Dine Brands Global, Inc.

Hello and welcome to the third quarter 2020 Dine Brands Global Earnings Conference call. My name is Leigh and I will be your conference operator for today. All lines have been placed on mute to prevent any background noise. After the speaker's room, you have a question and answer session. If you would like to ask a question during that time, simply press star then the number one on your telephone keypad. If you would like to draw your question, press the pound key. Please note that this conference call is being recorded. I will now turn the call over to Mr. Ken Depse, Executive Director of Investor Relations. Sir, you may begin.

Good morning, and welcome to Dime Grand's third quarter conference call. I'm joined by Steve Choi, CEO, Tom Song, CFO, Jay Johns, President of IHOP, and Dante Winsky, President of Applebee's. Before I turn the call over to Steve for opening remarks, Please remember our safe harbor regarding forward-looking information. During the call, management may discuss information that is forward-looking and involves known and unknown risks and certainties. The forward-looking statements are as of today. and assumes no obligation to update or supplement these statements. We may also refer to certain non-cap financial measures, which are described in our press release, and also available on our Investor Relations website. With that, I'll turn the call over to Steve. Thank you, Ken.

Good morning, everyone, and thank you for joining us today. I hope you're all safe and doing well. As the industry gradually settles into a new normal for the foreseeable future, the challenges we've faced have brought out the best in our franchisees and team members. I'm extremely proud of their commitment and fortitude. Additionally, their alignment with our strategy to stabilize our business and restore growth contributed to both brands delivering continued sequential improvements in quarterly comp sales. I'm very pleased to report that our off-premise business at both brands posted strong growth in the third quarter, even as states gradually reopened. Off-premise comp sales increased by an impressive 144% at Applebee's and 154% at IHOP. The pandemic has caused a shift in consumer behavior and changed how guests access our brands. We believe the convenience of takeout and delivery will remain appealing to our guests, even as dining room restrictions are eased across the country. According to a recent McKinsey & Company Consumer Pulse survey related to COVID, 56% of respondents intend to continue using restaurant delivery, and 46% intend to continue using restaurant curbside pickups. The survey also showed that 40% of respondents ranked dining indoors at a restaurant or bar as one of their top three activities they are eager to resume, following getting together with friends and getting together with family, which are obviously closely linked. In some states that don't have restaurant capacity restrictions but still require social distancing, we're seeing consumer demand exceed capacity in certain cases. With that said, we believe that guests returning to our restaurants for dine-in service will complement an already robust off-premise business and provide additional upside to sales. As we navigate through the pandemic, Dine's operations team remains fully engaged with local, state, and federal authorities during the reopening process. I would like to highlight that the end of the third quarter, approximately 3,200 of our domestic restaurants, or 97% of the domestic system, was open for business. This is up from 95% for the second quarter. We are committed to providing our guests with a welcoming and safe environment to dine with their friends and family while in accordance with guidelines provided by the CDC as well as state and local governments. The safety of our guests and team members will always be a high priority. To that end, both brands are utilizing best-in-class sanitation practices, including the use of an EPA-registered 2-in-1 cleaner and sanitizer. Not only will this reduce the number of products used, we expect greater efficiencies for our franchisees. In addition to safe food handling procedures and reducing the number of guest touch points in the restaurants, this is just one of the several measures taken to help protect the communities in which we operate. We understand that consumers are eager to safely return to indoor dining. In fact, black box sales data shows significant sales improvement since April 2020 in both categories in which we operate. This trend bodes well for our brands, which outperform their respective categories in each month of the third quarter, as well as the full quarter. Jay and John will provide additional details on their respective brands later. While the restaurant industry continues to recover, we believe that both Applebee's and IHOP are well positioned to stabilize sales and return to growth. I'm very confident in our plans, which resulted in significant progress over the last two quarters. we'll continue offering our guests an omni-channel experience to meet their dining preferences, whether in restaurant or off-premise. At the dine level, our business conditions have improved since the first quarter of this year. This, coupled with our disciplined approach to G&A management and an asset-light business model, enable us to end the quarter with approximately $389.6 million in cash. With that, I'll turn the call over to Tom to provide an overview of the third quarter results. Tom? Thank you, Steve. Good morning, everyone. During the early stages of the pandemic, we took certain precautionary measures to augment our financial flexibility during a time of great uncertainty. To that end, we drew $220 million in March of 2020 from a revolving credit facility, all of which remains outstanding as of September 30th. As a result of this and other proactive steps, Dine continues to have a strong liquidity position and significant cash on our balance sheet at the end of the third quarter. As Steve mentioned, we had total cash of $390 million, including restricted cash of $80 million. I'd like to highlight that if you exclude the $220 million that was drawn, our total cash is nearly the same level of total cash we had that year in 2019. This