebee's and IHOP to change the trajectory of comp sales and stem the declines in traffic.
At Applebee's, our dedicated and savvy franchisees are moving forward with simplifying restaurant operations while elevating the guest experience. This focus has resulted in marked improvement in the brand's overall guest satisfaction score over the last 12 months, and recently, in revenue performance. The entire Applebee's team is currently focusing on what needs to be done to make the brand more relevant and to jumpstart its growth. This action plan includes using breakthrough advertising to better communicate our message, implementing a refined national media strategy, promotions, and expanding our culinary pipeline, providing abundant, craveable food so that once again, our customers are Eatin' Good in the Neighborhood. We are working diligently to put Applebee's best days ahead of it. John Cywinski and his team are ensuring that the brand has the tools and resources needed to succeed.
In fact, over the last few months, we have thoughtfully restructured the organization to ensure that Applebee's has the dedicated resources to support our franchisees and the brand's growth strategy. IHOP, our franchisees are equally committed to improving performance and creating abundant value for our customers. To this end, we have made great strides in building on our IHOP 'N GO platform. The franchisees are also enthusiastically remodeling their restaurants, and we're tracking to achieve our target of 300 remodeled restaurants this year. To meet the convenience needs of the guests, we are executing on our strategy to expand on our off-premise business to deliver a great IHOP experience in different ways, including the use of technology. I'm confident in the steps we're taking to drive positive sales and traffic growth at both Applebee's and IHOP.
Our brand presidents are with us this morning, they'll provide additional detail on their respective strategies shortly. Regarding our third priority, returning DineEquity to a growth company, we are investing prudently for growth, both in our people and our brands. We are investing in tools and consumer insight analytics to provide franchisees with optimal support by having a best-in-class understanding of consumer trends and behavior. More rigorous quantitative analysis will provide a better understanding of key trends in customer expectations. This information will help us make better business decisions going forward. To succeed and remain competitive, we must reignite sustainable growth. This will be driven by developing a clear vision of our business, opportunities, and obstacles. We will focus on improving profitability through operational efficiency and closely managing our G&A. We will thoroughly assess opportunities to expand in unpenetrated markets through non-traditional and small format traditional development.
If we are not relevant to our consumers and growing, you can sure as hell bet our competition will be. Make no mistake, the competitive landscape will continue to change, we must evolve to be where our guests want us to be. We will also explore the potential for increasing our brand portfolio. International expansion continues to provide an attractive growth opportunity. Although our international operations comprise less than 3% of total consolidated revenues for our last fiscal year, it is still a very relevant part of our business and our strategy going forward. In fact, our international franchisees across both brands developed 24 new restaurants combined in the first nine months of 2017, representing approximately 33% growth over the same period last year. With that, I'm going to ask Greg to walk you through the financial results for the quarter. Greg?
Thank you, Steve. Good morning, everyone. I'll briefly cover our financial performance for the third quarter before turning to our revised performance guidance for the remainder of 2017. For the third quarter, our adjusted EPS was $0.91 compared to $1.46 for the same period of 2016. The decline was primarily due to a decrease in gross profit from franchise operations as a result of lower Applebee's revenue due to 7.7% decline in comp sales, royalties not recognized until paid in cash, an increase in Applebee's bad debt expense, the impact of 2017 closures, and a modest increase in G&A due to personnel-related costs.
I would like to point out that the franchise operation expenses in the third quarter were higher compared to the same period of 2016, primarily due to an increase in Applebee's bad debt expense and a $4 million franchisor contribution to the Applebee's National Advertising Fund. As discussed on our last earnings call, we expect to contribute an additional $4 million in the fourth quarter or $8 million during the second half of 2017. Finally, as an update regarding the $10 million in costs associated with the Applebee's stabilization initiatives we discussed previously, approximately $8 million was incurred in the first nine months of 2017. We expect the balance to be incurred in the fourth quarter. Regarding our third quarter impairment charges, in the third quarter, we incurred non-cash impairment charges totaling $532 million related to the write-downs of both Applebee's goodwill and other intangible assets.
The impairment charge consists of a $358 million related to goodwill and $173 million related to other intangible assets. The impairment of Applebee's goodwill is not deductible for federal income tax purposes, so there's no tax benefit associated with it. We did recognize a deferred tax benefit of approximately $65 million related to the other intangible asset impairment. Please note that the impairment of Applebee's other intangible assets can be deducted for federal tax purposes in the future, even though it's not deductible in the current year. The tax benefit, coupled with our approximate annual run rate of $12 million-$15 million for reduction in deferred taxes, resulted in the $77 million item for deferred taxes that you'll see in the statement of cash flows for the nine months ending September 30th. Let me provide some additional comments regarding this charge.
