Q4 2019 Earnings Call

Welcome to the Q4 2019 Global Incorporated earnings conference call. My name is Vanessa, and I will be your operator for today's call at this time. All participants are in a listen-only mode later. We will conduct a question-and-answer session during the question-and-answer session. If you have a question, please press start with that one on your touchtone phone. Please note that this conference is being recorded. I will now turn the call over to Ken dipti executive director of investor relations.

Good morning, and welcome to dine Brands fourth-quarter and full-year conference call. I'm joined by Steve Choice CEO Tom song CFO Jacob president of IHOP in Sante when he's president of Applebee's before trying to call or receive. Please remember our Safe Harbor regarding forward-looking information during the call, Let me discuss information that restored looking and involves known and unknown risks and uncertainties and other factors which might causing actual results of different than those expressed or implied. Please wait before looking information in the context of these factors, which are details in today's depressingly and 10K files.

Before looking statements are adds up today and assumes no obligation to update or supplement.

You may also refer to certain non-gaap Financial Manager which are described in our press release and also available and find branches website with that. I'll turn the call over to Steve. Thank you, Good morning, everyone and welcome a dime brands are strategic focus and strong alignment with franchisees continues to create substantial value for our shareholders and providing a guest would even better dining experiences. This past year was defined by several significant achievements despite facing a competitive Marketplace and the increasing importance of value in our life. I see notably. We successfully completed a 1.3 billion refinancing our existing long-term debt with very favorable terms.

Additionally our ability to generate robust adjusted free cash flow enabled us to rise raised our quarterly cash dividend by 10% a year ago as well as control are solid track record of returning cash to shareholders through stock repurchases as announced this morning. We further raised our dividend by 10%

we

Celebrated strategic domestic development initiatives which resulted in the largest multi-unit development deal in IHOP's history. We signed meaningful International Development agreements, which will continue to fuel the outside of the US are most recent deals will expand our footprint in Latin America Eastern Canada, India and Pakistan. We lost several digital initiatives across both ends in 2019, including new and enhanced ordering capabilities to make it easier for our guests and to support the growth of our catering business. We see catering long as the next area of growth for both brands with a lot of potential for Applebee's at dinner and IHOP breakfast. Additionally. We introduced it brand branded delivery. Both Applebee's and IHOP via their respective websites and mobile apps through a partnership with doordash.

We also improved our delivery Partnerships on behalf of our franchisees so that in restaurant carryout and delivery sales have roughly the same profitability off these accomplishments amongst others resulted in a 24% increase in our stock price for 2019 and 40% year-to-date. These thoughts were made possible by committed franchisees who made the necessary investments in their restaurants their team members who provide a better experience for our guests each day and the people throughout our organization who made data supported guess focused decisions around new products new technologies and other restaurant innovations that propelled our business forward.

thank you for your

education and hard work

turning to our fourth quarter Financial results as you saw in our press release issued this morning. We delivered another quarter of solid growth across key metrics including adjusted EPS wage adjusted ebitda importantly. We also achieved a meaningful Improvement GNA compared to the fourth quarter of 2018. We will continue to closely manage our G&A wage important lever for dine Brands, especially given our attractive asset light model.

We are operating from a position of strength and we're prepared to capture growth opportunities in the marketplace. We believe our momentum can be sustained by address significant unit development opportunities and leveraging Technology to enhance the experience in our restaurants as well as through off-premise. Additionally. We've expanded our pipeline a new products and elevated. Our marketing relevancy are ongoing menu Innovation and creative advertising across both Brands provides guests with even more reasons to visit app.

switching

Here's briefly to the performance of Our Brands fourth-quarter domestic comp sales at both Applebee's and IHOP performed in line with our expectations despite continued sales traffic volatility in casual dining and family dining according to public industry data. I would like to highlight that our asset-light business model makes us generally more resilient to fluctuations. Sales Trends looking ahead the outlook for Applebee's and IHOP is promising were extremely confident in Applebee's value-oriented positioning of Ford and have strong alignment with our franchisees regarding IHOP incremental growth from unit development represents a significant opportunity at a time when demands for wage and some franchisees and consumers remains high but J and John will provide more details on their respective Brands a little bit later.

enclosing fundamentals remain strong

And our Core Business is healthy. We've successfully executing against a comprehensive strategy that is focused on growing the business and creating shareholder value off by engaging our guests on their terms, whether it's through delivery or an enhanced dining experience in our restaurants are Brands will continue to focus on innovative solutions that further Elevate the guest experience and drive sustainable profit growth for both dine Brands and our franchisees. We created a high-performance value-based sculpture focused on Three core principles of people Brands and growth. We've elevated and added valuable experience and talent across the organization notably the prior to president of IHOP, which was very well received by our franchisees J has been an integral part of the success of IHOP for the last seven years and he hit the ground running to ensure.

Seamless transition we've really made the development of our team from recruitment.

To leadership development and succession planning one of our highest priorities. We truly value encourage and recognize the diversity inclusion of all team members wage because they are the foundation of Our Brands and take pride in their jobs every day with that. I'll now turn the call over to Tom to provide an overview of the financial results Tom. Thank you Steve. Good morning everyone. I'm very pleased to report that we continue to deliver your over your improvements and adjusted EPs and adjusted ebitda our performance for the fourth quarter and full-year highlights the ability for dying to perform and be agile, despite the competitive market with our franchise business model. We are able to return Capital to shareholders and invest in Our Brands and Technologies. I'll briefly recap the highlights for both the fourth quarter and 2019 and provide some high-level comments on our performance. I'm pleased that dine was able to finish the year on a strong note dead.

