Q3 2019 Earnings Call
From last year with a single tweet to imply that we were changing the brands name to IR hub and this went viral worldwide.
At Applebees, we brought back our popular all you can eat rivulets and chicken tenders and introduced our new three course meal, which contributed to the brands highest quarterly comparative sales increase in over two decades.
As others have noted the industry continue to face difficult comparisons coupled with challenging traffic trends during the quarter. This year.
Both Jay and John will provide details on the performance of their respective brands a little later.
We're pleased to have announced the largest multi unit development deal in Iops history.
We have plans to develop nearly 100 IHOP restaurants with Travelcenters of America headquartered in Westlake, Ohio, which conducts businesses in 43 States and Canada.
Jay will provide further details on this exciting new partnership.
Turning to our financial results adjusted EPS improved compared to the same quarter of 2018.
We also continued to see improvement and consolidated adjusted EBITDA, which reflects the stability of our asset light model.
Another compelling attribute of our business model is the ability to generate substantial adjusted free cash flow in the first nine months of 2019, we generated approximately $100 million in free cash flow.
Today, which is an important lever for us declined approximately 4% compared to the third quarter of last year, we will continue to closely manage our DNA.
Since joining time brands as CEO in 2017, we've executed against a multi prong strategy focused on returning to a growth company to that end. We've maintained a disciplined focused on those strategic those strategies, which will drive sustainable positive sales and traffic.
These include investing and data analytics and consumer insights to understand our guests better and develop a greater assessment of the competitive landscape.
Operations excellence in our restaurants, which contributed to achieving higher overall guest satisfaction scores between 2017 and 2019.
Contrary and menu innovation to provide our guests with a broad array of craveable food at attractive pricing.
Remodel programs, which create a warm and inviting atmosphere in our restaurants.
Strategic development initiatives to expand our domestic footprint in high impact locations.
Growing our off premise business to accommodate the ever changing dining preferences of consumers. We are also leveraging technology enhancements to improve how guests engaged with our brands either in restaurants are off premise.
While our progress has produced positive results we are not complacent.
We are committed to working even harder to build insurmountable leads in the categories in which we operate while strengthening our brands.
I would like to highlight the for the 12 consecutive year IOP was ranked the number one and family dining by Nations restaurant news based on domestic system wide sales for 2018.
Applebee's also has a long track record of being one of the top ranked casual dining chains.
Now lets turn briefly to our applebee's franchisees, we've improved the brands franchisee financial health over the past two years, while focusing on enhancing brand relevance and attracting new top tier operators to the system. In fact, two of these franchisees currently rank among the top performers in the domestic system.
This is a testament to our strategy of evolving the franchise portfolio by adding highly experienced franchisees.
This approach contributed to the overall improvement in comp sales between 2017 and today as a result dine brands recorded a significantly lower amount of bad debt by the end of the third quarter of 2019 compared to two years ago.
We continue to closely monitor the health of our franchisees and we're pleased with the progress that they've made Tom will provide more color on franchisee financial performance.
To close our franchise model continues to produce strong adjusted free cash flows and our industry, leading brands are well positioned to gain share in a competitive environment with that I'll now turn the call over to Tom to discuss the financial results. Tom. Thank you Steve Good morning, everyone. While we.
Had difficult difficult comparisons from last year I'm very pleased to report that we delivered year over year improvements in adjusted EPS and adjusted EBITDA.
For the third quarter of 2019, adjusted EPS was $1.55 cents compared to $1.53 cents for the same quarter 2018, the increase in adjusted EPS was due to relative earnings stability and the result of our commitment to return capital to shareholders through share repurchases approach.
By more color on capital allocation a little later.
Turning to our franchise operations gross profit declined 2.5%, primarily due to a decrease in applebee's franchise revenues due to fewer effective franchise restaurants, which includes the impact of our acquisition of 69 units, resulting in franchise royalty being replaced with company operated sale.
Yes.
Additionally, a decrease in domestic franchise restaurant comp sales and a decrease in revenue recognized upon cash collection, which did not recur. This year also contributed to the decline in franchise revenue.
This decrease was partially offset by growth in our house franchise fees in fact, when looking at Q3 revenue mix exclude the advertising fees and company operated sales IOP revenues now constitute 68% of darlings profit generating revenues.
At this time I would like to provide some insight into franchisee financials.
In doing so I would also will decide the data that I am site does not represent the financial data for died.
It is primarily based on our comprehensive surveys and data submissions for franchisees, which have not been subjected to independent verification.
Our applebee's, we've been tracking both four wall and franchisee entity level financial performance, let's start with four wall.