We are required under generally accepted accounting principles to periodically assess goodwill and other intangible assets for impairment when certain indicators exist. During the third quarter of 2017, based on various factors related to the performance of the Applebee's business over the first nine months of the year and the overall market capitalization of DineEquity, Inc., we determined that a valuation of goodwill and other intangible assets was warranted. The result of this valuation resulted in this non-cash impairment charge. With that said, please note that this charge has no impact on the company's ability to generate future earnings and cash flows. It does not impact our debt covenants. Finally, it does not impact our ability to pay dividends or repurchase shares. Turning to our tax rate.
Our GAAP effective tax rate for the third quarter of 2017 was an 11% tax benefit compared to a 35% expense in the third quarter of last year. The primary reasons for the variance is due to our book loss for the quarter and the nondeductibility of the goodwill impairment discussed earlier. For adjusted earnings per share, we currently expect that our effective tax rate for full year 2017 will be approximately 40%. Turning to our cash flow statement. Cash flows from operating activities for the first nine months of 2017 were $31 million, compared to approximately $62 million for the same period of last year. The overall decline was mainly due to lower net income resulting from a decrease in gross profit from franchise operation and higher G&A.
The increase in G&A was primarily due to a $9 million of non-recurring cash severance and equity compensation charges incurred in the first quarter related to the separation of our previous CEO, and $8 million incurred in the first nine months of 2017 for the Applebee's stabilization initiative. Adjusted free cash flow for the first nine months of 2017 was approximately $29 million, compared to approximately $66 million for the comparable period of 2016. The variance was due to the decline in cash from operations, as previously discussed, and higher capital expenditures compared to the first nine months of 2016. The increase in capital expenditures for the first nine months of 2017 compared to the same period last year, was mainly due to construction costs related to the test kitchen at our corporate headquarters and additional investments in IT for consumer-facing initiatives.
Turning to an update on our Applebee's franchisees' financial health. We continue to partner with our franchisees and our financial advisor, Trinity Capital. This includes the ability of franchisees to avail themselves to various financial assistance programs, including restaurant closures and direct financial support. Franchisee financial health matters are reviewed by both the brand and Trinity. Direct financial support will continue as necessary. Currently, only a limited number of Applebee's franchisees have availed themselves to any direct financial assistance in this program. However, I would like to point out that all but a few franchisees have participated in the approved closure process for underperforming restaurants. Lastly, I'll discuss the revisions to our performance guidance for fiscal 2017. Please see our press release we issued today for complete details on our guidance. We now expect Applebee's comparable sales to range between negative 5.5% to negative 6.5%.
Our guidance reflects the traction seen in the early fourth quarter from the implementation of our sales and traffic-driving initiatives. We have lowered our expectations for franchise segment profit to range between $297 million and $303 million, primarily due to continuing royalty collectibility related to a limited number of Applebee's franchisees. We've revised our expectations for cash flows from operating activities to range between $64 million and $74 million, mainly due to the timing of our marketing spend in the fourth quarter and the impact of the collectibility of Applebee's franchisee royalties previously mentioned. Turning to our adjusted free cash flow. Based on our revised guidance for cash from operating activities, we now expect a range of approximately $60 million to $70 million for 2017. To conclude, despite our 2017 challenges, our business model continues to generate ample adjusted free cash flow.
The financial health of our franchisees is a high priority for us, and we are committed to their success. We closely monitor the cost side of our business while making appropriate investments in our brands and people. With that, I'll now turn the call over to John.
Thanks, Greg, good morning, everyone. As anticipated, Q3 was a challenging quarter for Applebee's. In particular, our national media spending in Q3 represented a very unfavorable comparison with the same quarter last year. Additionally, we were off air more weeks in the quarter when compared to a year ago. With that said, we remain focused on our 2018 turnaround plan as we expect to see our initiatives take hold beginning in Q1. In fact, we saw a change in our trajectory here in October through a combination of new initiatives. We supplemented the ad fund with a $4 million contribution. We reintroduced Eatin' Good in the Neighborhood, our new campaign, with some terrific new advertising. We focused on our core 2 for $20 value proposition with a beverage underlay.
