Dine Brands Global, Inc.

Good morning, and welcome to Dine Brand's first quarter conference call. I'm joined by Richard Dahl, Chairman of the Board, Steve Joyce, CEO, Tom Song, CFO, Jay Johns, President of IDOC, and John Tawinski, President of Applebee's. Before I turn the call over to Richard for opening remarks, please remember our safe harbor regarding core booking information. During the call, management may discuss information that is forward-looking and involves known and unknown risks and uncertainties and other factors which may cause the actual results to be different than those expressed or applied. Please evaluate the forward-looking information in the context of these factors, which are detailed in today's press release and 10-Q filing. The forward-looking statements are as of today and it seems no obligation to update or supplement these statements. We may also refer to certain non-GAAP financial measures, which are described in our press release and also available on DIME's website. With that, I'll turn the call over to Richard.

Thank you, Ken. Good morning, everyone. I hope you and your family are doing well. I wish to take a moment to make this call in review of my time. Clearly, the primary focus of the company, the management, and the board is the crisis brought on by the coronavirus pandemic. The well-being of our guests, employees, franchisees, and investors is of utmost importance and concern. I wish to assure you that the Board and management are working ever so closely to ensure that everyone's expertise is brought to this war. The Board is constantly abreast of the ever-changing situation and is participating in all the major decision-making. I know you have read our earnings announcement. We have made some very tough decisions. and the board is completely supportive of these actions. We appreciate and respect the strength and can-do attitude of our team members, our franchisees, and our vendors, knowing that together we will succeed. I'm very proud to be a part of this company and this team. I thank them and all of you for your support. Now I'll turn the call over to Steve.

Thank you, Richard. Good morning, and thank you for joining us today. Before we begin, I would like to say that I hope everyone participating on the call is safe and doing well, and your families. These are truly unprecedented times. The country and our industry as we know it has changed drastically. The physical distancing measures and government mandates requiring restaurants to close dining rooms while only allowing off-premise to-go and delivery have had a significant impact on our industry as a whole. During the unceasing challenges we've faced this past month, I have been tremendously proud of the resiliency, focus, and commitment of our teams, our franchisees, and the thousands of restaurant team members across the country in the communities in which we serve. Each who has stepped up to work tirelessly on behalf of our company and brands during these trying times. I've truly seen the best of our people. Our board of directors is actively engaged with me and the management team and is confident that we have the leadership, resources, and agility to manage through these various scenarios with a steady hand and a clear path. Our response to the impact of the coronavirus is ongoing. Dime's cross-functional crisis team has been fully engaged with the authorities at all levels to obtain timely information, which has enabled us to maintain business continuity and make informed and crucial decisions related to operations across the organization as well as our company-operated restaurants. The health and safety of our team members and guests remains our number one priority. We have been monitoring the virus around the clock, making up-to-the-minute decisions on how best to stay safe in our work and in our restaurants while also keeping critical operations running. To our franchisees, I'm pleased to say that despite mandatory dine-in restrictions and other restrictions that mainly limited business to off-premise only, approximately 82% of our domestic restaurants remained open for to-go, and delivery services at the end of the first quarter. In fact, both brands have experienced meaningful growth across these sales channels, particularly in delivery. After transitioning to the off-premise only model, we have seen our domestic system-wide off-premise sales grow by 71% between the week ended March 1st and the week ended April 26th. Growing our off-premise business at both Applebee's and IHOP has been part of our long-term growth plans over the last three years. As a result, our franchisees were able to pivot to a to-go and delivery-only model with minimal operational disruptions. Technology and innovation have played important roles in our off-premise strategy. While before the pandemic, we launched several digital initiatives across both brands to including building new and enhanced ordering capabilities to make it easier for guests to order and to support the expansion of our catering business. IHOP's off-premise platform was already strong before COVID-19, but with increased demand for takeout, we introduced curbside pickup at IHOP, which is completely new for the brand. will continue to leverage technology that we've already developed with guest safety in mind. When dining service resumes in our restaurants, we'll rapidly move to offer guests the option to use their personal device to order and pay. I'm pleased to say that the performance of our off-premise business has enabled many franchisees to cover their variable costs in this reduced capacity. Tom will provide an overview of franchisee economics shortly. Both John and Jay will also provide more details on their respective brands a little later. To help minimize the impact to franchisees significantly affected by the mandated restrictions, we have offered financial support by deferring royalty, advertising, and other fees, lease payments, and remodel obligations on a case-by-case basis. Please remember that these situations are very fluid. so that we will continue to work closely with our franchisees on support measures and operational challenges. Additionally, we believe that the new established programs under the CARES Act have provided substantial liquidity support for those franchisees who are able to access the funding. The crisis has created some uncertainties, and just as other brands and businesses work to manage their operations, we must do the same. To help get through this period, We had to make some incredibly hard decisions to reduce our operating costs, and this included furloughing some of our support team