When looking at our trends from 2017 to 2018, not surprisingly we saw an improvement in margins, which were significantly driven by the 5% increase in tops.
While cost of goods remain flat approximately 25% for the system.
Total operating expenses, including labor cost decreased slightly for all four wall profits that average starting the low double digit margin range.
Importantly for 2019 performance am fees on stores remaining open or slightly stronger than system wide top performance up over 1% in the first six months at 2019 compared to the same period in 2018.
Food costs improved slightly in the first half of 2019 versus the same period of last year.
However, four wall EBITDA margins. During this period were down 1% pause almost entirely by the increase in delivery service provider fees paid but EBITDA margin was still in the low double digit range.
As John will note. We've addressed this issue with new contracts with delivery service providers that are designed to make delivery fully profitable for franchisees.
Importantly, the market basket for Applebee's cost of goods is expected to be favorable by approximately 2.9% for 29 team.
With respect to franchisee entity debt leverage we have seen dramatic improvements since 2017 looking back the system averaged three times debt to EBITDA historically.
But then had significant variability in 2017 and their return to a more normal range in 2018 with approximately three and a half times average leverage.
With respect to IOP.
We have seen very stable four wall profits over the past few years with lower food and lower labor costs, when compared to either applebee's or other full service restaurants.
When comparing the first half of 2019 to the same period of 2018, IHOP franchisees actually had higher margins in 2018.
The market basket for Iops cost of goods is expected to be favorable by approximately 90 basis points Rtwenty nine team.
We continue to work with our franchisees and improving four wall profitability, including improving comp sales.
Finally, I want to highlight that an industry, leading study across all brands shows similar data as our own and when compared to other brands Applebee's four wall profits.
The franchisee level are consistent with other national publicly traded brand franchisee margins and IHOP franchisees profits significantly exceed their competitive set of family dining franchise brands.
Regarding GNS now back to Dine Jones financials as Steve mentioned.
GNS, an important lever for us our DNA for the third quarter was $38.9 million compared to $40.8 million for the same period of last year. The decline year over year was primarily due to lower compensation costs and lower TNT expenses.
We will continue to diligently manage our DNA and expect modest growth over the long term consistent with the rate of inflation.
Regarding our tax rate, our GAAP effective tax rate for the third quarter of 2019 was 24.6% flat compared in the same period of last year.
Turning to our cash flow statement and one of the advantages of our highly franchise model is the ability to generate stable and strong adjusted free cash flow.
For the first nine months of 2019, adjusted free cash flow was $101 million compared to $63 million for the same period of 2018.
Consolidated adjusted EBITDA for the third quarter, a 2019 was $63.4 million compared to 62.2 million for the same quarter last year.
Excluding advertising revenue and company operating results, our adjusted EBITDA margins in the third quarter, a 2019 improved to 52.6% from 50.5% for the same quarter last year.
Returning capital to our shareholders remains a top priority review, we returned a combined total of $55 million in the third quarter. This was comprised of $12 million, a quarterly cash dividends and the repurchase of approximately 524000 shares of our common stock.
The total cost of $42.7 million.
This amount in the third quarter alone exceeds the $35 million, we repurchased in the entirety of 2018.
Switching gears to our 2019 financial performance guidance.
I would like to highlight some revisions these updates reflect among other factors. Our performance has evolved during the third quarter and our overall outlook for the fourth quarter of 2019, please see our press release or complete details.
We now expect applebee's domestic system wide comparable restaurant sales performance to range between zero and negative 1%.
This compares to previous expectations of between zero and positive one of the have per se.
We now expect Iops domestic system wide comparable same restaurant sales performance to range between positive, 1% and positive 2%.
This compares to previous expectations of between positive, 1% and positive 3%.
We currently expect IHOP franchisees to develop between 10 to 20 net new restaurants globally. The majority of which are expected to be domestic openings.
This compares to previous expectations of between 20 and 30.
For Applebee's, we now expect net closures to be between 30, and 40 restaurants globally. The majority of which are expected to be domestic this compares to previous expectations of of between 20 and 30 units.
We now expect adjusted earnings per diluted share to range from $6.75 per share to $7 per share. This compares to previous expectations for a range from $6 in 80 cents per share to $7 in five cents per share.
To close we have led our business through a competitive period in our very own difficult same restaurant sales comparisons.
I'm pleased that we've been able to maintain cost in margin discipline EBITDA guidance remaining unchanged over the course of the year with that I'll now turn the call over to John .