is a notable milestone. As restaurants continue to reopen for dine-in service, weekly comp sales trends improved for both brands during the quarter. Just to compare, At the beginning of the third quarter, Applebee's was down 22.3%, and IHOP was down 40.4% in comps for the weekend of July 5th. In comparison, for the final week of the quarter, ended September 27th, Applebee's increased 40 basis points, and IHOP decreased 23.5%. These comp sales figures represent improvements of 23 and 17 percentage points during the quarter for Applebee's and IHOP, respectively. During September, both brands posted their best weekly comp sales performance since the week ended March 1st. The solid improvement in comp sales trajectory is primarily due to the progressive reopening of our domestic restaurants, as well as the significant growth in off-premise business that Steve mentioned earlier. Now let's turn to our third quarter financial results. For the third quarter, we reported adjusted earnings per diluted share of $0.80 per share compared to $1.55 per share for the same period of 2019. We reported $36.9 million in G&A expenses, of which $6 million was non-cash. Our leverage ratio as of September 30th was 6.7 times compared to 6.3 times as of June 30th. We anticipate making an initial quarterly payment of $3.25 million on December 7th and a subsequent payment in the first quarter of next year. I'd like to highlight that we continue to have ample cushion in our debt service coverage ratio, or DSCR, at 3.2 times as of September 30th. The first key DSCR measurement is tripped when the ratio is below 1.75 times. In March of this year, in light of the COVID-19 pandemic, Standard & Poor's placed the company on credit watch negative with respect to our 2019 Class A2 notes. In September, S&P removed the company from credit watch and reaffirmed our BBB rating. We are pleased with this outcome as it reflects the strength of our business and our very strong brands. We will continue to diligently manage our business as it recovers from the pandemic. Regarding our tax rate, Our gap effective tax rate for the third quarter of 2020 was a 9.5% tax benefit compared to a 24.6% expense for the third quarter of last year. The primary reason for the variance was due to the release of unrecognized tax benefits incurred in the third quarter of this year. Just to note, our fourth quarter Three-month effective tax rate is expected to be significantly higher than the statutory tax rate since, overall, we expect a low single-digit effective tax expense for the full year. Our adjusted EBITDA for the third quarter of 2020 was $42.7 million compared to $63.4 million for the same period of 2019. Turning to our cash flow statement, cash from operations for the first nine months of 2020 was $36.7 million compared to $105.6 million for the same period of 2019. While the difference was primarily due to the lower gross profit, we also had an increase in receivables related to the franchisee assistance programs. which provided approximately $56 million of royalty, advertising fees, and rent payment deferrals for franchisees primarily in the months of March and April of 2020. A total of 30 franchisees, representing 94% of Applebee's restaurants, deferred payments with repayments scheduled over up to nine months. These repayments began in the third quarter of 2020. As of September 30th, the outstanding balance for Applebee's was approximately $24.4 million, with four franchisees having repaid their deferred balances in full. We offered IHOP franchisees the opportunity to defer their royalty advertising, equipment rent, and sublease rent payments, primarily for the months of March and April. A total of 193 franchisees representing 58% of IHOP restaurants participated in this deferral. Repayment of deferred amounts scheduled over up to 36 weeks began in the third quarter of 2020 as well. As of September 30th, the outstanding balance was approximately $20.4 million with 37 franchisees having repaid the deferred balances in full. Overall, a total of $11 million of the original deferrals have been repaid. I would like to note that our bad debt expense for the third quarter was $2.8 million as compared to $5.1 million in the second quarter of this year. Adjusted free cash flow for the first nine months of 2020 was $35.6 million, and we expect to generate positive adjusted free cash flow during the remaining three months of 2020. Now let's turn to our financial performance guidance for the fourth quarter of 2020. This guidance is based on information we currently have and due to the tremendous uncertainty of the pandemic, we continue to believe that our results could be materially impacted. We expect our domestic system-wide comparable same restaurant sales for Applebee's and IHOP to gradually improve for the quarter. Domestic development in Applebee's by Applebee's franchisees is expected to result in net closures of approximately 15 restaurants. We are currently evaluating significantly underperforming domestic IHOP restaurants due to the pandemic's impact in unit-level economics, and Jay will provide more information a bit later on the call. G&A for the fourth quarter is expected to be approximately $45 million, including non-cash stock-based compensation and depreciation expenses totaling approximately $7 million. While we deferred many expenses and furloughed significant staff over the past several months, we are now fully resourced to support our franchisees in the 97% of restaurants that are open. To sum up, Applebee's and IHOP made significant progress in improving the trajectory of their respective comp sales. Our off-premise business drove solid growth and remains robust, even as dining rooms continue to reopen with restrictions across the country. Lastly, our cash position and liquidity remain strong. With that, I'll now turn the call over to John. Thanks, Tom. Good morning, everyone. Good afternoon, if you're on the East Coast. I've often stated that Applebee's is at its best in times of adversity, and this couldn't be any more evident than it is today. After seven extraordinarily challenging months, we've come full circle from closing our dining rooms in March to achieving our first week of positive comp sales in September. This has been a