With our adjusted EPs and adjusted ebitda results being in the top half of our guidance range. We continued to prioritize the return of capital to shareholders while at the same time decreasing debt leverage from 4.57 times from 4.9 times in 2018, as a result of continued growth months later. I will provide an overview of our guidance for 2020 which reflects our solid fundamentals instability of our business.

turning to her

still results I'll begin with a notable changes on the income statement for the fourth quarter adjusted EPS was $1.78 compared to $1.70 for the same quarter of 2018 for fiscal 2019 adjusted EPS grew approximately 29% to $6.95 compared to $5.37 in 2018 higher gross profit an increase in the number of IHOP effective restaurants do to positive net development and IHOPs domestic comp sales growth all contributed to the increase your over Europe Switching gears to G&A given our asset-light business model GNA remains an important lever for us as it constitutes 56% of our total revenues, excluding advertising revenues and 33% went further excluding company own revenues and related g n a

Or GNA for the fourth quarter.

2019 improved to forty one point seven million dollars a 3.6 million dollar improvement from last year. The decline was wage primarily due to lower compensation expenses and a decrease in Professional Services cost.

GNA for 2019 was 162.8 Million which beat the low end of our guidance range this compares to 166.7 million months in 2018 as a reminder GNA included over five million dollars a cost related to company restaurants in both the fourth quarter and for the full year, it's clear that are careful management of GNA contributed to our favorable Financial results.

Regarding our tax rate or gaped effective tax rate for the fourth quarter of 2019 was 25% for the full year. Our Gap effective tax rate was 24.6% The 2019 effective tax rate applied to pre-tax book income was higher than the statutory federal tax rate of 21% primarily due to recognize tax benefits.

an incremental state and local income taxes

turn the cash flow statement are highly franchise model continues to generate strong adjusted free cash flow. This allowed us to return significant cash to shareholders money or repurchases in dividends, which I'll discuss later. We're 2019 adjusted free cash flow was $149 million dollars compared to $141 4:20 a.m. The favorable variance was primarily due to an eleven percent increase in cash from operations regarding the Improvement and adjusted ebitda Consolidated adjusted ebitda for 2019 was 273.5 million dollars compared to two hundred thirty point six million dollars for 2018. Then 19% increase was primarily due to improvements in both Total revenues and gross profit in 2019 compared to the prior-year along with previously mentioned G&A management because of our birth

model and low capex requirements

We have very high quality adjusted ebitda. Despite a 36% increase in capex to nineteen point four million for 2019 primarily driven by Investments. And yes may be in the should haves capex still represented only 7% of adjusted ebitda. Switching gears briefly to creating value for shareholders off. The return of capital to shareholders remained a top priority in 2019. We returned a combined total of $157 to shareholders. This compares favorably to the $85 returned in 2018 and 2019. We paid $47 in quarterly cash dividends and repurchased over 1.3 million shares of common stock at a total cost of $200 of total cost of $112 million dollars this morning. We announced an increase in our quarterly cash dividend dead.

276

Cents per share a 10% increase lastly. I'll review the highlights of our financial performance guidance for fiscal 2020. Please see the press release we issued today for complete details month. We expect sales at Applebee's to be between 0% and positive 2% and IHOP. We expect comp sales to be between 0% and positive 2% total segment profit, which excludes the company restaurant segment is expected to be between $385 and $395 million dollars. We expect net closures of between 0 and 10 domestic Applebee's restaurants and IHOP. We expect some upside to development compared to Prior years with projected net openings to range between forty and fifty new domestic restaurants.

GNA is expected to range between 170 million dollars and $175 including non-cash stock-based compensation expense and depreciation of approximately $45 billion dollars. Please note that this range is inclusive of five million dollars of G&A related to the company restaurants and took solidated adjusted ebitda as expected to be between $275 and $285 billion dollars inclusive of company restaurants. I've been which is expected range approximately between $9 and $11 lastly.

adjusted earnings

Per diluted share for 2020 is expected to be between $7.08 and $7.28 to wrap up by several measures wage in nineteen was a successful year for dining despite facing a challenging and competitive market while there is a lot of work ahead of us. We achieve several significant accomplishments which laid a solid foundation for Success. I'm particularly proud of the completion of our securitization and the great progress that has been made on franchisee financial help. We continue to closely monitor our franchisees and down there for one expansion while offering compelling development opportunities.

With our continued execution of several strategies to deliver top-line and bottom-line growth. I'm very optimistic about the year ahead.

I'll now turn the call over to John. Thanks Tom and good afternoon to those of you on Eastern time. We expected Applebee's Q4 to be a challenge given our success in 2017 in Q4 of 18. Does 2-year Concord 11. + 4.8% was the highest we've seen since 2012 as a result. We closed Q4 2019. Sales of minus 2.5% and Applebee's full year. 2019 top sales were down 0.7% while rolling a plus 5%, from the prior-year dead now. Well Q4 was a challenging quarter 2020 is marked the return to positive, sales as our momentum has shifted considerably through the first eight weeks of this year off without who's having re-established its value leadership position in the market. I thought this context was important to share in today's call, although I'll Reserve additional detail until we report q1 Thursday.

It's entirety later in April.

As stated previously. I believe Applebee's is poised for consistent growth moving forward for several reasons first. We concluded our strategic initiative opposing approximately 200 underperforming assets said differently. We pruned up the US system of grand damaging restaurants over the past three years and will now Target no more than 10 to 15 closures per year. Also, after three years of navigating royalty an advertisement that debt we begin twenty-twenty with a healthy franchise system in no material delinquency. This is a very important Milestone and ensures a far more stable and predictable income stream as well as a fully-funded 4.25% national marketing plan wage initially. Our franchise partners are 100% aligned around Applebee's brand Essence in our need to remain relevant among value speakers throughout the year. This provides great clarity Thursday.

Develop an Executor taxable.

Plans here in 2020. Finally. We fully intend to leverage our scale in terms of media muscle supply chain and our large franchisee business model is a meaningful points of difference that smaller Brands and independent restaurants. Simply don't have at their disposal.