Thanks, Tom and good morning, everyone in line with our expectations Applebee's posted a 1.6% comp sales declined in Q3, as we lapped our record setting 7.7% increase from last year, the highest comp sales results reported by any restaurant brand in Q3 of 18.
After significantly outperforming the casual dining category on comp sales last year, our 2019 year to date performance is identical to the category average through Q3.
With that said, we are expecting a challenging Q4, given our very positive 2017 in 2018 Q4 comparisons.
For context, our Q4, two year hurdle of plus 4.8% is the highest we've seen since early 2012.
These expectations are now reflected in the full year Applebee's guidance that Tom just outlined for you now.
Looking forward there are three important milestones I'd like to highlight for the Applebee's brand.
First 2019 marks the completion of our three year strategic initiative to close approximately 200 underperforming low volume restaurants with the current base of 1600, 67 US restaurants, 2020 will bring a normalized closure rate of less than 1% of this base.
While we returned to selective new unit development towards the end of 2020 and certainly into 2021.
Additionally, we've completed eight franchisee transactions over the past two years, representing about 170 restaurants. This portfolio evolution has resulted in the exit of several underperforming operators, while introducing new and deeply experienced franchisees to the app will be system as well as.
Creating growth opportunities for several existing franchisees.
Perhaps most importantly for the first time three years, we have no material royalty or advertising delinquencies as of the close of Q3.
This is a significant development one that ensures a far more stable and predictable income stream as well as a fully funded 4.25% marketing plans are coming up here in 2020.
These very tangible milestones bode well for our future. It means the applebee's brand is stronger than it's been in quite some time without the constraints challenges we've had to navigate over the past few years.
This optimism was evident in the last month's annual franchise conference, where we aligned with our partners are on our 2020 strategic plan.
This plan included our focus on guest satisfaction.
Value and innovation off premise excellence and restaurant PNM cost reduction.
On the guest satisfaction front, we continue to see consistent progress on core brand attributes such as brand affinity likely to recommend and likely to visit we also track the percentage of our guests experiencing a problem.
And our franchisees are very proud of the fact that we reduced this important metric from a high of 8.1% at the start of 17 to an all time low currently a 4.3% with very little variability across the system.
While value for the money perceptions continue to hold steady for Applebee's. This was a central point of discussion with our franchise partners and you'll see a renewed commitment as I mentioned, our last call to value in our tactical plans moving forward.
On the off premise from Q3 sales were up 13.7% on top of last years, 36.6% increase off premise continues to be an important growth engine for applebee's as we believe we're we're the best position brand and CDR, given our given our useful demographic profile our menu variety.
Hey value orientation, and the fact that we have more locations than anyone else in the category.
To go as currently about 70% of our off premise mix in our franchisees continue to improve restaurant execution around our top two priorities order accuracy and the order being ready when promised.
Delivery represents the balance of our off premise mix with more than 1400 restaurants, now offering applebee's delivery through our website as well as third party delivery through multiple partners. We've also successfully refined our third party delivery contracts to ensure sustainable margins for our franchise partners moving forward.
In total approximately 65% of applebee's off premise orders are now placed digitally.
As I've mentioned previously catering has been activated nationally as the third component of our off premise business. While currently in its infancy. We believe catering represents a significant incremental sales layer for applebee's and we plan to begin leveraging this opportunity aggressively in 2020.
Shifting to technology.
We believe we can meaningfully enhance our guest experience by introducing server tablets, beginning in 2020 as well we've been very deliberate and methodical in refining this initiative overtime as we established the business case for implementation in partnership with our franchisees.
From a guess perspective, there are very clear benefits around speed attentiveness and engagement from a server perspective, there are benefits in terms of ease of ordering enhance tips and satisfaction.
And from an operator perspective, there are meaningful labor savings associated with proper deployment as well as kitchen efficiencies due to a more balanced point of sale order flow.
And we've also experienced revenue benefits as all orders, particularly beverages are far more likely to be captured data entered with server tablets.
Bottom line. This is a very contemporary and Q4 the brand and when we plan to deploy and sequenced fashion throughout 2020, and 2021 with high cost labor markets first in line to receive.
Finally, I'd like to publicly recognize the rosemarie by the Philadelphia for being awarded Applebee's franchisees to year as well as the Doherty during enterprises out of New Jersey in long island for being awarded Applebee's neighbor of the year, so well deserved and with that I'd like to turn it to Jay Thank you John .
Good morning, everyone.
I am delivered slightly positive comp sales for the third quarter of 2019, marking the brand seventh consecutive quarter of positive sales growth I'm very pleased with this achievement as we are rolling over the very successful launch of ultimate stake burgers platform in 2018.
