Dine Brands Global, Inc.

Hello and welcome to the second quarter 2020 DynBrands Global Earnings Conference call. My name is Patty and I will be your conference operator today. At this time, all participants are in a listen-only mode. If you have any questions, please press star, then 1 on your touchstone telephone. Please note that this conference is being recorded. I will now turn the call over to Mr. Ken Deepti, Executive Director of Investor Relations. Sir, you may begin.

Good morning, and welcome to Dine Grand's second quarter conference call. I'm joined by Steve Joyce, CEO, Tom Song, CFO, Jay Pons, President of IHOP, and John Zawinski, President of Applebees. Before I turn the call over to Steve for open remarks, please remember our tape cover regarding forward-looking information. During the call, management may discuss information that is forward-looking and involves known and unknown risks, uncertainties, and other factors which may cause the actual results to be different from those expressed or implied. Please evaluate the forward-looking information in the context of these factors, which were detailed in today's press release and 10Q file. The forward-looking statements are as of today and it assumes no obligation to update or supplement these statements. You may also refer to certain non-GAAP financial measures, which are described in our press release and also available on Dine Brand's Investor Relations website. With that, I'll turn the call over to Steve.

Thank you, Ken. Well, good morning, everyone, and thank you for joining us. Before we get started, I know the last few months have been challenging for everyone, so I hope you're all safe and doing well. I'd also like to recognize our franchisees and team members for their continued hard work during these difficult times, which has brought out the best in our team across both our organization and system. from creating resourceful ways to drive our business during these times to having a solid focus on our guests and welcoming them back into our restaurants. Our approach has generated some good progress. With that, let's turn to the second quarter results. When we last spoke to you, we provided a look into the sequential improvement in weekly comp sales trends for April. Notably, after reaching lows in late March, the sales trajectory for both brands continued to improve through June as dining restrictions were eased and states began to gradually reopen. Guests who felt more comfortable about restaurant dining were eager to get out after a long period of staying at home, whether that was through off-premise, outdoor, or indoor dining. We set out to bolster this variety of options to meet the different needs of our guests and establish stringent safety protocols that would instill confidence, and keep guests coming back. Despite the impact of COVID-19, our brand showed meaningful progress in recovering, which we believe reflects the successful execution of our off-premise business and the affinity guests have for our brands. While our restaurants have always offered guests respite and a place to enjoy being with friends and family, they've continued to savor our great food increasingly in the comfort of their own homes as the strong growth of our off-premise business demonstrates. We remain optimistic about the overall marked improvement in industry sales and traffic data since April, which would support continued momentum in our business. We're closely monitoring those states that have recently reversed their reopening plans. This situation is obviously fluid at both the state and local levels, so it would be premature to attempt to quantify any impact presently. We're staying nimble in this ever-changing environment and shifting our approaches when warranted, such as refocusing on outdoor dining and off-premise service where it makes sense. We've demonstrated the ability to manage our business during a challenging second quarter, and our franchisees proved their tremendous resiliency in meeting the convenience and safety needs of our guests. We've also leveraged our digital capabilities to support significant growth in our off-premise business. To provide some details, Applebee's online-to-go sales for the second quarter increased sequentially by approximately 18 percentage points to 23% of total sales, with off-premise sales representing 61% of total sales. Similarly, IOP experienced growth of 28 percentage points in online-to-go sales to 35% of total sales during the same period, with off-premise sales representing 54% of total sales. The off-premise business at both brands continued to pose significant growth in the second quarter as guests became more familiar with the platform. We believe our sales will be further supported as dining room restrictions are lowered. John and Jay will provide additional details on their respective brands later. During the reopening process, Dine's crisis management team remains fully engaged with local, state, and federal authorities to obtain the latest information available, enabling us and our franchisees to make well-informed decisions. I'm pleased to say that at the end of the second quarter, 95% of our domestic restaurants are open for either dine-in or off-premise service. This compares to 82% at the end of the first quarter, which primarily consisted of takeout and delivery service. As we reopen dining rooms in accordance with government mandates, the health and safety of our guests, franchisees, and team members are top priorities. In addition to following guidelines provided by the CDC, as well as state