For the first month since about middle of 2015, we saw positive traffic and sales growth in October. On another positive note, we just concluded our Applebee's conference. Our franchisees are both confident and optimistic as we look to next year. We outlined our turnaround strategy as well as a comprehensive 2018 plan. We have franchisee alignment and support of all components of this plan. Most importantly, we once again have the proper lead time required to execute at a consistently high level, particularly at the restaurants. I'd simply categorize our partnership with franchisees as the best it's been in years and one of the primary reasons I'm very bullish about our future. Speaking of franchisees, I'd like to take a moment to recognize our largest franchisee, Apple American Group, who we just announced as our 2017 Franchisee of the Year.
I'm proud of Greg Flynn and his team because they consistently walk the talk on all key operating metrics. They really represent the brand exceptionally well day in and day out. In addition, I'd like to welcome our newest franchisee, Apple Mountain LLC, operating 10 newly acquired restaurants in Utah. As we look forward, we'll likely have additional transactions as part of our long overdue portfolio optimization. Turning to operations. We remain focused on narrowing variability across the system while removing complexity in our restaurants. I am very pleased to welcome Kevin Carroll to his new role as Chief Operations Officer for Applebee's. Kevin is a seasoned leader with tremendous experience in delivering operational excellence and guest satisfaction while building a vibrant operating culture of accountability. Kevin will hold our franchisees accountable for an elevated guest experience through partnership, sharing of best practices, and adherence to brand standards.
From a marketing perspective, we'll embrace our Applebee's brand essence. We're fundamentally well-positioned as an all-American, value-oriented, and family-friendly brand with deep connections throughout the communities in which we operate. You'll see us fully leverage our Eatin' Good in the Neighborhood positioning across all touch points. We'll target routine traditionalists as well as those very important value seekers who prefer casual dining restaurants and Applebee's in particular. Our approach to content development has been refined, media and advertising strategies have been substantially enhanced. Our brand voice and personality will become crystal clear to our guests as we move through 2018. On the culinary front, we'll shy away from niche and trendy menu items while embracing broadly appealing mainstream flavor profiles as well as abundant value. Our new discipline testing and validation process is now in place as we build our innovation pipeline with a relentless guest orientation.
Importantly, all culinary innovations will have a clear operations complexity filter prior to consideration. This is an essential part of our new process. From a supply chain standpoint, we'll activate our partnership with PricewaterhouseCoopers in pursuit of enhanced restaurant profitability that can be redeployed to both labor and food investments over the next 24+ months. Off-premise remains a priority, requiring greater operational consistency as well as technology and packaging enhancements. These investments are slated for implementation in middle of 2018 once we have validated the ideal service model. We continue to see the off-premise business as a growth engine for the brand, with to-go being the near-term focus while we actively test and expand our delivery footprint, currently present in about 150 restaurants. To-go currently accounts for just over 8% of total sales, We're very optimistic about the opportunity to grow this platform.
An equally important part of our brand optimization is the overt shift of DineEquity shared resources to dedicated Applebee's resources. To date, we've implemented this structural change with consumer insights, business analytics, operation services, and restaurant training. This evolution ensures we have a fully autonomous structure with the distinct Applebee's culture and very clear brand accountabilities. While 2017 is a transitional year for Applebee's, we once again have clarity on who we are and what we stand for. We know what our guests value and what makes us so unique in this crowded space, We are most certainly aligned with our franchisees on how we execute this turnaround plan moving forward. Our initiatives begin to line up in Q1, We expect to see sequential improvement throughout 2018. Thank you, everyone. With that, I'll turn it over to you, Darren Rebelez.
Thank you, John Cywinski, good morning, everyone. IHOP's third quarter comp sales declined by 3.2%, partially reflecting the continuation of soft industry conditions, specifically one of the steepest quarterly declines in family dining comp traffic over the last two years. IHOP's results were primarily driven by that decline in comp traffic, as well as underperformance in the dinner day part due to cycling a successful Kids Eat Free promotion in 2016. Despite the declines in both category sales and traffic this year, development by IHOP franchisees continues at a very solid pace. Franchisees opened a total of 50 restaurants globally, gross, in the first nine months of 2017. This represents a 108% increase over the same period last year. I'll provide more details on our development results later.