The third quarter represents our longest sustain positive sales performance in three years and as a direct reflection of the work we've done against our strategy to defend and grow our brand.
As stated on prior calls IOP has an aggressive growth plan that will continue to build upon for the foreseeable future. Our four strategic initiatives continue to serve as our roadmap each playing a critical role in defending and growing the brand as a reminder, needs are running great restaurants, driving traffic being where the guest is.
Okay and reinventing the guest experience.
These strategic initiative is important to IHOP success to the for the most critical priorities given the categories traffic trends and labor challenges that are facing franchisees.
Now let me provide some color on the two foundational priorities to drive profitable growth.
The first is running great restaurants. This encompasses defending our core business as sharpened focus on operations helps us keep our current gas drive frequency and attract new gas.
At the end of the day best in class operations comes down of having great talent in our restaurants best in class manager training is essential which is why we rolled out a new certified leader program. This year.
Through this program will serve by more than 2000 managers by the end of next year.
Equally important is simplifying the core menu and our recipes to greatly improve execution.
In both at the front and the back of house, while also enhancing the experience for our gas every guest everyday.
Finally, we're taking corrective steps to address underperforming restaurants, franchisees and or markets to sustain iops long term by viability.
Defending our core business is only half of the strategy.
In order to grow the brand we need to be on the gas mines and in their path.
Everything we do in both the long and short term is about our second foundational priority driving traffic.
There are more than 60 billion meals up for grabs and we believe there is substantial opportunity to steal share from the competition, both within and outside the category.
This is an and proposition.
Which looks to grow traffic both in our restaurants and off premise one way we plan to do this by having a strong multifaceted value proposition.
Abundant values already a strength for IHOP and thats not going to change however, we need more.
We're continuing to test multiple approaches such as price points and deals during non peak hours to see what resonates with our gas and that our profitable for our franchisees.
As part of our continued Daypart expansion strategy, we introduced a new buttermilk chicken of crispy chicken menu.
For a limited time, we operated crispy chicken and pancakes combo for 699, this pairing which gave our gas the ideal combination of abundance and value boosted chicken sales by over three times at our peak and sustained item incidents at double the amount of chicken sold prior to the new menu launch.
The brand also marked another milestone with the introduction of new gluten friendly pancakes, along with gluten free dimming waffles and a gluten friendly bond for items like our ultimate state burgers.
Clearly friendly gluten friendly menu items were one of the most requested innovations for IOP and we believe the addition of these new items allowance to reach both current and new gas looking for great tasting quality menu items made without blood.
Switching gears to convenience for our guests we continue to see solid growth in our to go business in the third quarter.
This is a key area for continued traffic and sales growth.
Off premise comp sales increased approximately 24% in the third quarter, primarily driven by traffic.
Today on premise makes up a little more than 9% of our total sales and improvement of over 200 basis points compared to the third quarter of 2018.
Our media goal is to grow our to go business to 15% of sales.
Delivery accounts for roughly one third of the total on current sales will also continue to ramp up a number of restaurants offering delivery currently that stands over 1400 restaurants participating with at least one delivery service provider.
This this reflects an increase of four times the number could sustain restaurants just in the last year.
Expanding our sales channels creates additional opportunities to drive traffic steal share and grow our business at the very end of Q3 Q3, we rolled out IHOP catering in nearly 700 restaurants with another 200 restaurants expected to participate by the end of this year.
Learning from the initial launch will continue to refine and grow the platform in 2020.
Although it's still in its early stages, we're very optimistic about the potential for this business and provide additional updates in due course as progress is made.
Keeping IHOP top of mind for our guests is imperative to drive traffic.
Our my I Hopped my are my hop email platform consistently showcases new food and offers to our gas and now includes exclusive experiences in partnership with an in network. We created a tiny IHOP restaurant and offered up a once in a lifetime dining experience from my heart members only.
We will continue to find fun creative ways to drive sign ups for our E club email cloud, while also deepening our engagement with our current subscribers.
More iops in more places is the final push to grow the brand and drive traffic as Steve mentioned today, we announced the deal with travel centers of America to opened almost 100, IHOP restaurants and travel centers across the us over the next five years.
Yes on the go visiting a Ta center will be able to enjoy is full menu of made to order items in a full service restaurants.
Deal with travel centers America marks the single largest IHOP development deal in the brand 61 year history and supports our larger development plan.
To wrap up I'm pleased with our overall performance, we're executing its against our key strategy. Our key strategic initiatives, which has served as a roadmap for iops growth at the cornerstone of our plans, creating fun freshly made foods and beverages that delight. Our guests are limited time and core menu innovations paired with struck.