and local governments, we've implemented our own operating procedures at both Applebee's and IHOP. These include, but are not limited to, safe food handling procedures in addition to practices to ensure that the restaurants are sanitized, including team members who focus on cleaning and sanitizing common touch points throughout the restaurant. As we continue to welcome guests back, we want to ensure that they feel safe and comfortable whether they choose to dine in restaurant or off-premise. Our research has shown that consumers have a strong desire to return to restaurants. In fact, out of the top five categories that consumers said brought them the most joy, dining out was ranked the highest. As we enter a new normal for dine-in, we know that guests will view health and safety as equal to value and credibility and will continue to serve our guests' needs and desires. Our cross-functional teams have worked relentlessly to ensure our franchisees are equipped with the right information to make sound decisions for their operations and their teams. We're working closely with our franchisees and taking the necessary steps to prepare our restaurants so that we can emerge from this pandemic in a strong competitive position. The coronavirus has had a profound impact on businesses across the country and the globe. As you know, the restaurant industry has been especially hard hit. As a result, industry analysts estimate that a substantial number of independent restaurants that have closed due to COVID-19 will not survive. In contrast, DineGrants has the advantage of scale, a strong cash position and liquidity, experienced restaurant operators, and an asset-like business model. Collectively, this profile has enabled us to withstand the challenges facing our industry, which makes me more optimistic about our future. Looking ahead, We believe that there are potential opportunities to increase our market share due to expected closure of independent restaurants. We'll continue to set the competitive landscape as we focus on our near-term priority, which is returning our core business to sustainable growth. With that, I'll now turn the call to Tom to provide an overview of the first quarter results. Tom? Thank you, Steve. Good morning, everyone. I hope that you and your families are all doing well. Given the circumstances, I'm going to first review the financial initiatives and decisions that Dine has taken during the pandemic. Then I'll discuss our financial results for the quarter. First, we responded by fortifying our financial position during this challenging period for our industry. As a reminder, we borrowed a total of $220 million from a revolving credit facility in March. As of June 30th, the entire amount remains drawn. At the end of the second quarter, we continued to have a strong liquidity position and significant cash on our balance sheet, totaling $342.5 million, of which $278.5 million is unrestricted. I would like to highlight that non-current restricted cash increased by $16.4 million due to DINE voluntarily doubling its interest reserves to enhance our securitization structure. In addition to further support our securitization, we voluntarily accelerated the funding of quarterly interest. And as of today, for example, we have already fully funded interest payments due on September 8th. We did not repurchase our common stock during the quarter and anticipate this will continue for the foreseeable future. Turning to our G&A, we made some very difficult decisions. to furlough approximately one-third of our corporate staff, which led to the sharp decrease in G&A for the second quarter of 2020 to $30.9 million as compared to $39.4 million for the second quarter of 2019. This represents a 22% decline. The decrease was mainly due to lower compensation expenses as well as reductions in other discretionary costs. I would like to clarify that during this quarter of extreme austerity, we were able to reduce our gross cash G&A to approximately $27 million, which includes capital expenditures. However, we are not changing a $30 million per quarter figure that we previously mentioned for G&A and capital expenditures for the remainder of the year, as we have recalled some of our team members from furlough and anticipate resourcing our business to serve our franchisees. To provide financial support for franchisees, we disclosed last quarter that we implemented franchisee assistance measures aimed at enhancing the stability of both brands. The assistance primarily consisted of deferrals of royalty and advertising payments primarily for March and April for both brands and for certain IHOP franchisees, also rent payments. Additionally, we allowed IHOP franchisees to further remodel the new unit development obligations for 2020. Most franchisees did avail themselves of our support. In aggregate, we provided nearly $56 million of deferral for our franchisees. Offsetting these significant deferrals, we received approximately $11 million of deferrals and abatements from our landlords on IHOP properties that are subleased to our franchisees, as well as our other leased properties. While the programs offered, both through Dine and the CARES Act, helped to somewhat mitigate the financial impact of COVID-19 on our franchisees, the effect of dining room closures and restrictions has caused significant deterioration in franchisee cash flows. As a result, we recognized over $5 million of bad debt expense during the second quarter. I would like to note that after the deferral period, both Applebee's and IHOP franchisee collections have been strong, and