Yeah, let's turn to restaurant panels are cost reduction initiative is now beginning its third year and the results are clear. We achieve the 65 basis point reduction in 2018 followed by an impressive 135 plus basis point reduction last year much of which will benefit restaurant P & L's here in 20 20 given the staggered timer implementation. Most of these savings are food-related with a focus on commodity renegotiation and operational food cost management. Some of the savings are also related to off-premise packaging and with respect to labor. We partnered with franchisees to implement best practices around discipline forecasting and scheduling as well as just in time portioning eliminate some prep hours throughout the week and with server tablet soon to be deployed in about four hundred restaurants. We continue to offset labor pressures particularly in Highway.

geographies

Now what we smart and methodical here and be sure to fully optimized this initiative before expanding two additional restaurants are twenty-twenty cost reduction targets is an additional seven basis points, which puts us on track to ultimately exceed the initial three hundred basis point objective that we established with PWC directionally about two-thirds of these thoughts will flow to our franchisees bottom line while one-third will be reinvested in very specific menu quality improvements.

Yeah, and the portfolio front we continue to own and operate 69 restaurants in North and South Carolina and I'm proud to say that these restaurants have consistently outperformed Dar system average wage posting pile of the top sales in 2019 their first full year under Company ownership in total. Applebee's now has a base of 1660 + restaurants in 32 franchise Partners in the US as with the past few years. We plan to continue refining this portfolio for maximum performance as part of this optimization. I anticipate a huge entity transactions here in twenty-twenty as we continue to introduce a select number of new well qualified franchisees to the brand while also providing growth opportunities for our bed franchisees via strategic acquisition with each transaction. We continue to narrow our operational variability while elevating guests metrics such as overall satisfaction.

and brand affinity

Based upon these metrics I can say with confidence that Applebee's fundamental brand health is stronger than it's been in years. Let's shift to a brief overview of our off-premise business after Thirty 2% growth in eighteen and twenty 2% growth in nineteen. I expect off-premise comp sales to naturally moderate a busier 20/20 of our 13% off premise mix car side to go is a very stable component. It needs at 9 to 10% of mix or about 70% of the total off-premise Business Delivery representing balance of our off-premise mix and continues to grow to health equipped. Although I anticipate this delivery growth rate to slow as penetration matures and guest adoption stabilizes.

From my perspective. This means more of a marketing driven growth Dynamic and less of a penetration driven growth dynamic in a category. Which bodes well very well for Applebee's off as referenced on past calls. I believe we're best positioned in the off-premise market, even our menu variety value orientation operational improvements, youthful demographic and the fact that we're generally right around the corner with more than 1,600 locations simply stated. Applebee's wins the convenience battle over the Long Haul.

To reinforce this relevance. We just posted our hi.

digital sales day ever 10 days ago on Valentine's Day

In summary, you can expect a steady Cadence of value and Innovation from Applebee's in 2020 as we leverage our big Grand scale improve unit economics and most importantly wage hold our franchise Partners accountable to the highest standards of restaurant Excellence with that. I'll turn it to J. Thank you John good morning and afternoon, everyone IHOP delivered in a cup of 1.1% increase in cam sales for the fourth quarter rolling over our strongest quarter of 2018. This marks the Brand's eighth consecutive quarter of positive, sales rep.

I'm also pregnant yet. We posted positive comp sales in every quarter of 2019, which is particularly meaningful given that we laughed over some of our most successful launches in recent years, including the launch of our home state Burgers platform and the award-winning Ranch inspired limited-time offer which led to our highest score like on sales increase since the third quarter of 2015 during the fourth quarter. We followed up on our 2018 tie in with the Grinch animated feature film with not one but two beloved family-centric entertainment property Partnerships first, we kicked off the Bertha limited-time menu tie in with MGM animated film The Addams Family which resonated with guests of all ages.

then our can I

The Addams Family movie was followed by a holiday inspired Elf on the Shelf promotion a first-of-its-kind restaurant partnership for the elf property both The Addams Family and elf on the shelf life and featured fun food and are popular kids eat free offer further underscore our commitment to create unique craveable menu items and strategically leveraging value.

The success of these programs demonstrates IHOP's iconic strength the Affinity guess have for IHOP and growth opportunities for the brand.

There is more that can and will be done to sustain ions positive sales momentum and aggressively grow the business we want our guests to continue the IHOP as having great food and great value proposition and a great option for both Dine-in and to go our strategic plan is squarely focused on defending and growing the business to achieve this we continue to focus on our four key areas which are running great restaurants driving traffic being where the guest is in Reinventing the guest experience.

You just send our leadership positions underpinned by two of the most foundational priorities running great restaurants and driving traffic during great restaurants helps ensure guests come back more often to do this. We sharpen our focus on operations training and technology that improves efficiency in a restaurant as a result Our Guest metrics continue to improve

over the last two years. We've also conducted a thorough review of a domestic system and provided extra attention to those restaurants and franchisees whose performance ranked in the bottom 10% off as a result. We've taken actions to address the under-performance and ensure the long-term sustainability of IHOP sales momentum.

Switching gears driving traffic is more relevant. Now than ever IHOP has been the leader and family dining for ten consecutive years based on domestic system-wide sales rep. We believe our competitive advantages provide a significant opportunity for us to grow by taking share from the competition and attracting their guests into our restaurants.

Doing this in a variety of ways, we're increasing our mix of digital advertising to more effectively reach our younger consumers. One of my house many advantages is our favorite guests demographics or 15% of our guests our age thirty-four and younger compared to an average of only 31% for a family dining peers. Additionally. We're leaning into value centered price points and attractive dog during non-peak hours. For instance. We started a year by bringing back our popular all you can eat pancakes and paired it with any breakfast combo.

We've also introduced a weekday to buy to buy to offer that includes two eggs two pancakes and the choice of two sausage links or to hickory smoked bacon strips were only 499. We're committed to providing our guests with relevant value as one offer leans into abundant value and wanted a competitive price point to increase frequency particularly to enhance traffic on weekdays to balance our traditional strength on the weekends.