Dziedzic value offers are meant to entice guest to enjoy more high hot more often.
Having a REIT food served in Brady environment by outstanding operators is the best way, we can defend the brand to grow the brand or focus on significantly improving our lunch dinner and overnight business expanding our to go business and building new restaurants. All of this is supported with technology that improves the guest experience and Mac.
Summarizes restaurant efficiency, we're confident in this approach has stated.
We're already seeing great results and with that ill turn it back over to see for closing comments. Thanks, Jay to recap, we continued to deliver year over year improvement in adjusted EPS and adjusted EBITDA in a challenging environment, our asset light business model generated significant growth in free cash.
Cash flow during the first nine months of 2019 compared to the same period last year. This enabled us to return over $125 million to our shareholders to quarterly cash dividends and share repurchases year to date.
Both brands remain well positioned to gain share as we execute against multi prong strategies, which are underpinned by strong value propositions.
I couldn't be more confident in the long term plans, we have in place to deliver value to our shareholders.
Now we'd be pleased to open up the call for any questions operator.
Thank you we will now begin the question and answer session. If you have a question. Please press Star then one and your Touchtone phone. If you are using a speakerphone. Please pick up your handset first before purchasing any numbers. Once again, if you have a question. Please press Star then one on your Touchtone phone.
Our first question comes from Nick Setyan from Wedbush. Your line is now open.
Thank you and thank you for all the color around the franchisee profitability.
Yes.
Probably the number one question I was minus.
How are we stabilized.
The comp trend from October .
And I guess what are some of the learnings from this year that he can apply to next year and to ensure a stable.
In 2020 at Applebee's.
Hey, Nick this is John the I referenced a bit of this on our last call.
When we met with our franchisees recently in the past few months, we zeroed in on value value perceptions and very specifically aggressive.
Value tactics engineered to be profitable, but those that would drive that value seekers.
Incremental traffic and sales were aligned on that moving forward as I also mentioned.
We've kind of turned up the system, so our underperforming restaurants or outs.
Our.
AD fund is whole our bad debt is.
Essentially nonexistent.
And you may see in the market than things at current example of that kind of tactical approach. It's a short term burst hair, but our 25 settling programs would be one example program we aligned upon a few months ago with our franchisees.
Yes, I think on the either side of the business to answer that question in a week, we really as we stated we want to fill our seats, where we have opportunistically.
Areas lunch dinner overnight, we were very strong and breakfast, we want to continue that will keep working on breakfast innovation and bringing great new family phone items in our pipeline and we've got to work on value and I think value, especially to help us hill seats during off off peak.
Periods.
Once was was advertising spend at applebee's.
Every year, because when I kind of during the 5% IHOP him back into the advertising spend at Applebee's seems like year over year may have come down and then what's the expectation in Q4 now what's the expectation on AD spend in 2020.
Relative to 29 team.
Nick John again.
Q4 as favorable versus year ago.
And.
Kind of back half as a little more favorable than the front half and so I mentioned, we get to a more predictable run rate and operating model here.
By virtue of the absence of bad debt.
The commitment to 4.25% moving forward, you'll see a very balanced quarter to quarter flow of dollars in TRP is in 2020, a Nick This is Tom just a couple of details as well you mentioned that fun.
Comparison, while at Applebees, you did have the for 25.
Ed floating rate both last year in this year for Q3 was.
What I remind everyone is that.
2018, you had some prior quarter collections for Q3 in Q4 that.
That boosted up both franchise revenues as well as AD fund.
Collections and so.
Now that was a little bit offset Gs acute fewer effective restaurants open so.
A couple of puts and takes there.
Got it and I'm, just lastly, and what's the plan with the company owned stores going forward.
So when you add back the DNA what was a four while EBITDA margin.
In Q3 versus operating margin that you guys disclose.
Let's start with.
Expected longevity of the ownership.
As we said when we bought it.
Our view was we didn't want to we didn't want to wait and allow those restaurants to continue to cure rate any further than they had so we stepped in and quickly bought them and now have moved them up towards the top end of the performance of the system. So our view is obviously, we're not a long term owner of restaurants.
And so as we feel that we've begun to stabilize and those restaurants are in the right position will begin looking for an exit strategy, but the exit strategy would fit with our with our ongoing.
Re formation of the franchise system and that is we would want to bring in hopefully high performing new franchisees that are interested in growing with us. So Nick you can look at our guidance with respect to margins.
So what we said was that the.
EBITDA contribution would be approximately $10 million for the entirety of the year for the full year and then DNA was running approximately $6 million above restaurant, and so that kind of implies that profitability a four wall profitability, that's pretty consistent with.