members. We came to this decision as a last only resort after several other efforts to reduce costs and cut non-employee expenses over the past several weeks. We have deprioritized discretionary spending, have implemented cost savings, including a freeze on new hires and substantial reductions in contractors. We believe these tough decisions will help us get through these difficult times and emerge from this crisis in a positive position to bring back our furloughed team members as conditions improve. We remain optimistic that Don and our two strong brands will be able to safely navigate the road ahead and look forward to welcoming our guests back into our restaurants. With that, I'm now going to turn the call over to Tom to provide an overview of first quarter results. Tom? Thank you, Steve. Good morning, everyone, and thank you for participating today. I hope that you're all doing well. Our industry is certainly in uncharted territory. I'll begin by discussing how we responded to the pandemic and the steps we've taken to reinforce our financial flexibility. Last month, we drew down a total of $220 million from a revolving financing facility or variable funding note, which was issued as part of the securitization we completed in 2019. While we didn't have an immediate need for additional cash, this action was taken as a precautionary measure given the uncertainty caused by COVID-19. In doing so, we shored up our balance sheet. At the end of the first quarter of 2020, we had $395 million of cash with $345 million being unrestricted. I'd like to highlight that this includes cash held related to IHOP advertising funds and the company's gift card programs. Given our solid cash position, minimal capex requirements, and asset-light business model, we believe we have strong liquidity to manage our brands and operations through the crisis. regarding our quarterly cash needs. The company estimates its cash, general, and administrative expenses to be approximately $35 million per quarter. The company has $16.4 million of quarterly interest payments on our securitization and the VFN drawdown that I just mentioned. These projections exclude gross lease exposure of approximately $1.3 million per quarter on franchised restaurants that are currently closed and being monitored. Our cash G&A forecast represents a one-third reduction of controllable costs at dine for the remainder of the year. In addition, we have reduced our capital expenditures by one-half to approximately $6 million for the remainder of the year. Covering our securitization, we are currently paying interest only, and the quarterly principal payments would only be mandatory if our leverage ratio goes above five and a quarter times. These quarterly payments would be $3.25 million if we exceeded that leverage. As of March 31st, the leverage ratio was 4.79 times. I'd like to highlight the debt service ratio, which was 3.93 times as of March 31st. Now, let's turn to assistance for franchisees. At the DIME level, we've implemented several programs to help ensure the stability of our franchisees at both brands. We're evaluating, as Steve mentioned, on a case-by-case basis, requests for royalty and advertising payment assistance, which includes deferrals of near-term payments. And specifically, For IHOP franchisees, we reviewed requests for rent and financing deferrals and engaged with landlords on behalf of some franchisees regarding rent concessions. Switching gears briefly to franchisee economics, our analysis has shown that unit economics under restricted off-premise only conditions were generally consistent across both brands. Many franchisees have been able to substantially reduce costs and cover variable costs and sometimes rent with the current sales levels under the off-premise only model, which is comprised of to-go and delivery service. This is why we've been very pleased with the aggregate number of open restaurants, which is a testament to the quality of our franchise operators we have and their impressive ability to tackle these severe conditions. As Steve mentioned, at the end of the first quarter, 82% of our domestic system across both brands were open for business, the vast majority of which offered off-premise service only due to the state and local government restrictions on dining room service. As of April 27th, 84% of our domestic system was open. This increase in openings is due to the meaningful changes Sequential growth in both takeout and delivery sales at Applebee's and IHOP in April compared to the first quarter of 2020. John and Jay will provide more details on our off-premise operations. Now I'll briefly recap our first quarter financial results. Adjusted EPS for the first quarter of 2020 was $1.45 compared to $1.90 for the first quarter of last year. The decline was due to the lower gross profit as a result of significant decrease in guest traffic as these state and local government restrictions were implemented on dine-in service and mandated stay-at-home orders. Regarding our G&A, we continue to drive year-over-year improvement in G&A. For the first quarter of 2019, G&A was $37.5 million compared to $42.5 million for the same period of 2019. The decrease was mainly due to lower compensation expenses and a decline in cost of research and professional services. Turning to our tax rate, our GAAP effective tax rate was 23.2% for the first quarter of 2020, which was essentially flat to the 23.1% for the same period of 2019. And with respect to our cash flows, for the first quarter of 2020, cash from operations increased to $29.6 million from $28.9 million for the first quarter of last year. We're very pleased with the fact that despite the challenging start to this crisis in March, our adjusted free cash flow was relatively stable at $27.5 million for the first quarter of 2020 compared to the same period of 2019. Adjusted EBITDA for the first quarter of 2020 was $61.7 million compared to $74.7 million last year. Regarding capital allocation, as disclosed last month, due to the uncertainty caused by COVID-19 and the need to take precautionary measures, the company has terminated all outstanding orders for repurchases of its common stock in the open market for the foreseeable future. Our board of directors has also suspended our cash dividends. We will re-evaluate our capital allocation strategy as industry conditions improve and normal restaurant operations resume. At this time, we are not updating our guidance beyond my previous comments related to our expected expenses. But we anticipate that we will revisit this as restrictions are lifted. With that, I'll now turn the call over to John. Thanks, Tom, and