Our top priority at IHOP is to rebuild sales and traffic momentum by executing against a broad four-pronged strategy, which includes significantly enhancing the guest experience, running great restaurants, building and driving traffic, and being where the guest is. I'll briefly discuss each of these, starting with game-changing enhancements to the guest experience. We know that the atmosphere in our restaurants is an integral part of the dining experience. We've added a dedicated consumer insights team to conduct in-depth analysis to better understand who our guests are, what matters to them, why they care about the brand, and what role our great food plays in their lives. Through this work, we know that value is top of mind for everyone, Guests expect a great experience based on the strong brand equity we've built with consumers across a very broad age demographic.
Make no mistake, we are more in tune with our guests than ever before, and our focus is to drive higher frequency among our existing IHOP guests. Providing a warm and welcoming environment is just as relevant to our guests as the service itself. To that end, the IHOP Rise and Shine remodel program has elevated the dining experience, and we believe has helped to further differentiate us from our competitors. I'm pleased to report that our franchisees remodeled 92 restaurants in the third quarter, bringing the total to 230 restaurants this year. We are on track to complete 300 remodeled restaurants for the second consecutive year. To meet the needs of today's technology-savvy consumer on the go, we will also better leverage consumer-facing technology to increase the brand's accessibility.
These initiatives include enhancing IHOP's website and launching a mobile app, both of which we expect to roll out this quarter. Lastly, we're making progress on growing our off-premise business, which includes online ordering and delivery. I'm pleased to announce that our online ordering platform is almost fully deployed and will support the revamped IHOP 'N GO program that we launched earlier this year. These combined initiatives have yielded positive results, generating overall to-go comp sales growth of 8.3% in the third quarter, with solid growth in both traffic and check. This compares the to-go comp sales growth of 7.1% in the same quarter of last year. Regarding delivery, we will start limited tests this quarter with Amazon and DoorDash.
Once we confirm that the online ordering integration with these initial vendors has met our operating standards, we'll be able to quickly expand to other restaurants offering the platform that are within the respective coverage areas. Additionally, we plan to start testing with Grubhub in the first quarter of next year. To date, IHOP's to-go sales account for slightly more than 5% of our sales mix, which is approximately 50 basis points higher compared to the third quarter of last year. While the platform is still in the early stages, we're optimistic about the potential that this incremental revenue channel represents. Let's shift gears to running great restaurants. Our sharp focus on all aspects of restaurant operations has helped IHOP to be the leader in family dining for 10 consecutive years, according to rankings issued by Nation's Restaurant News in July.
We're building on this success by addressing hospitality and operational basics. Our efforts resulted in IHOP reaching a new high and overall guest satisfaction score in the third quarter. I'd like to thank our franchisees and team members for their hard work in achieving this. To continually improve, we're focusing on hospitality training programs to provide our guests with an even better experience. We're also collaborating with franchisees on operational improvements by using tools to help with sales forecasting, food cost, and labor scheduling. We also plan to increase the frequency of our operations meetings in 2018, as well as our high-touch, people-centric training events to provide franchisees with the tools they need to train their teams and foster better implementation. Additionally, we will continue to have a major focus on our off-premise business and best practices and effective execution to further unlock operational efficiency.
Lastly, we've realigned our training organization to report into field operations, which will better enable that team to support the needs of franchisees at a local level. Taken collectively, we believe that these initiatives will drive our business improve results over time. Turning to driving traffic. Attracting new guests into our restaurants and enticing repeat visits from existing ones are imperative to rebuilding IHOP's momentum. To break through the clutter, we're going to focus on continued culinary innovation, a sharper value proposition, and more effective advertising to drive traffic. Regarding culinary, we introduced our all-new French Toasted Donuts with a bold new marketing campaign during the quarter. While this product garnered positive guest sentiment and purchase intent, we believe the lack of a compelling price point caused it to underperform versus our expectations.
This promotion was followed by the introduction of our new Latte Lover's Pancakes, which are inspired by delicious flavors found in the most popular coffee beverages. Starting at just $4.99, this offers the guest a compelling value combined with our core equities available across each day part and takes creativity to the next level. Early indications are that this combination of value and core equities is resonating with the guest. To better communicate IHOP's value proposition and what we stand for as a brand, we recently selected Droga5 as our ad agency of record. Droga5 will assist us in both creating effective messaging and generating new breakthrough creative that will resonate with consumers and help drive traffic into our restaurants.