The system and if you kind of think of last year being very tail ended the year. So we're literally talking up December was when the portfolio was acquired by Guy.
Yes, I think weve that all pleasantly surprised by how quickly we were able to stabilize the teams done a great job of stabilizing the portfolio and and so our guidance remains unchanged on that front.
Thank you.
Our next question comes from Brian Vaccaro from Raymond James Your line is now open.
Good afternoon, thanks for taking the questions I want to start out with Applebee's and the third quarter at constant seems to be a few data points from various sources floating around and I thought it might be helpful. If you could set the record straight on what the system saw from a comp cadence perspectives through the quarter and then as it relates sticking with the comp.
As it relates to your updated comp guidance for Applebee's is a pretty wide range as one quarter to go would you be willing to tighten that range on your fourth quarter comp in any assumptions that are embedded within that guidance.
Hey, Brian It's Jon let let's start with your question on Q3, I'm going to resist providing any kind of sequential movement within the quarter.
So fairly balanced rolling over and as you know some.
Unprecedented performance to prior year and that our guidance remains as it's a.
Zero minus one.
You can model that based upon three quarters of data.
And.
I wouldn't anticipate narrowing that guidance at all here as we move forward.
Okay, and I guess.
Can you remind us as we move through fourth quarter and the monthly cadence last year I think you talked about tapping the brakes. If you will on the marketing spend in the in December .
Do you view your comparisons is getting easier or are they similar as they move to the fourth quarter.
And Brian as I mentioned with with Nick's question.
We sit in a favorable year over year Q4.
Position from a PRP kind of a media delivery.
Perspective, it's balanced within the quarter, whether this favorable versus year ago, where as perhaps.
Our prior quarters were not so I'd like our position.
We like our tactical flow of activity that we have planned and.
With that said, we're rolling over two years of a very favorable positive performance in Q4 in 17 as well as Q4 in 18.
And again Thats reflected in our guidance of that.
Thinking about the tactical shift at Applebees towards value can you give us a sense of how positing rail car loans performed versus your expectations and also on this 25 cents Boneless wing promotion did did you test that in certain markets are in the past than I can give us any sense of how that impacted and really resonated with that.
Seeking guest you've been not seeking to reengage.
Sure the startup cost and broken those that.
Resist providing too much color a taxable event, although than to say that event delivered on abundant value, which is kind of front and center for the brand.
And we're pleased with that outcome. The 25 cent Wayne proposition was tested.
It was tested approximately two months ago.
In very much delivered on that value seeker guest segment that I've referenced in the past, Brian and so we have meaningful insights and data, albeit based upon small sample size in test and we've applied that year.
As we speak.
All right that's helpful and Tom circling back to the question on the Appleby Company unit.
Im assets suggests that the profitability flattened out this quarter was there something one time in that maybe that was seasonality and analytics expected, but any color on that yes. That's a great question, you'll see that and then DNA commentary over or Q.
Yes, I'll give some further color, though which is in talking to the leadership team there were some nonrecurring items in Q3.
That.
Matt.
We'll have improved profitability in Q4.
Okay, and the Mdna section does it have the details of that or would you could you all know adjust it just sites it just.
Right and just sites up the segment profit contribution.
Okay, Alright, and then last one from me back I to appreciate the franchisee profitability question, you talked about four wall margins being down trying to make sure I heard correctly four wall margins down 100 basis points year on year in that first path for the year, but the four wall EBITDA margins are still in the low double.
They did I hear that correctly.
That is correct.
Okay, and you called out 100 bit.
Roughly you talked about 100 basis points being related to the delivery costs.
Associated with the delivery build on witnessed renegotiated agreement that due to the franchisees get back half of that more than half of that any color on that.
Again, a lot more than half back so it puts them back in the position of almost equivalent profitability, whether its carry out in restaurant or delivery.
All right fantastic. Thank you.
Our next question comes from Jeffrey Bernstein from Barclays. Your line is now open.
Great. Thank you very much.
Couple of questions. One just on the unit growth side of things.
Seemingly reduced openings or perhaps noted more closures.
Both brands.
With one quarter remaining I'm just wondering if you think defend the underlying long term concern whether its trenches engagement, our interest and accelerating growth going forward ethanol Napoli side, you said, maybe Lee 20 year into 21, we might see that growth, but the fact that both brands was taken down just wondering whether there's any short term hesitation in terms of net unit growth.
Let me, let me start and then I'll, let contribute so on the on the IHOP side as we've mentioned based on this deal and based on some other things that you will hear in the future. We are very bullish on iops growth and believe that it's going to accelerate in the future on the applebee's side, we believe we're going to start returning.