remarkable story of overcoming adversity and returning Applebee's to its vibrant leadership position in casual dining. After being down 49.4% in Q2, Applebee's comp sales were down 13.3% in Q3. Sequential improvement throughout the quarter was very clear as we moved from minus 18.4% in July to minus 15.2% in August to minus 7.4% in September. And I'm very pleased to report that this strong trajectory has accelerated here in early Q4 with comp sales at minus 1.9% through the first four weeks of October. Now, to put this performance in proper context, according to Black Box Intelligence, Applebee's has now outperformed the casual dining category over the past 17 consecutive weeks. This terrific momentum coincides with our return to national marketing, if you recall, back in mid-June after a self-imposed 90-day hiatus at the peak of the pandemic. This is also a strong indicator as to the current health of the brand, recognizing we still have several geographies impacted by COVID lockdowns, creating natural variability throughout the system, as you might expect. Additionally, our franchisees have been remarkably consistent in paying the royalty and advertising fees including our March-April deferrals, which are being paid back over nine months, as Tom referenced, beginning in August. Importantly, our 99% collection rate beginning in May has allowed us to quickly reestablish our economic model, very important to us, as well as our ongoing national media presence. While I'm certainly proud of Applebee's performance, what I'm most proud of is our franchise partners and their relentless fixation of around restaurant execution, sanitation, guest safety, and guest reassurance throughout this pandemic. This is most evident in our very favorable brand affinity and visit intent metrics. From my perspective, the most important currency in the restaurant industry right now is trust, and our franchise partners have earned the trust of their teams and the trust of their guests with each and every restaurant visit, whether that's a dining room experience or a car-side-to-go occasion. Simply stated, America trusts Applebee's now more than ever, and that's perhaps the single most important point of difference a brand can have in this environment as we look to 2021. At present, we have approximately 1,600 U.S. restaurants open for business, averaging between $44,000 and $45,000 per week with a mix of about 70% dine-in, 20% car side to go, and 10% delivery. Now, regarding government-imposed capacity constraints, we feel this impact most noticeably with Friday and Saturday dinner, where demand is abundant, but restrictions have limited our ability to fully satisfy this demand. This, of course, varies by geography. It's also worth noting that Applebee's is disproportionately penetrated in the Midwest and Northeast where these restrictions are most prevalent. Now, the good news here is that many geographies have been gradually easing these restrictions, with 20 states having removed all capacity restrictions as of this call, while our own rigorous safety and sanitation standards remain firmly in place. However, as we've certainly seen lately, the landscape remains volatile and subject to change. On the off-premise front, we continue to innovate in the form of relevant, occasion-based digital marketing. We're also launching tamper-evident delivery packaging throughout the system coming up here in November as a new brand benefit and yet another form of guest reassurance. On the rapidly evolving beverage front, Applebee's signature Mucho Cocktails to Go are now available digitally in about 30 states, and as you might expect, have become very popular given the surge in off-premise dining. As an example, our proprietary Spooky Sips are featured here in October in our branded Mucho To Go 20-ounce cups, properly mixed and properly garnished and ready to take home as part of your bundled meal. Our off-premise innovation will also extend to our virtual brand, currently called Neighborhood Wings by Applebee's, which is currently being piloted in about 700 restaurants in partnership with Grubhub. As of Q1 next year, this initiative will be meaningfully repositioned for greater relevance and visibility and then expanded throughout the entire system. Additionally, I'd like to thank our supply chain organization, which has simply been a tremendous asset in mitigating supply risk for both brands in this turbulent environment. While enabling a pipeline of innovation with Truly impressive agility and rock-solid expertise. Also, after furloughing a portion of our team in early Q2, I'm very thankful this exceptionally talented Applebee's and Dine team is once again reunited as we head into our annual franchise meeting next week. Of course, that'll be a virtual meeting. Who would have thought that we'd be celebrating Applebee's 40th anniversary in the middle of a global pandemic, but that's precisely where we are today. And I'm proud of our team's response to this ongoing challenge. I'm also excited about next week's franchisee session because of our accelerating business momentum as well as early alignment around our 2021 strategic plan, albeit with significant built-in flexibility given the current environment. Importantly, I should also note that Applebee's Franchise Business Council and Franchise Marketing Committee have unanimously agreed to continuing our 4.25% National Ad Fund contribution throughout 2021, and I anticipate aligning all of our franchise partners on this subject in early November. This is terrific news for the brand. In summary, we are extraordinarily well positioned moving forward. While the effects of COVID remain uncertain, I genuinely expect Applebee's to thrive next year as we fully leverage our sizable brand scale, buzz-worthy innovation, and restaurant excellence, of course, in partnership with our franchisees who have really exhibited remarkable courage, resilience, most importantly, belief in navigating the past seven-plus months. And after being knocked down, I believe Applebee's is truly symbolic of America. as we get back up, dust ourselves off, and get back on that horse. And on behalf of the entire team, I can tell you it sure feels good to be back in that saddle again. And with that, I'll turn it to Jay.