This firm is widely regarded as one of the leading agencies in the country, has been named agency of the year multiple times by Ad Age, Adweek, and the Cannes Lions International Festival of Creativity, in some cases since their inception. We're confident that this change will allow the IHOP brand to stand out and break through the clutter. Regarding the final element of our strategy, being where the guest is. Approximately 46% of adults and 61% of millennials surveyed said the most important factors when choosing a restaurant are availability, convenience, and friendliness. For these reasons, offering more ways to access IHOP and providing convenient carryout service in our restaurants are more important than ever. An important aspect of our plan encompasses both traditional and non-traditional development by franchisees, which continued at a healthy pace in the third quarter. Our franchisees opened 12 domestic restaurants, four of which were non-traditional.
This includes the recent opening of an IHOP Express at the Dallas Fort Worth International Airport, which is our first location after the TSA screening area. This newest restaurant is in response to long-time demand from guests for great IHOP food on the go. Passengers traveling through the airport will be able to enjoy their freshly prepared favorites, like our world-famous buttermilk pancakes 24 hours a day, but will also have the option of several hot grab-and-go items ideal for those in a hurry. This opening is part of our growth strategy, which includes expanding the brand's overall traditional footprint, introducing smaller prototype restaurants, and expanding into locations like airports, universities, casinos, and travel centers. We've had success with this strategy and developed a total of 25 non-traditional IHOP restaurants in the U.S. to date. I'd also like to clear up some confusion about IHOP's development.
First, I'd like to reiterate our previous guidance of between 80 and 95 new restaurants globally, the majority of which are domestic openings. We also expect to close between 25 and 30 restaurants globally. This level of closures is completely consistent with our historical annual run rate and simply reflects lease expirations and market optimization moves. Our net development is on pace to reach the highest level since 2009. There continues to be very strong interest in the IHOP brand globally, and our franchisees are growing. This Saturday is Veterans Day, and each year, IHOP participates in celebrating our veterans and their service to our country. We honor those that have served by offering both retired and active duty service members a free short stack of our red, white, and blue pancakes. Last year, we provided approximately 405,000 free pancakes throughout the domestic system.
In addition, we're announcing our partnership with the Children of Fallen Patriots Foundation, whose mission is to provide college scholarships to children who have lost a military parent in the line of duty. The IHOP system will donate $1 for every red, white, and blue pancake combo sold in the month of November to this worthy cause. To wrap up, we're doing the necessary heavy lifting to rebuild IHOP's sales and traffic momentum. I'm very confident in the steps that we're taking to drive the business forward as we approach our 60th year of providing guests with an inviting and warm atmosphere to enjoy their favorite IHOP meals. We recently wrapped up our global franchisee conference, where we shared our plans for the future.
Franchisees are excited about what's to come and aligned around our direction moving forward. With that, I'll turn the call back to Steve for his closing comments. Steve?
Thanks, Darren. Well, obviously, we're very excited about creating this company into a dynamic enterprise, which is going to do great things, and we're working with a talented and seasoned management team. We have the best franchisees in the business who have demonstrated their commitment to success and confidence in our long-term growth plans. We have a lot of work ahead of us as we execute on our strategies to establish a performance-driven culture, driving sustainable sales at both brands, and return DineEquity to a growth company. As I said on the second quarter call, I think we're going to do a lot of different things that will add value. We have tremendous assets that need some adjustments, and we're looking forward to providing comprehensive updates on our progress. We're going to give you a vision for the company going forward early next year.
I'm enthusiastic about the opportunity to realize the company's full potential, I feel very confident in the steps that we're taking to achieve that. With that, let's open it up to any questions you might have. Operator?
Thank you. We will now begin the question-and-answer session. If you have a question, please press star then one on your touch-tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touch-tone phone. Our first question comes from Stephen Anderson from Maxim Group.
Yes, good morning. Certainly taking a look at the comp improvement we've seen so far in the quarter, I just wanted to ask, can you pin down how much of the improvement, as well as any kind of effect that you saw in third quarter from the two hurricanes we've had?
Hi, this is Greg. The effects were pretty minimal to our businesses. The amount of time the stores were closed down versus when they reopened was relatively quick, there's usually a bounce back in people coming out after the restaurants reopen. Very minimal on the sales line for the quarter.
Okay, going to fourth quarter, we saw a Black Box come out late last night, up 1.4% on casual dining. Looking at that, we saw some big gains in Florida and Texas. I just want to see, of the sales and traffic gains from the quarter, can you attribute some of that from the hurricane recoveries?