The growth of units in 20 and that that that is out we'll have moderate growth going going past that into 21.
And so the real question is on the development side. We are currently in discussions with the franchisees about start restarting the development.
Process and with the groups they have in place, but we're also going to use the opportunity to bring in new franchisees with new territory models.
Good example of that Steve is.
We're seeing some.
Growth opportunities on not only with and so we've spoken of international being predominantly but there are some some international franchisee interest in applebee's as well.
And if I look at the closure rate just to nail that down.
We don't see anything out of line here. So if I look at Q1 Q2 Q3.
Again this is some of the details of our financials.
No no real change year this has been pretty consistent.
The only thing to ads is some of those some of those decreases or dry international Yep.
Okay and then just following up on an earlier question you talked about how at least at Applebee's.
To be a tough fourth quarter from a comp perspective. The fact that you have I guess on Japan at this point range in terms of your full year comp guidance would imply you got a 400 basis point potential swing in the fourth quarter, which.
Again to the earlier question seems rather.
Wide considering the relative stability that you see on two and 300 basis I'm just wondering if youd.
Well for any color in terms of what October brings or whether.
Tracking on the higher or lower end of the very wide range.
Yes, no color on October , but keep in mind were month in and so the reason you see the range that we provided as we have two months remaining and.
And so we're being prudent.
Okay.
And then lastly, Steve you mentioned.
Being proud of the growth in both EBITDA and EPS for 19.
As we look to 20, and I know, you're not giving any formal guidance, yet, but any directional thoughts on whether EPS or EBITDA growth than that your long term guidance is for high single digit EBITDA and high teen Vps, just wondering whether that's around a possibility for 2020 year, maybe for some color and from the sensitivity I don't comps. So we can.
We'll have that actual performance in 2020 below what we have not come off our long term view of this call.
Okay, and Thats inclusive of the rents in the 2% to 3% comp longer term seems still viable at both brands.
Yes.
Great. Thank you.
Our next question comes from Brett Levy from MKM Partners. Your line is now open.
Great. Thank you all for taking the call.
I guess, if we could start off.
Just a little bit on where are you seeing these new franchisees coming from what's what's in the general makeup of people that are looking to get into the system.
Brett I'll speak first regarding applebee's.
We see meaningful demand for the Applebee's brand externally.
And we're very specific we're looking for.
Deeply experienced.
Operators.
The restaurant industry could come from multiple categories well capitalized.
We're not looking necessarily for purely financially oriented.
Entities and.
We have stated that we will evolve the portfolio.
Seven or eight transactions over the past two years and you can expect additional transactions.
As we move forward and those are very high caliber highly qualified.
Prospective franchisees that allow us to be very selective as we enter into transactions moving forward, but it's interesting we have but it's a combination of backgrounds of the new franchisees coming back in their all obviously in the restaurant business, but we've had some that are interested they are coming from QSR backgrounds.
From a fast casual and some comments from from from casual dining beyond the IHOP side, a lot of the franchisees potential franchisees, we spoken too, especially you think about a concept like ours that as a family dining lot of breakfast et cetera.
A lot of those potential franchisees they talk about their rounding out the portfolio. They don't have the family dining concept.
One of the things they look to do not compete against themselves.
We think the final point that will make on the applebee's side as as we transact moving forward depending on the geographies, we would expect that to some of those transactions come with development opportunities as well.
Great if we could turn to delivery and off premise for second.
You've obviously had a lot of success and you've been producing.
Outsized returns.
We are hearing out where obviously hearing a lot more on the competitive front about.
More companies going after and what just with the law of large numbers at some point, we're going to start to see slowing rates of growth. How are you thinking about that both from a competitive but also from how you can get to that next level. How you can get from the nines and the low double digits to the need for the high teen rate to mix. Thank you.
Brett on the Applebee's side we.
We accomplished one of our objectives as Steve referenced.
By passing along those third party and delivery fees to we did at both brands.
To the guest in so we want our franchisees to be margin whole. If you will whether that is a dining experience to go experienced soaring delivery experience and then and then we'll ever get to side.
Very clear demographic profile of our off premise users to tend to be very heavy applebee's guests that use dine in as well as off premise, we make it easy for them. We've enhanced packaging, we certainly enhanced our operating experience, we're getting better at accuracy and delivering that food on time and so.
So this is not a fully optimized segment of the business it is highly incremental and.
We love our position.
I think from from the Hot standpoint, the way we look at it is that first of all you got to be in the game you don't want to concede off premise to all the competitors are doing it. So we're in the game, we're doing really well we're growing the business.