You understand what yes want and expect from IHOP. Our primary focus is on culinary Innovation, which is enabled us to produce a 2020 marking calendar full of new and exciting food that continues to walk in value strategic Partnerships and expanded platforms. We're using key learnings from successful promotions to develop relevant offers and then entice guests to come in more often often our culinary approach coupled with deep consumer insights also feeds a tested menu pipeline that allows for flexibility to respond to potential competitive threats.

So that point to me on hold driving traffic. We're focusing on taking share from the competition will do that by being on our guest mind and in their path wage continued to refine our strategic mix to break through the Clutter differentiate our brand and leverage data to better reach IHOP guess with messages that are compelling and relevant.

In Q4 2019. We also announced the next phase our off-premise strategy with the rollout catering today almost nine hundred restaurants to sign up for catering at a one more way for guests to experience IHOP. We also continue to expand the number of restaurants offering delivery through one or more of our third-party service providers bring the total number of participating restaurants, too over 1,350 to go delivery and now catering provide us with additional growth levers in Q4 2019 off-premise made up about 10% of total sales reflecting an impertinent approximately 200 basis points compared to the same quarter last year.

so the convenience of

The number one factor and a guest choosing where to eat. We have to be in the guest path. This means growing a restaurant footprint and high impact areas. We're proud that IHOP has a stable job history of net unit development. In fact over the last decade through 2019. Our franchisees developed an average of approximately 61 gross restaurants and 40 net new restaurants annual no one else in the family dining category has a similar development track record like IHOP late in 2019. We announced to development deals that we believe will have outside for the brand of the coming years. The first was a nearly hundred restaurant deal with Powell Centers of America in October making it the largest multi-unit development deal in history. These restaurants are expected to open over the next five years with approximately 15 plan for 2020.

Additionally in December we announced plans to launch a New fast-casual Concept in the spring of 2020 called flipped by IHOP. This fast-casual concept will feature an all-day menu inspired by IHOP favorites and will directly address growing consumer demand for fast quality breakfast options in densely populated city centers flute will also have a heavy Focus off to go delivery and Technology.

in addition

Then quickly expanding our non-traditional development with our Travel Centers deal. We also plan to continue building traditional IHOP restaurants in addition to New Growth. We also plan to close a limited number of underperforming years just as a part of a routine course of business with the robust development plan in place. We are confident that our growth in 2020 will be stronger than 2019 to wrap up. I'm very pleased with our fourth-quarter and full-year, sales performance. We have well-defined plans in place to defend their Core Business and grow the brand which have delivered positive results. It will fuel a Roman bath in a year ahead. We've also taken strategic steps to drive further upside and I hopped unit development potential while pushing further into off-premise and p.m. Bro.

To close out. My remarks tomorrow is IHOP National Pancake Day our signature annual giving campaign that supports Children's Miracle Network hospitals since 2006. I have friends that have raised more than $30 million dollars for a charity Partners during this campaign now in its fifteenth year was up the excitement National Pancake Day by adding an interest on sweepstakes component that we believe will be a big draw for fans. We invite you to join us tomorrow at restaurants Nationwide with that. I'll turn the call back over to Steve first closing comments. Thanks J off to briefly recap. We ended 2019 with strong results and continued to deliver year-over-year Improvement in adjusted EPs and adjusted ebitda. Despite a challenging. The year was highlighted by several notable achievements Each of which lays the groundwork for future success, which makes me very enthusiastic about the road ahead.

We're seeing the tangible.

Hopes of the heavy lifting that's being done over the last two years to improve the Core Business such as the significant growth in adjusted free cash flow during this period our asset-light thoughts continued generate substantial free cash flow, which enabled us to return roughly $157 to shareholders through quarterly cash dividends and share repurchases and 2019 by all of these measures dying has performed very well, and we are enthusiastic about our ability to suck seed in 2020 and Beyond as we remain focused on our key business priorities and creating value for our shareholders a very pleased that we were able to delivering a strong quarter of solid operating results now with that we please to open up the call to any questions operator. Thank you. We will now begin our question-and-answer session if you have a dog

Please press * then 1.

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 one thousand. If you have a question, please press * then 1 and we have our first question from Nick's again with wedbush securities.

Thank you. And thanks for the the directional commentary on Applebee's quarter that that was very helpful. I think there was a a sent that last year maybe the system at Applebee's. Yeah, it took a little bit more pricing than maybe you know relative to the category. Would you say that you know kind of looking out into twenty-twenty that off the franchise are pretty much on board with perhaps a little bit more control when it comes to the price increases.

This is John. Yeah, go ahead and site on your part. We love our position in the market our franchisees. There's smart Savvy operators Thursday. We are we're loaded for bear in terms of our price positioning in the market or tactical plans and and they're well aware of that guest profile which is you know, a value-oriented consumer and everything we do is is geared toward that consumer. So to answer your question very directly. Yes, we like our position and I think to add an egg Steve, you know, I think what we have learned convincingly and the franchisees are 100% aligned with us is when we are on our game plan and providing abundant value at a club price pointing. We are going to win in the marketplace we demonstrated that last year and we're demonstrating it year-to-date. So we think we've got a great plan for the year on both for both Brands both of them.

and both of our brands are known for

Same thing abundant value and very aggressive price point and when we stick to that plan, we're going to be successful.

Yeah, that's helpful. And on the unit growth a front. I thought the the Applebee's not you know unit growth gas was actually pretty impressive. Is there anything that we're doing the maybe on the incentive front too? If if not yet at least. You know, how are we thinking about maybe you making the incentives even more attractive for franchisees to May celebrate unit growth if not in 2020, but you know twenty Twenty-One and moving forward. Yeah, so good question. I think obviously we have not pushed development office in the last couple of years at Applebee's for all the apparent reasons. We are now in a position to do that franchisees number of them are talking to us about new new unit development. We have several under development as long as we speak and yes, we plan on its sending significant development over the next couple of years both of the existing franchisees, but also bring in some new franchisees who want to grow with us. It's it's a ninja

saying discussion when we go to the

Conferences the relative interest of not only existing franchisees, but more importantly a number of folks that are outside of the system today that have a strong interest in coming in and developing new restaurants with us.