No, actually, I think where we feel we are now is what we're doing is working. October does not make the year, we were pretty positive about what happened in October. We're contributing it to, in both of our brands, we're doing better marketing, providing better value, running better restaurants, and capturing the customers' interests with some really interesting approaches to not only our advertising, but also the food that we're serving in the restaurants. I think, look, our brands represent the 99%, so we think anything that's positive in these categories, we're obviously going to benefit from. We attribute it mostly to things we're doing that are making a positive difference.
All right, thank you.
Our next question comes from Michael Gallo from C.L. King.
Hi, good morning, just want to echo the positive signs of stabilization. Good to see it early in the game here.
Thank you. Good morning.
Good morning. Stephen, I know this maybe is still to be unveiled when you think about your vision for each of these companies, you've been on the board for some time. You've seen the positives and negatives of having these brands together. Obviously, you'll have an opportunity when the make-whole on the securitization goes away in the spring. If you had any high-level thoughts on whether you think ultimately these brands benefit from being together, don't benefit from being together, whether it might make sense at some point to split them apart, just some thoughts on maybe it's too early to answer, but some high-level thoughts there would be helpful. Thanks.
Oh, it's not too early at all. Let me tell you something. Franchise business is about scale. Scale allows you to balance your costs over a larger number of units. The incremental value of a unit to us is almost entirely profitable. This business is a scale business. You can expect us to grow that scale, not shrink it.
Great. Just want to delve in on IHOP a little bit. Obviously, it's had a little bit more of a challenging year relative to some of the prior years. You've had some success in to-go, but it just seems the promotion since you changed the advertising campaign last September, it just seems that it's gone from outperforming the category for a long time to underperforming. I was wondering whether you might look at the same evaluation regarding the ad campaign and how effective that is as you're undertaking at Applebee's. Thanks.
Well, yeah, Mike, we're really focusing on a number of things to positively drive that. As I mentioned last quarter, we made a change with our chief marketing officer and brought in someone who's got nearly 20 years of experience in that role. We further went on, as I mentioned just a few minutes ago, to replace our ad agency to arguably the top creative agency in the country. We've got a lot of great food. We've got great service in our restaurants. We're remodeling the restaurants and creating a new and more contemporary atmosphere, and we felt like we really needed a top-notch agency to highlight all of those changes in our restaurants, and that's what we've done. We absolutely expect to see better results in the coming quarters as a result of those changes.
We think all those things are going to drive what is already a brand that everybody loves. One of the things that we're focusing on, which we think is important and we've heard from our consumers, is we're going to provide greater value than ever. That value concept communicated well in a way that's befitting of this brand, is just going to reignite this brand to levels that it should be at, and we think we're starting to see results already.
Great. Thank you.
Our next question comes from Brian Vaccaro from Raymond James.
Thank you and good morning. It's pretty encouraging to see the traffic and sales rebound in October, especially at Applebee's. John, you mentioned a few initiatives, but I didn't hear any attribution to the Dollarita promotion. Could you provide some color on how that promotion performed, maybe some perspective on both sales and profitability during the month of October versus the past three to six months?
Hey, Brian. Good morning. As much as I'd love to, look, just for competitive reasons, we're not going to delve into any detail here. Suffice it to say, really, from all of our qualitative and quantitative work, this new advertising, which is basically a formula that we've used previously around Eatin' Good in the Neighborhood with great success, is resonating. Our value propositions are resonating both on the food and beverage side, and we're lined up for 2018. I'm a little surprised by the early traction in October, but we expect all of these initiatives on all fronts to hit beginning in Q1 and frankly, early Q1. I'm going to resist the temptation to disclose any detail for competitive reasons, Brian, and I know you understand that.
Yeah, we can also say, look, there are three or four factors that are contributing to that change. First of all, the advertising, as John mentioned, is resonating much more with consumers than what we were doing previously. We sold more 2 for $20s than we've sold, I think, in the history of the brand. That program and offer clearly is driving people into these restaurants. We've had successful promotions as well. You can expect us to continue all of that, you can expect, we think, that all that is the formula for putting us on a positive, sustainable sales growth going forward.
Okay. Would you be willing to disclose your alcohol sales mix in the quarter?
Brian, look, our alcohol mix, generally speaking, is in that 14%-15% range on an annual basis. I honestly wouldn't disclose any detail beyond that. Frankly, I wouldn't even have it at my disposal. We're pleased with where we are on both the food and alcohol front.