hello, everyone. My objective here today is to share as much detail as possible as to the current state of the Applebee's business. For context, let's start with Q1 performance before the crisis emerged. As outlined in the release, Applebee's had tremendous momentum prior to the various government restrictions placed upon restaurants. Comp sales results through the week ending March 8th were positive 3.2%, rolling a positive 1.4% from the same timeframe a year ago. In total, Applebee's posted 10 consecutive weeks of positive comp sales to start the year and meaningfully outperformed the casual dining category. before the downturn began the week ending March 15th. This downturn, along with local dining restrictions, led franchisees to quickly shift to the off-premise business model we have today. And given the uncertainty at the time, franchisees temporarily closed 251 of our 1,657 domestic restaurants in mid-March. Now, the good news here is, is the number of temporarily closed restaurants is getting smaller with each passing day as franchisees reopen their off-premise operations. At present, approximately 175 domestic locations remain closed, and we expect that number to become even smaller over the next 10 days. In total, we have about 1,482 Applebee's restaurants open for off-premise business, and we anticipate all of these restaurants as well as most of our temporarily closed restaurants to reopen their dining rooms once the local municipalities provide the green light. Now, I'd like to share a comp sales detail from the point in time the crisis emerged through this past week. After being up 3.2% year-to-date through March 8th, we progressed from minus 15.8% the week ending March 15th to minus 76.0% the week ending March 22nd, to minus 80.6% the week ending March 29th, with this representing our lowest point of demand since the crisis began. April comp sales were minus 76.2% the week ending April 5th, and minus 76.5% the week ending April 12th, But it's important to note here that 838 restaurants were closed on Easter Sunday, making this a very tough week to read. Our comp sales then improved to minus 64.9% the week ending April 19th and minus 64.4% the week ending April 26th, representing our best performance yet, as I believe we all benefited from stimulus checks arriving across the country over the same time frame. For additional geographic context, system sales ranged from minus 70 to minus 80% in California and Texas to minus 50 to minus 60% in the Midwest and Northeast over the past two weeks. So in total, Applebee's is currently capturing approximately 35% of last year's average restaurant volume, again, depending upon the geography. From an absolute dollar perspective, Applebee's average weekly off-premise sales have now almost tripled from about $6,500 per restaurant at the start of Q1 to approximately $17,700 this past week, keeping in mind our average restaurant volume of approximately $2.4 million at the end of 2019. Interestingly, car side to go has moved from 70% of mix in mid-March to to 76% currently with delivery representing the balance at 24% of mix. While in this off-premise mode, all restaurants are operating obviously with a very small team, reduced hours, and a limited core menu to ensure operational excellence. I'm also pleased that our franchise partners are reporting that they've successfully retained the restaurant management teams, which will help us significantly with the reopening of dining rooms. Now, I'd like to shift gears and frame our actions from a marketing perspective. Effective March 18th, we chose to discontinue all Applebee's national media spending, and we've remained on hiatus throughout the crisis. The only modest activity currently taking place is through our own postings on Twitter, Facebook, and Instagram, as well as our database activation and, of course, local restaurant signage to make our guests aware that we're indeed open for takeout and delivery. In addition, we successfully canceled 100% of our Q2 media commitments, although we certainly have access to media inventory once we decide to reintroduce national marketing. As I review the past several weeks, it's clear to me that our guests are favoring Car Side to Go, over third-party delivery, in part because they trust the Applebee's brand, they can pick it up themselves, and they don't have to worry about additional third-party handling. Plus, after a bit of prolonged cabin fever, I believe our guests really enjoy getting out of their homes and hopping in their cars for a little indulgent escape to the neighborhood Applebee's. We're seeing this across the country. I'm also pleased to report that our first dining room reopenings occurred this week, Monday and Tuesday in Georgia and Tennessee in accordance with local regulations and in strict adherence to safety, sanitation, and social distancing parameters as well as our new service protocols. As of this call, we're applying best practice learning before we begin a smart, measured, and sequenced expansion in Texas, Oklahoma, Iowa, Utah, Alaska, North Dakota, Montana, Missouri, and as of this morning, it appears Nebraska will be opening up as well, with other geographies to be determined. It's certainly conceivable we have more than 200 full-service restaurants open next week, including dining rooms, with a cascade of additional restaurants to follow, contingent, of course, upon guidance from state and local governments. It's my expectation that our off-premise business will remain robust and and continue to play a critically important role in the lives of our guests moving forward. I should also note that our supply chain remains in very good shape and is poised to satisfy demand throughout this rolling cascade of openings. A quick note on franchisee engagement in this environment. We initiated interactive town hall calls beginning in mid-March for all franchisee leadership as well as the entire Applebee's team. This cascade of communication and connection has proven invaluable as our primary means of real-time engagement, strategy, and alignment. In total, we've held 17 of these calls over the past six weeks. Finally, I'd like to take a moment here to thank our franchise partners, as well as our very talented Applebee's and Dine teams, for their remarkable resilience, perseverance, and certainly entrepreneurial spirit throughout this crisis. It's my personal experience that these leaders are often at their best in tough times. We've become even more unified and determined as a result of this adversity, and I'm confident we'll come out stronger than ever and sooner than most folks expect. With that, I'll turn it to Jay.