Okay. I'm just the last question just for context. Would you mind sharing sort of what kind of valuations the franchisee portfolios tend to suck trade hands at in terms of the Applebee's franchisees.

Yeah, well, there's you know, we've seen several transaction over the years and obviously based on the the portfolio it varies, but I think what you'd find is we're trading right in the middle of where you're seeing all the transactions off.

Okay, that's very helpful. Thank you. We have our next question from Brian with Raymond James.

Thanks. Good morning. I'm just a few questions on the guidance. If I could start out with the cops. Could you put some more context around how you arrived at the flat up to range for each brand and in light of the stronger in December friends? Is it reasonable to assume that quarter-to-date? You are above that range at each brand.

Yeah. Hey Brian, this is Tom. So yeah, the the guidance was developed thinking through kind of how we're ending up in a year for twenty nineteen and and looking ahead obviously over the course of the balance of the year. I don't I wouldn't read we do tend to have a little bit of seasonality and and I'm in in our in our in our quarterly results. And obviously we have a have a different range of laps from last year. So I would have read into that necessarily as where we are order today.

I think I think we can reiterate the very comfortable with that guidance and that well, you know, I think we believe strongly that as long as we're on game plan, which is the which is exactly where we are we're going to do very well. I think we're also cognizant of you know, there's a number of factors going on in the environment and the industries that could have an impact on our businesses right now. It looks pretty good. But you know, I don't have to list with you the various things going on in the world that could change that, you know, including tax collections typically don't have much of a much of an impact on our on our business but you know, this seems like a different election. So, you know, I I don't think we're I don't think we're being a Mystic at all about the Year. We're very confident going in that we're going to run positive comp numbers and I think we're just trying to give a sense of but let's be clear. There's a number of things out there that could impact it right now wage.

It looks good. But you know, we'll see looks like we're going through most.

The weather for the winter. So that's a good thing looks like a lot of the other issues that could have been impactful on our numbers are sort of settling out but I think our our guidance is flexible of all those potential considerations.

All right, that's helpful. Thank you. And I believe there's an extra week in 2020. Could you quantify the benefit to ebitda and EPS from that extra weight off your right? We do have a 53rd week for the year. So the way to think about it is from an ebitda perspective. It could be kind of in that office 5 million dollar range and for the from an EPS perspective perhaps in the mid-teens.

since

Okay, great. Great. And then just one other one time the Applebee's company units. Could you just set some light on the profitability there and some of the the moving pieces but then take the fourth quarter. So if you look so are you thinking perspective lie or or back in 2019?

It's just more details on the fourth quarter. I think we have something in the loaded call it low almost mid single-digits on ebitda margin but and and then perspective, you know any of you on Thursday on the puts and takes a veteran. Yeah. So so as John alluded to we did have positive comps there which was which was good in light of the overall system performance. It did outperform for the year. It did Miss Eva. As well as on on on but having said that it was just a bit of offset on G&A or twenty-twenty. I think we're finding that we're we're finding that portfolio stabilizing with about 16 million for Wally Baton Rouge approximately ten million entity-level Eva. Which implies five six million dollars of above restaurant GNA.

All right.

And that's all thank you so much important consideration and how we Gage is obviously we're we like the fact that that we are leading from the franchise system with a number of other newer franchisees on the top end and that we're running comparable profit margins for wall to the rest of the franchisees.

Thank you, and thank you. Our next question is from Jeffrey Bernstein with Barclays.

Great. Thank you very much a couple of questions. The first one just on the Applebee's cops and some of your casual dining peers have been talking about, you know, more aggressive discounting on food and beverage seemingly with an eye on Applebee's and I know you mentioned that that is kind of a foundation of the brand just wondering one of the conversations like with the Applebee's franchisees. I know you mentioned strong alignment, but interest desire and willingness to continue with these more aggressive value offers, especially if not currently driving presumably the desired traffic growth just their willingness and acceptance of the morgue of discounting and then how to follow up.

Hey Jeffrey, this is John good question. We have a

Tight partnership with our franchisees and in particular franchise business Council the you know, we take into consideration pack mentality when we when we Implement our plans and our assumption is that our content will be relevant. We will drive incrementality. It's not always a broader Target. Sometimes those are well-defined narrow targets with high degrees of incrementality it varies depending on whether it's a beverage proposition of food proposition of a value proposition. Um, but the Assumption moving forward is that we driving from mentality and we maximize incremental profit as well as revenue and off for a number of reasons. We believe we will be very successful in doing so in 2020 and we talked about strong alignment. I think what we can clearly count off.

Is the franchise?

These as well as as the dine team and the Applebee's team now concede directly that when we innovate bring in a really strong new products create abundant value and aggressively priced point. We are going to build traffic we proven that ourselves last year and we're certainly proven it to ourselves this year. And so, you know just for for example, we're just adding a incredibly successful campaign with with bowls which were priced at 79th. And obviously that was well-received and enthusiastically supported by our guests and by our franchisees and so, you know, it's those types of programs on both brands that we think hang that we're hanging our success factors on and I think when you look at it, yeah, I think we're we're dead.

um where we did

Not see a lot of competition in eighteen clearly in nineteen people took notice and started doing things to compete as well. So we expect a similar level of competitive environment this year, but we also are very confident that what we've got planned is going to significantly lead both categories.

And Jeff, I would add in here that are like we have a number of large franchise entities and it's hard to compete with a brand of our scale, If you happen to have a concept with two hundred three hundred four hundred units. And so, you know, we we welcome a the market wage sure battle. We believe we're well-positioned to win that over the Long Haul.

Got you, and I think about the the 2020 earnings guidance. It seemed like there was a disparity between you know Eva table of consensus while EPS wage well below. I'm just wondering if you could provide any color on a specific line item guidance, perhaps between ebitda to help us reconcile, whether that fixes expanse or tax or share count off usual is that might have led to the disparity between ibadah and EPS growth relative to expectation.

That's a good.