Yeah. By the way, we think the bar is an opportunity for us because we think we can move that needle.
All right. Fair enough. You mentioned the advertising weights were down pretty significantly in the third quarter at Applebee's. How did that comparison look in October? Was that also part of it, the weight sort of normalizing year-on-year? Then also, fourth quarter, is advertising weights going to be up year-on-year, another down quarter? Any perspective there would be helpful.
Hey, Brian, I think you nailed it. Q3 was a bit of an anomaly year-over-year. Q4 is back to kind of a normalized year-over-year comparison. I wouldn't call it an increase year-over-year, but stable is probably the best way to categorize it. Again, we don't have those issues moving forward into 2018, so very bullish as we look forward.
All right, shifting gears to the guidance. The adjusted free cash flow guidance lowered pretty meaningfully on a reduction in the franchise segment profitability. If you parse down and really drill down on the fourth quarter, it implies an even greater year-on-year decline, it would seem, in the Applebee's franchise segment profit. Can you help parse that out between sort of the cash basis royalties and the collectibility there versus maybe the bad debt expense?
Well, they're all. This is Greg. Brian, they're all an effect on our cash, if you will, whether it's a bad debt or not collecting it in the first place, because either way, it relates to collectibility. Those items that are projected for the rest of the year, plus we mentioned in our guidance that we're going to have some additional weighted marketing spend on a cash basis in the fourth quarter. Those two items is what's driving the revision of the adjusted free cash flow to where we're comfortable with it for the rest of the year.
They're roughly in equal weights.
Yeah, essentially.
And look-
Okay
I've been in this business a long time, I can tell you this. The way to improve your receivables and collectibles is to have your franchisees make more money, and that's what we're doing.
Okay, just to be clear on that, the NAF contribution that you're accruing in the expense line, Applebee's franchise expense, I think that was $4 million in the third quarter.
Yes.
Will that also be $4 million in the fourth quarter, or is it going to be more than that because of what you just said on the cash spend on ad spend?
Our contribution will be $4 million in the fourth quarter also, 8 for the whole year, for the second half of the year.
That fourth quarter is in advance, not an expense.
There's part expense and part advance.
Yeah.
There'll still be a $4 million of income statement hit in the fourth quarter that'll go through franchise expense. Then, like I said earlier, we're also advance spending some money from our cash for marketing spend in the fourth quarter that'll be incremental to normal run rates, if you will.
Okay. All right. I'll follow up offline on that. Then the last question on the IHOP unit growth outlook. I know this has been the best year in a while on net unit growth. I guess as you look at the next few years, where do you see net unit growth trending, given you're at nearly 1,800 system units with most of those domestic? I guess maybe your latest thoughts on the total ultimate domestic opportunity, and the last piece of it, is part of the comp weakness at IHOP you think related to intensifying cannibalization? Thank you.
Yeah, Brian. Well, just to correct one of your numbers, we have around 1,650 domestic restaurants, so a little bit less than that 1,800 that you were citing. Yeah, we absolutely believe we have more room to grow, and we're not seeing the comp challenges come from cannibalization because our franchisees are the ones that are really driving the development. They're less inclined to cannibalize themselves. We're seeing good incremental growth there. The other channel that we really think gives us a lot of upside is the nontraditional channel, and it's really allowing us to penetrate some areas that we traditionally have not gone after. Our guests are telling us that they want access to the IHOP brand. We're pretty bullish on our growth moving forward, and we think we can do that without cannibalizing our existing restaurants.
I guess the way we think about it is we think we've got a long runway for IHOP domestically. Also more importantly, that brand is incredibly in demand globally. There is just a strong interest on almost every continent. You're going to see us talking in the future about we're in discussions on several multi-unit deals. We don't have anything to tell you at this point, but it's one of the many nice surprises I've gotten since joining this company, is seeing the demand for our brands, particularly IHOP International.
All right. That's helpful. Thank you.
Our following question comes from John Ivankoe from JP Morgan.
Hi, thank you. There were some initial comments made that the success of this business was going to be around driving total shareholder return. To state the obvious, it's a combination of dividend and capital appreciation. Your dividend is extremely high. Very close to what a given year's net income is, but you do have some cash on the balance sheet. There's different ways to basically cut this. You could imagine a situation where a meaningfully lower dividend allows you to reinvest in your business in the short term in order to drive long-term value of the equity. Where you could also imagine that more of the TSR would be driven by the dividend itself. Since you brought that up and you want to be measured by total shareholder return, that's obviously very different ways to get there between dividend and capital appreciation.