each brand's ad fund is in a stable position at this point. Also, as previously disclosed, an IHOP franchisee that operated 49 locations initiated an assignment for the benefit of creditors and then subsequently filed for bankruptcy. In July, 41 of the 49 units were sold to a new franchisee approved by us, and as part of the transaction, we received $4.6 million dollars which represents a complete recovery in fees. Let's switch gears to our second quarter financial results. For the second quarter of 2020, we reported an adjusted net loss for diluted share of 87 cents compared to adjusted EPS of $1.71 for the same quarter of 2019. While we started the quarter at a very low point with weekly comps down 77% at Applebee's, and down 82% in IHOP for the weekend of April 5th, both brands improved dramatically, with Applebee's down 18% and IHOP down 34% for the last week of the quarter. This represents improvements of 59 percentage points and 47 percentage points for Applebee's and IHOP, respectively. You'll also see in our recorded results that we recorded over $120 million of impairment losses for the quarter. most of which was attributable to Applebee's goodwill and intangibles. Turning to our securitization, our leverage ratio as of June 30th was 6.3 times, up from 4.8 times as of March 31st. Under our securitization structure, we are required to make quarterly principal payments of $3.25 million when our leverage ratio is greater than or equal to 5.25 times. which is our total debt at quarter end divided by adjusted EBITDA for the four preceding quarters. Please note that exceeding the leverage ratio of five and a quarter times does not violate any covenants related to the securitization. We anticipate making a principal payment in the fourth quarter of 2020. I would like to highlight that our debt service coverage ratio, or DSCR, remains robust at 3.34 times as of June 30th. The first key DSCR measurement is tripped when a ratio is below one and three quarters times. So we have ample cushion. Adjusted EBITDA for the second quarter of 2020 was $12.1 million compared to $68 million in last year's second quarter. Turning to our tax rate, our GAAP defective tax rate for the second quarter of 2020 was 8.2% tax benefit compared to 26.4% expense for the second quarter of last year. The primary reason for the variance was due to the non-deductibility of the impairment of Applebee's Goodwill in the amount of $92 million. I'll wrap up on a positive note. Our international business is off to a promising start in the third quarter. We recently opened four new restaurants. These include two IOPs in Canada, one Applebee's in Mexico City, and one Applebee's in Puerto Rico. We also recently entered into a 13-unit development agreement for IOPs in India with a very experienced multi-unit QSR developer. This is a key market for us and complements our prior development agreement for Applebee's in India, which we executed in late 2019. I would also like to welcome Tony Moraleo, President of our International Division, and Justin Skelton, our new CIO, to Dyn's executive team. To close, while our industry remains challenged, we have taken steps to ensure we continue to maintain strong liquidity and remain responsive to franchisees. Our brands have significant scale, as Steve mentioned, and are well positioned to benefit from any potential contractions. restaurant industry competition. We've experienced meaningful improvement in our off-premise business at both brands, which will greatly complement our dine-in sales when restrictions on restaurant operations are further lifted. With that, I'll now turn the call over to John. Thanks, Tom, and good morning, good afternoon, everyone. I've been looking forward to sharing these results, given all that's unfolded since we last spoke about 90 days ago. I plan to provide detail on Q2 as well as a review of what's transpired here in the month of July. Let's start with a bit of context. Pre-COVID, the Applebee's brand had tremendous momentum. We posted a 3.2% comp sales increase through March 8th, meaningfully outperforming the casual dining category and delivering 10 consecutive weeks of positive sales to start the year. Once the pandemic emerged in March, We temporarily closed about 250 restaurants and quickly moved to an off-premise business model. As a result, April comp sales declined 70.4%. May sales declined 54.1% as we began to reopen our dining rooms. In June, sales were down 29.3% as we began to see a real shift in momentum. Four primary factors impacted our Q2 results. The most obvious was the closing of dining rooms, which represented approximately 85% of our business pre-COVID. Once dining rooms began to reopen, government-imposed capacity constraints represented another meaningful variable, with most geographies imposing a 25% to 50% capacity restriction. Another factor limiting our revenue recovery is the understandably cautious nature of the American consumer in this environment, which of course varies depending upon the geography. And finally, we chose to discontinue all national marketing back on March 18th, and we've been on a self-imposed media hiatus through almost all of Q2, In hindsight, this was absolutely the right strategy as we allowed our ad fund to replenish while waiting for the right time to reintroduce Applebee's to America. Now, let's talk about where we are today. I'm very pleased to announce that 1,600 Applebee's restaurants are currently open for business in the U.S., representing 97% of our portfolio. The remaining 56 restaurants are a combination of temporary and