Question job. Um, you know the I don't need to uh site what the difference between the two figures are but but you really look at it. There might have been some wage differences on interest expense. We in our reconciliation table at further split out. For example, our debt related interest expense wage or and and other interest expenses. I I think a lot of it does have to do with depreciation amortization. So there are two factors there one being if you'd notice our capex came over the past few years has has ramped up and so you're going to have more depreciation flowing through, you know, which will impact CPS and then with respect for company operated restaurants. Not only do we have for this year running about four million dollars a capex attributable to that company operated business. We also have a game

amortization

Of cost based on our purchase accounting. So I think you know those are probably the factors that you know, every every million bucks of variation on a depreciation amortization assumptions could have some significant impact on EPS. Hopefully that helps the answer your question. Yeah, but I think one thing to keep in mind on the depreciation front page, it represents investment in future technology programs that are going to allow us to drive additional business. So and we have clearly Rampage are spending on technology significantly over the last three or four years. And now those Investments are starting to pay dividends in the restaurants, but we're going to see depreciation based on them. Both Investments that we made franchisees are investing alongside of us as well and Technology, but you know, it's allowing us to do things like the technology around server tablets and how that's going to suck.

Through both productivity as well as sales as well.

I was overall customer experience. We're doing things in the kitchen where we're using technology. We're also doing the cost program that John reference. So there's a number of things that we've invested in over the last couple of years in a row need some company stores, which obviously we're spending money on some of those which has some depreciation of fact now in the end, you know, as we've said our ownership of that is not going to be long term. So that's that's a temporary blip, but I think you should be the depreciation as it's going to dampen earnings a little bit but it's also investment in the future Jeff one final point. Just giving you additional detail here out of the 40,000. So if you look at our twenty-twenty reconciliation table between net income and and adjusted ebitda, we have $43 million of depreciation amortization 6,000 of that is from company-operated.

Very helpful. Thank you. Okay.

And thank you. We have our next question from Brett Levy with mkm Partners great. Thank you. Good morning to you. All since I'm going to the West Coast. I just follow up a little bit on Jeff's question to start where he was asking about the competitive landscape and how others might be more aggressive you all have obviously succeeded on the value equation. How much more dry powder do you think you really have given that you talked about off-premises now more of a marketing as opposed to a growth and you're already had some very successful value promos, and then I've got a couple of follow-ups.

You know, this is Jay.

You know Brett let me address from the IHOP standpoint first. We want to be relevant for our guests to give them reasons to get off the couch and come into the restaurant, or to order to go excetera. So, uh about 40% of our guests are what we would consider to be in that value guess category. So it's a large amount of our guests. We we are a kind of middle of America kind of brand we're a value brand just like John said Applebee's is so we have to be cognizant of that. We're not going to play at the highest end of the restaurant business. So we've got off make sure that we always have some type of relevant value for the gas to get them to come in more frequently and I think the guests need to know that we have that so we're not just keep discounting for the sake of discounting. Our franchisees are on board with us to have profitable traffic and that's what we need to do with our value program. So we'll do different things off.

Different times they'll be food innovation.

They'll be value programs. They'll be discounts or where we are really leaning into this is not on the weekends. You know, we do a great job on the weekends filling up our restaurants, but we have opportunities to fill up seats at the other day parts. And that's where we're going to lean heavily on our Value Place is in Bremen Applebee's perspective just to be very often direct. We have a lot of Drive Powder we do from a beverage stand point. We do from a culinary standpoint and in you know, marrying that that role be relevant message with the right demographic within the right occasion framework understanding the drivers for those guests is really important for us. We leverage data we test and validate propositions if we have ever gone wrong in the past. It's when we've lost sight of the value of speaker and so to answer your question directly there was dead.

dry powder and our plans tend to be twelve to eighteen months in advance with a lot of like

Disability should the market Dynamic change.

Yeah, so I think I think our expectation is the environment is going to remain very competitive like it became last year, but we're also confident what you should be hearing from us as we believe we've got a game plan that drives traffic that drives cops or sales growth that brings in that value seeking Gast but at the same time we drive profitability the franchisees and we're very confident we can do all those things together.

Great and following up on an earlier discussion about development. Can you share a little bit more on what you're thinking for twenty twenty in terms of the international landscape then also domestically you you called out the 200 IHOP remodels. What do you thinking about in terms of what still needs to be done on IHOP? And also when should we start to think about next gen on the Applebee's side? Thank you. So let's start with the renovation aspect for both Brands. So and IHOP, we've we've had a program going for about four years now and we've been doing about three hundred restaurants a year. We do those on an exact schedule franchisees will remodel the restaurants on our schedule based on when I began their franchise agreements every so many years. So there's a regular schedule that goes on we've only got a couple more years left of that schedule will be done with this and we're already starting to look at Birth.

What's next because we do have a regular remodel program to keep our restaurants fresh.

And we've got a committee that's actually working on the next remodel as we speak. But this has become kind of autopilot for us is we're we're cranking out a lot of them every year and we'll be done with that box. Next couple of years will be ready to start the next program. Hey Brett on the Applebee's front. We are asset portfolio is in very good shape considering we remodeled approximately 90% of the system within the last 6 years in and if there were assets that were distressed and and and didn't a good from a consumer standpoint. Those have been removed from the system's part of our recruiting up the system. We have a new prototype that we've developed to Value engineered we're focused right now and kind of the page and predictability of comp sales growth and at the right time, we'll engage our franchisees and begin the next evolution of remodeling

Yeah, so on the development front, let's start with the international side. We're very bullish on the ability to grow the brands globally mentioned a couple of areas where we got we've got 150,000 restaurants in our Pipeline and that is rapidly expanding each year. What you've seen on the other hand in the last couple of years is some turn on the existing package that we're done previously in the last 2 and 1/2 to 3 years are approached to franchising has become very different globally. So we are obviously much more interested in having scale within a market wage and much more concerned about who we're doing business with as franchisees than we may have been in the past. And so the combination of those factors we think are going to drive significant profitable growth in those in those markets going forward. We think we've got a great opportunity with existing and new franchisees to continue to expand the international.

