Dine Brands Global, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Q2 2021 DynBrands Global Earnings Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 1 on your telephone. If you require any further assistance, please press star then 0. I would now like to turn the call over to your host, Mr. Ken Dipty. You may begin.

Good morning and welcome to DynBrands' second quarter 2021 conference call. I'm joined by John Payton, CEO of Ben Chang, CFO, Jay Johns, President of IHOP, and John Sawinski, President of Applebee's. Before I turn the call over to John, 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, uncertainties, and other factors which may cause the actual results to be different than those expressed or implied. 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 assumes 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 Dine Grant's website.

With that, I'll turn the call over to John. Good morning, Ken. Good morning, everyone. Thanks for joining us today. We're pleased with our strong Q2 results, and I'm excited for you to hear from Vance Chang, our talented new CFO. I'll start by defining this moment in time. The restaurant renaissance is clearly driving our rebound at Dine Brand, and Americans are returning to indoor dining. And now that Americans are back, we're pivoting from triage to acceleration. And what I mean by that is we're accelerating the innovation and the reinvention of the guest experience. Today, I'm thrilled to report that our investments in innovation and the resiliency of our franchisees and team members is clearly paying off. During Q2, both Applebee's and IHOP posted significant improvements in comp sales. And as this is important, both brands are fundamentally improved businesses due to off-premise sales. And I'm seeing that for myself. I've been on the road. I've now met with 61 franchisees and toured our restaurants in Ohio, New York City, Connecticut, New Jersey, Vegas, and Atlanta. And each conversation with a franchisee or a team member or a restaurant manager reinforces for me our unique advantages that ensure our business is built to win. First, we've got two iconic brands that thrive based on guest connection. Collectively, Applebee's and IHOP have been serving communities for more than 100 years. Both brands are beating their comp set because our guests have long-lasting emotional connections that endure even during these tough times. Second, our guest satisfaction is strong, and that's impressive because many of our restaurants are operating with less labor than they're used to. And finally, we work side-by-side with experienced, talented franchisees who are doing extraordinary things and, as a result, are emerging from the pandemic with stable financial fundamentals. Our brands posted meaningful improvements during Q2, and on this call, we'll be comparing comp sales to the same period in 2019 due to the pandemic distortion of 2021 results. So here we go. I'll recap second quarter highlights, including comp sales, EBITDA, free cash flow, off-premise growth, and development. So first, according to BlackBox, and this is terrific, Applebee's and IHOP each outperformed their segments in Q2, and both brands' second quarter comp sales improved compared to the first quarter. Specifically, Applebee's second quarter comps increased by 10.5%, and IHOP's comps declined by 3.4%, which reflects an improvement of 17.8 percentage points compared to the first quarter. We achieved revenue of $233.6 million and EBITDA of $71.7 million, which reflects the continued strength of our franchise model and a gradual return to steady state. We generated free cash flow of $107.3 million during the first six months of the year, which is consistent with Dyn's track record of generating strong and stable adjusted free cash flow. And finally, in Q2, we opened 10 new restaurants, signaling the growing confidence our franchisees have in our brands and in putting their capital back to work. Now, despite what is still a fluid and unpredictable environment due to the Delta variant and COVID-19, we remain cautiously optimistic, and there are two main reasons why. First, improving consumer confidence is approaching pre-pandemic levels, It looks like federal spending will continue, this time via the infrastructure bill, and low unemployment are all meaningful tailwinds. Now, that said, our optimism is somewhat tempered by continued volatility. For example, the labor shortage is affecting wages, hours of operation, and the availability of certain SKUs in our supply chain. Inflation is also in concern for our guests as well as for our network. We're seeing its effects on the cost of paper and packaging, oils, poultry, pork products, and eggs. And based upon current conditions, we now expect commodity inflation in the range of approximately 4% to 5% for the full year. And the final unknown, of course, is the Delta variant, which is largely regional at this time. Our outlook would certainly be impacted if large areas of the country return to lockdowns or restaurant guests become uncomfortable dining out. And now that I've covered our performance, I want to give you a more complete picture of how we're accelerating innovation through digital technology. At Dyn, we're leaning into our scale. Our strategy is to build one common digital architecture for both Applebee's and IHOP that enables us to do more for both brands than either brand could invest on its own. So far, just in 2021, we've implemented a new CRM and digital platform that enables sophisticated offer management, strengthens our digital marketing and marketing analytics, and improves our management of customer data while also serving as a backbone for our loyalty programs. We've also rolled out upgrades to our apps and our websites. Now we provide a more seamless food-oriented experience. For example, guests now have more ability to customize their orders, and it takes fewer clicks to navigate the menu. And these new apps and websites provide us a more comprehensive understanding of our guests' purchasing preferences and online behavior. We've also added cool functionality like geofencing to track guests' arrival in advance of car side or in-restaurant pickup and delivery. And in our call center, approximately 150 Applebee's are on our new AI and fully automated voice ordering platform. In 2021, we've also introduced tech to improve the on-premise dining experience. That includes handheld devices for servers that are now in 500 Applebee's restaurants. Those handhelds drive faster table turns, additional drink orders, and most importantly, one of our servers in Atlanta told me that she's earning more money because she's turning her tables faster. We also introduced Pay and Go that enables guests to pay at the table using their own device and a digital wallet that allows guests to redeem offers and coupons from their phone. And finally, later this year, IHOP will begin to roll out new point-of-sale and kitchen display technology. We expect the new POS and KDS systems to reduce the cost of labor, ensure food is served hot and with improvements in order accuracy. And importantly, the new POS and KDS will integrate order flow between digital and on-premise to seamlessly support car side and to-go orders. All of these digital tech capabilities are new in 2021, and by end of year, approximately 75% of our digital technology tools will be modernized or new. And this is the most robust delivery of digital tech in Dyn's history. Our franchisees will be adopting the on-premise technology in their restaurants throughout 2021 and 2022. I'll wrap up by emphasizing that our performance, our brands, and our finances are strong. We understand that today's environment remains fluid, and we're drawing on our deep experience and guest insights to continue to grow Share today and in the future. Our new CFO, Vance Chang, is going to share more information about our financial results in just a moment. But first, let me proudly introduce the newest member of our leadership team. Vance spent the past 20 years in both banking and building high-growth consumer and healthcare companies. Vance is here because he's an operations-oriented CFO. He'll lean into our domestic and international businesses and work with those teams to fuel growth and improve profitability for Dyn and for our franchisees. Vance is a high-impact executive who's got a track record of driving innovation and delivering on execution, and that's exactly the profile we need as we pivot from the crisis to innovation that accelerates our growth. So, Vance, welcome to Week 6.