We're still at very high growth rates, I said about 25%.
We think there's still more opportunities we're only in 1400 plus restaurants are doing it we stood up more restaurants, we can add on.
We have more delivery service providers within the restaurants, we already have that you can expand service providers because some gas are used one instead of the other these door to astronaut overeat. So if you get more providers you can actually expand your your ability to capture more gas, we just rolled out catering to expand that bill.
So those all have kind of.
Run of time that were we think we can get great growth in next few years Youre right at some point, there's going to be a point, where okay. Maybe there's not a lot more growth within the industry will think were anywhere near that right. Now and then we're just going out that execute everybody and becomes a share or at some point at the end the we're far from the end.
But in response to your question about what's going to take us to the next level for both brands, we've see catering as as as the major opportunity because we think that space has been under served.
And at both our brands can relate very well to catering operation. So we are both we've prepared as well as did the packaging and everything else we needed we're going to target both residential catering for families and.
When we get Togethers and social occasions.
But we're also going to.
Go after after business catering as well because we believe in lot of cases, our product would be more desired than some of the other ones that on that business today.
And we just need to get out and have the franchisees be able to execute well on the catering front.
And I guess, if I could speak in one more.
As you as you've lowered the outlook for the fourth quarter, how much of what you're seeing.
Do you think is internal weather.
Mr that are just not achieving is higher rate of usage on year menu in your offerings versus what you're seeing externally across the competitive landscape and then I'll throw it back to the Q.
Brett Ivy. This is John have acknowledged this acknowledged passed on our Q2 call.
Some of this is self inflicted with Apple means that we use the heat is again as a good example, where we have a product that is exceptionally well received by our guests.
Our our failure to launch that product with a.
Trial incentive already starting at price points.
From the data that we see.
Led to a mr. within secure the value seekers.
Trust me, what I'd say, we've applied that learning to our tactical plans moving forward. So.
As we normalize here and we reduced bad debts, and we've closed our restaurants.
Modestly for the first time in three years I feel like I don't have a hand it back in the brand is poised for predictable stable growth.
And we won't have those missteps with respect to value as we turn the corner on 2020.
And on the IR side I fully expect that we will outperform the industry. So there are there are headwinds for the industry clearly there is traffic challenges across the industry and.
I think theres a cycle that takes place here where there's.
Minimum wage pressure on on franchisees to take price et cetera, and not just in our business you look across the entire industry. There's there's margin pressures people overcome margin pressures, we're taking price you take too much price should run off traffic Theres a cycle that goes on here and we think through having the right offerings and the right price.
Thats in right experience that will be over to able to overcome that and perform better than the industry. So we're confident in our plan and confident in the direction, we're going right now but in both conferences. Just so you know we showed the franchisees the cost of taking pricing in excess.
Of.
Where the consumer expects the price increase to go and so and we could definitely show correlation between those who are more moderated in price in their ability to hold traffic and perform better and so on both brands that was a major part of the discussion.
Because.
Some of the performance issues that are that our internal our brains based on taking price I would also say, though that in general.
Pretty tough competitive operating environment and.
In both cases, our expectation is we're going to outrun the competition in in Jays case. They are John's case, there kind of added.
And so but our but our our stated goal is we want to lead the industry.
Our final question comes from Brian Vaccaro from Raymond James Your line is now open.
Yes, just had a quick follow up on the IOP side, the updated guidance would seem to suggest a pretty nice acceleration in comps versus what you just reported in the third quarter. That's despite lapping more difficult comparisons can you help us understand what's driving that acceleration whether that the successful.
Product launches it daypart specific any color you can provide.
Well I don't want to get into.
You know how the quarter breaks down in those exact trends et cetera. So.
If you just look at our guidance I mean, all we really change was we tightened it a little that we lowered the high end down but.
You know if you we were one one.
At the year to date number our guidance is one to two so we're still I think we're comfortable with where our guidance is and where we're going to end up but I don't think theres. This huge acceleration implied in any of that.
But we have us, but having said that.
Not to get into numbers, but we believe we've got strong programs in place for the remainder of the year.
And we'll just have to see how well they perform keeping in mind that the grinch was very successful program first last year.
Yes, I understood all right. Thank you.
That completes our question and answer session. At this time I would like to turn the call back to Steve choice for closing comments.
Okay. Thank again for your time, we'll look forward to speaking with you again on our fourth quarter quality progress we've made.
Good day.
Thank you ladies and gentlemen, this concludes our conference call for today. Thank you for your participation you may now disconnect.