and but in put in a market by

A market approach where we've got greater density than we may have done in the past. And so that's and you'll see us talking about that an additional resourcing and and bringing additional Investments to the international side off on the on the domestic front. There's just some really exciting things going on. The idea of Applebee's returning to growth is is really exciting like the idea of looking at new formats for both. We've obviously introduced a fast-casual format and flip for IHOP, but we've also looked at some similar formats and we have some we have one open on the on the Applebee's side. So you're going to see us continue to work with individual franchisees to look at by Marketplace what size unit and what approach makes sense with the guess based on expectations so that we think that was your birth.

to pay big dividends

Returning Applebee's to growth will really I think signal the overall health of the system of the franchisees and and so excited about that on the IHOP side though. It is just incredible the opportunity that lies in front of us. I mean, we've already I mean if you look at who's grown in this category last ten years, it's been IHOP. And yeah, there's some other folks that are new that are growing but there's not an ad in the number same number of restaurants were adding. So the so our position IHOP is good. If you look at the guidance that we're going to talk about going forward for growth of IHOP. It's nice to be explosive. We are expecting big things from flip the interest level strong. We're going to open the first one and call it April in Atlanta. We like that concept a lot worse than looking at some goes kitchen options. We're looking at and then we're looking at this ability to grow the existing footprint as well as these Not Dead.

Additional opportunities where we've signed a big one but there's a lot of other big ones out there.

And you know when you look at the value that we bring to particularly conversion restaurants, whether they be in in truck stops or other areas or looking at for example, gaming casinos run by Native Americans. There's just significant opportunity that we even begun to tap that we think is going to give us a significant expansion of the footprint of IHOP as well as we're going to we think we're going to get to a strong expansion .44 Applebee's

Thank you. Our next question is from Jake Bartlett with SunTrust Bank. Great. Thanks for taking the questions. You know, I first had just a a couple of quick kind of clarifications. Maybe maybe call it but you know on the international side with with Applebee's there was a month a large number of closures in the in the fourth quarter. Is that is that representing kind of a cleaning up of that or I know you've given us guidance for domestic development net development. But what about kind of how should the international package to that? I think that what you should what you saw in the fourth quarter was some cleaning up but it was really one franchisee that we were struggling with them decided. We did not want to continue to do business with and so that drove most of that result and we expect to go back into that market and replace those units that we lost dog.

I think the way you ought to think about it is I think we're continuing to prune the inventory.

But you'll see strong growth and then eventually, you know in the next year or two Strong net unit growth as a result of those efforts.

Got it. And then and one comment that that we've heard from some of your competitors are you know that that Applebee's can't you know keep this level of value forever or kind of keep something like the all-you-can-eat riblets forever home and and just to kind of answering that question. Could you could you tell us what you expect for commodity inflation in 2020. Also just you know, how how your franchise off these martians or during those kind of you know deep value promotions. Is it value engineered in a way that you're actually maintaining margins and that you you it's actually can you know to that level of value forever when the programs were running when we're driving traffic. We are increasing marketing not decreasing. That's the way the programs are designed. So we are.

I'll let John talk this a little bit. We are looking at an opportunity going.

Forward where we believe that it's a combination of abundance value as well as strong price pointing in both Brands to keep and maintain our guests interest in coming in to the restaurants and driving traffic. Our goal is to continue to drive positive traffic and drive, sales in a balanced fashion with a combination of mild price increasing and well as managing are mixed so that our pricing may go up but it's not because of price increases because we're we're highlighting different items on the menu. So, you know, our franchisees are profitable we monitored very carefully the programs that we build when they were dead. They not only drive traffic they drive profitability and that has been the home are over the last several years and that is our goal. We expect the same thing to go in 2020. We don't log

see any shortage of our ability to continue to drive value because when we drive

How you through these programs and drive people in not old and by the offer that's made we make sure we structure the offer that's made so that it is not margin deteriorating. Josie's and with the other business. That's, it's a positive aspect for us. We don't see any limit to what we can do. I think Steve frame. Well, Jake look, we we design these month. We create an architecture around these programs with our franchise Partners. We don't do this in a vacuum. And then we we have a myriad of ways by which we test and validate and we believe we can do both. We believe we can drive incremental traffic and incremental profitability for our franchisees. We want them to be extraordinarily profitable wage. Also understand that dynamic between the percentage of our guests who actually

Come into the restaurants in order what may be perceived as a deeply discounted proposition and the percentage of our guests that order from a full margin balance of menu wage, um and and understanding that Dynamic we end up in a profitable place. And so we and again we do this in partnership with our franchisees. We believe we can I continue to be successful. It's important we communicate over value and we have it over in value isn't always probably Stallone We Believe price is critically important to the boss is she grew is little discretionary income but abundance and Innovation also important to us. Let me Jake this is Tom. Let me just get the commodity basketball the question. So 2019 was pretty favorable for both Brands. Applebee's year-over-year was favorable by 2.6% IHOP was favorable by 1% off.

2020

For now, we're seeing some signs of some give back on that Applebee's we're looking at unfavorable for twenty twenty by sixty basis points and IHOP unfavorable by a month basis points. So a little bit of give-and-take Applebee's between the two years still favorable by 2% but keep in mind will continue to take advantage of the corner Improvement programs that were running for both Brands and those offset any increases were going to see in commodity J any thoughts. Yeah. The only thing I would say from the standpoint similar to John is that that there's only a a certain percentage of people that actually buy what's on your deal what's on the discount and it's lower than you would send it, you know, depending on what the offer in the campaign is that maybe 10 to 20% only that actually buy that the differences of these values speakers and people that want value. It may be the difference on whether they get off the couch or not. That could be the difference between being down 2% off.

Picking up 2% in traffic if you can move.