I was hoping that you could elaborate on that.
John, this is Greg. As we've done consistently, our board and management evaluates the rate of the dividend every quarter, and we have an existing dividend being paid early next year. It's always a careful, thoughtful evaluation as to how to deploy that capital. As far as the cash goes, I think we've said that probably about half of our cash on our balance sheet or more is related to gift cards and advertising money. At the end of the third quarter, there's probably about $40 million or $50 million of free cash, if you will. The rest of it is really tied up in those funds, if you will, that are earmarked for specific purposes. It's been that way for a while.
There's not a huge amount of cash that we have at our disposal at any point in time for that, but about half and half is what it is. The dividend, as I've said, will be evaluated quarterly.
Right now we are happy with our position. We obviously are going to continue to reevaluate it. I measure my performance and this company's performance, and this management team's performance by what we give the shareholders. In our model, we are going to continually reevaluate how we allocate our resources. What we're going to do long term that you can count on, is we're going to be the most efficient company in terms of how we deliver value to the shareholder. As environments change, and lots of things are in the mix right now. Who knows what's going to happen on the tax bill? There's a whole bunch of different things that could change our outlook, but right now, we're satisfied with where we are, and we'll continue to update you on where we think we're going.
Thank you for that. Secondly, as you're talking to the franchise community and they're making their 2018 plans, the industry doesn't have a lot of pricing power. Labor costs in certain markets are actually a problem. Commodities aren't going down like they used to, or they did for a couple of years. Maybe they're even ticking up depending on the commodity. It's hard to see a path where franchisee profitability will be up 2018 over 2017. Just hoping to kind of get your comments on that and just your sense on the overall franchise community of how they're looking at their cost structure in the middle of the P&L and whether that influences their willingness or ability to reinvest at the levels that you would like them to.
We've got several things working on that front. We're pretty optimistic about 2018, and so are our franchisees. We just had our convention, and the Applebee's folks during the general session were voting on a number of questions we were asking, one of them which was, "How do you think we're going to do in 2018?" Their response was uniformly positive that we're going to do well. There are some things on the cost side that we're doing. We're trying to drive efficiencies around labor, because you're right, labor costs are not going down. We're trying to drive efficiencies around our buy, and that is the Pricewaterhouse study that was mentioned earlier. We know it's already yielding positive results, but we don't have the final.
We've got a very aggressive target for the benefit of that study, and at this point, we think we're going to achieve it. The other big thing is we're going to drive traffic, and if we drive people into those restaurants, we're going to make more money. It doesn't get any simpler than that.
Just two related points. One, your belief that Applebee's drives traffic in 2018, is that conditional on the belief that the industry bar and grill casual dining, however you want to define it, drives traffic in 2018?
Look, I think we're going to outpace the industry, but if the industry's not in a reasonable environment, then we're not going to generally follow the industry, but our plan is to outperform the industry.
Okay.
Wherever you're going to put the industry, put us above it.
Okay. It's all right. Thank you for that clarification. The final question. When you and the franchisees look at your menu, your average ticket relative to traditional and non-traditional competition, how do you feel about the average ticket? Do you have opportunities up or down on average ticket in 2018 versus 2017?
We think in both brands, our greatest opportunity is to drive more value for the consumer, that's what we're planning on doing.
Yeah, John. This is John Cywinski. Look, we're much more fixated on traffic than we are check growth, when we look at 2018, quite frankly.
Yeah. This is Darren. I'd reiterate the same thing. We've got alignment with our franchisees around focusing more on a more sustainable value proposition, and that's what we're working on right now.
Thanks.
The final question comes from Stephen Anderson from Maxim Group.
Yes. Just wanted to follow up on the comments about your contribution to the ad fund. As you think about 2018, can you comment yet about whether you'll see any additional contribution for '18?
This is Greg. We don't give guidance right now for 2018. We carefully evaluate everything that we need to assist our franchisees in the business overall. We wouldn't comment on that right now. When we go out with that guidance, you will know.
All right. Thank you.
Okay. Thank you for your interest. Thanks for participating in the call. We are obviously very excited about where we are now, but also more importantly, where we're headed, and we look forward to sharing that with you over the next several quarters. Have a great day.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.