permanent closures that that will evolve slightly as we progress through the balance of the year. Of the 1,600 open restaurants, about 1,450 are fully operational with open dining rooms. And given the recent dining room shutdowns in New Jersey, New York, California, New Mexico, South Florida, and Philly, to name most of them, we now have about 150 restaurants operating in an off-premise only mode with some outdoor dining rooms. and we certainly expect these numbers to evolve as local governments modify their guidelines in this very fluid environment. I want to take a moment to talk about our franchise partners, the restaurant teams, and our cross-functional leadership team. Throughout this pandemic, our top priority has always been the safety of our team members and guests, and our partners have simply been exceptional in delivering upon our elevated brand standards. Remember, there was no playbook for this back in March. The pandemic took us all by surprise, yet this adversity has unlocked, from my perspective, a remarkable entrepreneurial spirit of creativity, agility, and resilience. Virtually everything we do in this environment is new and different, and in many cases, better than it was four months ago. And I couldn't be more proud to be associated with this talented team that I am today. I've often stated that Applebee's is at its best in tough times, and that's certainly proving to be the case once again. And the good news is we're now beginning to see genuine momentum return to the business. Thanks to our franchise partners and our Chief Operations Officer, Kevin Carroll, our restaurants were prepared and ready with respect to safety, sanitation, parking lot staging, social distancing, contact-free dining, outdoor dining, as well as all of our food and beverage standards. After an approximate 90-day media hiatus, we returned to national marketing in mid-June with a terrific digital media plan crafted by our Chief Marketing Officer, Joel Yashinsky. That plan was broadened in early July to welcome guests back to our dining rooms while continuing our off-premise messaging, In particular, we received positive feedback around the tonality and authenticity of our current advertising to the music from Welcome Back, Cotter, for those of you not to call old enough to remember that show. I hope you've had a chance to see that ad because it's the perfect message for Applebee's, as though the lyrics were written specifically for us at this precise point in time, and it appears to have really resonated with our guests. In addition, The current product we're featuring, Applebee's Irresistibles, is a great example of abundant value and broadly appealing innovation developed by our Chief Culinary Officer, Stephen Boldarelli. And this also illustrates, importantly, the power of our supply chain team and their ability to move fast and supply the brand with very little notice, as was certainly the case here. Our restaurant P&Ls have also benefited in this environment. from a substantial reduction in our core menu, resulting in the simplification of our operation, better execution, and a reduction in food and labor costs. Of course, some of this benefit is offset by a heavier reliance upon off-premise and its packaging costs, as well as our investments related to safety and sanitation. So let's talk about our business momentum and provide the complete picture as to where we stand today. After steady and sequential progress throughout Q2, we saw a noteworthy change in our comp sales trajectory from minus 37% in early June to an average of minus 18% over the past six weeks, while posting a minus 15.6% result this past week ending July 26th, representing our best comp sales performance since the crisis began. Additionally, and importantly, according to the most recent four weeks of Black Box reporting, Applebee's is once again outperforming the casual dining category. At present, of our 1,450 restaurants with open dining rooms, average weekly sales are about $39,000, with 64% of this volume being dine-in and 36% off-premise. Now, of this off-premise volume, approximately 68% is Applebee's car side to go, and 32% would be delivery. From my perspective, this convenience-oriented and digitally-led business has really thrived under the leadership of Scott Gladstone, and for obvious reasons is more important to us and our guests than ever before. We remain very well positioned in this off-premise segment, and execution has really become a core competency for of the Applebee's brand. Interestingly, as we reopen dining rooms, we appear to be holding most of our off-premise business with only about a 15% to 20% cannibalization rate, suggesting the relevance and staying power of Applebee's to-go and delivery. On another positive note, after the deferral of March-April royalty and advertising payments, I'd like to highlight that Applebee's ad fund is now in a cash flow positive position as we're also beginning to restore our royalty income stream. While we navigate the uncertainties of this environment, we remain 100% aligned with our franchise partners to return our business to its full revenue potential as quickly as market conditions allow. In closing, I believe Americans will choose brands they trust in this environment. And we've been working hard to nurture that long-standing trust in Applebee's over the past several months. Looking forward, I'm confident Applebee's is well-positioned to continue its trajectory, particularly given our momentum and the likely contraction of CDR restaurant supply over time. With that, I'll turn it to Jay.