A significant number of those people to come to your place instead of somebody else. So we've got to be competitive to to drive that extra traffic in that incremental traffic is the difference a lot of time of of whether or not you're going to be up or down. So we're going to have relevant messages for a gas. And I think it's important to that that what your marketing outside of your building helps you drive train in concert with that. You have to have a good program of what your p o p look like in the restaurant will has your menu laid out. What do you handing people the goal is not to trade everybody down to everybody who comes in the restaurant buy that product. There's a balancing act that comes here, but we definitely want to have the traffic and we want profitable traffic for a franchise. He's in Penny profit. And I think that's something that I've got to keep in mind is sometimes you get actually make use an example you make a tenth or two Less on a percentage of profit, but you drive it enough traffic you flown more dollars to the bath.

And that's what the franchisees care about is.

Having money Hey Jake final point. This is John on this one. I think it's an important point the the content right? It's one thing to have a compelling proposition. The advertising must be compelling and you must have the media muscle to drive incrementality. Right? And I'm not sure if you look across the landscape in particular. It's smaller players without scale that they have the ability to do that on a consistent basis. You can engineer a proposition to be attractive for the guests. If you don't have the muscle any effective communication to drive awareness and trial and repeat you're going to fail on that proposition you think off hand IHOP or well position there.

Got it. And it just real quick. When one other question is the the advertising Revenue was was more than the expense in in the fourth quarter. Actually, it was flipped the fourth floor last year, but is that really that's something that might kind of comes out in the wash. So so should we expect that to be a dragon 2020 or is that a catch-up from some prior. Know? You can expect advertising receipts to to roughly equate to advertising expenses. That's that's our overall expectation. When you do tend to have slight timing differences on expenditures in the following year or shortly thereafter you tend to make those up.

okay, and then

You know in in terms of the the 4.25% of the contribution, you know, we're in the kind of the last year of that any any any thought you can share on the likelihood that that would continue beyond 2020 off Jack as we've stated. I'm not going to reveal anything proprietary here. We have a terrific partnership with our franchisees and when they're making money off and driving brand relevance, uh, we tend to be aligned on things like contribution rates. So more to come on that subject. Got it. Thank you very much. Appreciate it.

And we have our next question from Todd Brooks with c l king and Associates.

Okay. Good afternoon. Everybody. Just a quick question on catering Steve. I know you highlighted that as a as a Big Driver of growth for both Brands. Can we talk about thoughts on Pace of roll out of catering then across kind of two facets that you guys are really focused on one if you can talk about marketing scale and how rolled out catering would need to be in both Brands before really putting down behind that and then secondly, if you could talk about the concept of taking the value that we're we're driving it at both the name plates in the restaurant and carrying that forward to the catering menu. Yes. So let me let me start in general and we'll talk about each branch. So we we obviously in case there's a big opportunity for us and we see it into two ways one is we see it in a residential setting when families are getting together and they don't want or don't have the time because they're doing another event to do the cooking, you know, we see ourselves as being perfect for that, you know for a brunch.

from from IHOP, you know to which which would likely be lots of options or from a

Very men, you'd very, uh many varied options from an from Applebee's catering option. We are rapidly rolling them out to all franchisees and they can talk about where we are in each brand and we will put marketing muscle behind it because we think that this is a this is a opportunity for us going forward off premise that will drive significant value in profitability for the franchisees and that uh, it is a it is traditionally a market that has been dominated by one or two players. And the only reason that they're dominating is cuz they went after it and the rest of us didn't so we see big outside in the catering aspect and yet we will put marketing muscle behind it. So J. Yeah. Yeah. Yeah, as I said in my my message, we've got nine hundred restaurants that sign up for catering already. They've they're getting the operational chops down to be able to do this as kind of goes into phases dead.

We we like to get things established in the restaurants before we go spend a lot of money to Market. We want to make sure we've got a processes, right?

And we've got critical mass with our franchisees. So this is really goes into phase is the first phase is really the Grassroots marketing of this locally. This is having people at the Restaurant level going out and building this business. Do you think about going to talk to administrative assistants who both these kind of things for offices et cetera? And how do you how do you start to build that grass-roots business? That's the first wage that actually helps you get the skills together to execute this and now it's kind of Market more broadly. And what we're looking at doing is folding catering into some overall off-premise marketing to push all channels as much as we can and Catering will come on with it. And I think taught on the on the Applebee's side 2018 a very much a kind of reintroduction of to go to America 2019 was optimizing that then kind of the emergence of delivery 2012.

Is fully leveraging both of those engines with approximately 9 and 10% being to go 3% being delivery and while catering is incidental our franchisees email offer that everywhere and I would consider twenty twentieth foundational here and then twenty Twenty-One a significant activation year and could it be a 5% sales rep without question when you Benchmark other brands who have been in this business for a long time, but it does take some time to establish a database and it does take some time to establish credibility in this Arena both of which will be working hard against this year.

That's great and just looping back on the value part of of how you go to market with catering. Is this do you do you price this to capture share and reinforce the value positioning or would the the convenience on the service that you're pricing? Is this more of a market price type of offering for both Brands. Thank you. I missed that. He talking a talking broad scale offer delivery on catering scale catering. Look average check is probably thirty bucks. Applebee's catering is north of $100. You do have a fishing. She's from a guest consumer standpoint and and we make it easy for you and and and it's far more attractive financially than ordering the individual entrees so long. So yes, there's a there's a value component to that clearly embedded.

I think on the IHOP side we're thinking about this is that you know, I've seen this fail in other places the past where people try to charge x amount X. The number of guests you have access to expensive. There's got to be kind of a bulk rate that you do on this. We're not talking deep value be discounting but there is a value to that consumer in the marketplace that you're getting a bulk price.

Okay, great. Thanks. That was helpful.

And thank you. We have no further questions at this time. I will now turn the call over to Steve for a closing remarks. So thanks again for your time. We look forward to speaking again on a first-quarter call scheduled for April 29th. Have a good day.

Thank you. Ladies and gentlemen, this concludes our conference. Thank you for participating you may now disconnect.

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