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.

Thank you, John, for that warm introduction, and good morning, everyone. I'm excited to be here today and look forward to working with all of you in the months and years ahead. It's great to be with everyone on my first earnings call as CFO of Dyn. During my first month at the company, I've been meeting with team members and franchisees and reviewing plans. The onboarding process was instrumental and reinforced my confidence in the business and our direction. I spent the past 20 years of my career advising, investing, and building high-growth consumer healthcare companies providing strategic leadership during times of meaningful change. While we all continue to emerge from the pandemic, we know there are very real challenges still ahead of us, and I recognize the obligation we have as leaders within our industry. For me, it's a humbling responsibility as we work together to maximize the full potential of the enterprise and to deliver profitable growth for all of our stakeholders, including our shareholders, franchisees, and team members. John just highlighted some of our baseline results, but let me spend now a few minutes talking about the financials. I'll begin my remarks with a review of our cash position. The continued improvement in our business has helped us maintain our strong cash position. We finished the second quarter with a total unrestricted cash of $259.5 million. This is a 44% increase over the first quarter's unrestricted cash balance of $179.6 million. Turning to our operating results, franchise revenues for the second quarter were $167 million compared to $67.9 million for the same quarter of 2020. Turning to the company restaurant segment, sales for the second quarter were $38.2 million compared to $16.8 million for the second quarter of 2020. Rental segment revenue for the second quarter of 2021 were $27.4 million compared to $23.7 million for the same quarter of 2020. The improvement was due to an increase in percentage rental income based on franchisees' retail sales. Adjusted EPS for the second quarter of 2021 was $1.94 compared to an adjusted net loss per diluted share of 87 cents for the same quarter of 2020. The improvement was due to an increase in gross profit as our business continued to recover from the effects of the pandemic. Regarding our GAAP effective tax rate, our effective tax rate for the second quarter of 2020 was 24% expense compared to an 8.2% benefit for the same quarter of last year. The main reason for the variance was due to the non-deductible impairment of Goodwill in the second quarter of 2020. Regarding G&A, G&A for the second quarter of 2021 was $39.3 million compared to $30.9 million for the same quarter of 2020. The increase was primarily due to higher personnel costs associated with our incentive compensation accrual based on company performance. Turning to the cash flow statement. Cash from operations for the first six months of 2021 was $106 million compared to cash used in operating activities for the first six months of 2020 of $10.5 million. The improvement was primarily due to the recovery of our business as discussed earlier. We believe the positive trend in our liquidity and comp sales will allow us to strategically invest for growth and innovation. Now I would like to share some thoughts about the back half of the year. We expect G&A to be higher in Q3 and Q4 relative to the first half of the year. As a reminder, our G&A does include non-cash expenses such as depreciation and stock-based comp that we normally add back as EBITDA, but the expected increase in G&A is primarily driven by two factors. First, we push professional services and travel expenses to the second half of the year given the uncertainties that we face during the first half of the year. Second, higher incentive compensation is expected in the second half, which is a variable component of G&A that will fluctuate based on our business performance. Additionally, I would point out that our Q2 financial performance reflects strong pent-up demand that we may not experience at the same level in Q3 and Q4, in addition to the normal trends that we typically experience in the second half of the year. We also had more restaurants in the first half than we will have in Q3 and Q4 due to recent closures. Turning to our 2021 financial performance guidance, I would like to highlight a revision to our G&A guidance primarily due to the factors discussed earlier. We now expect G&A to range between $168 million and $178 million. This compares to our previous expectation for G&A to range between $160 million and $170 million. Our guidance for CapEx of approximately $19 million for 2021 remains unchanged. Please see our press release issued this morning for complete details. Moving on to capital allocation, we took proactive measures to reinforce our financial flexibility in early 2020, which included the temporary suspension of our quarterly cash dividend and share repurchase program. On past calls, when asked about our plan to return cash to shareholders, we have indicated that we wanted to see several quarters of improving performance before reinstating a dividend or buyback program. Since the start of the year, our fundamentals have continued to improve, contributing to our strong adjusted free cash flow position as referenced earlier. As we enter the back half of the year, we will have a shareholder return strategy to share with you and are considering all options to maximize shareholder return and deliver sustained long-term profitable growth for the system. We will have more details on our third quarter call. And a few points on our capital structure. In early 2020, Dine took preemptive steps to mitigate the effects of the pandemic on its operations and its franchisees, including voluntarily increasing the interest reserve for our securitized debt from the required $16.4 million to $32.8 million. I would like to highlight that due to the strong improvement in our business over the last 12 months, we have decided to reduce the interest reserve back to $16.4 million. Our leverage ratio as of June 30 was 4.9 times compared to four times as of March 31st. With our leverage ratio back below 5.25 times, we will no longer be required to make principal payments on our 2019 Class A2 notes after September. I would also like to highlight that we continue to have significant cushion in our debt service coverage ratio, or DSCR, at 4.6 times as of June 30th. This is an improvement from the DSCR of 3.45 times as of March 31st. As a reminder, the first key DSCR measurement is not tripped until the ratio falls below 1.75 times. Maintaining our financial flexibility to meet our debt service obligations is one of our highest priorities. We'll continue our disciplined approach to monitoring liquidity, especially during these times of uncertainty due to the pandemic. We're very pleased with our achievements and remain cautiously optimistic about our recovery. We've done a lot of the heavy lifting to build a solid foundation for long-term growth. Now I'll turn it over to John Swinsky, who will provide an update on Applebee's business performance.

John. Great job, Vance, and welcome to the team. Your timing is good. I'm very pleased to report that Q2 was an exceptional quarter for the Applebee's brand. When compared with our 2019 baseline, April, May, and June comp sales were positive 11.7%, positive 8.1%, and positive 11.4% respectively. This combined plus 10.5% result marks the best quarterly sales performance throughout the 14-year history of DynBrands. Of course, that excludes the anomaly of the 21 versus 20 pandemic year. Restaurant sales delivered approximately $53,000 per week throughout the quarter. To put this in proper perspective, the months of March, April, May, and June in sequence rank as Applebee's four highest weekly sales months under Dine's ownership. I'm particularly proud of our franchisee partners and the entire Applebee's team as they continue to showcase their restaurant-level excellence within an obviously challenging environment. According to Black Box Intelligence, Applebee's has now outperformed the casual dining category on comp sales for 25 consecutive weeks by an average of 596 basis points. As expected, with guests returning to our dining rooms, we experienced a natural shift from off-premise sales to dine-in sales in Q2. To better understand this trajectory, dine-in mix moved from 67% in April to 72% in June, with 16% car side to go and 12% delivery in June, reflecting this gradual migration to a normalized post-pandemic mix. Applebee's off-premise weekly sales in June was $14,700 per restaurant, and as a percentage of total sales, it's reasonable to assume our off-premise mix may ultimately settle in the low to mid 20% range. I should note this represents about double our pre-pandemic off-premise mix of 12%, illustrating Applebee's enhanced relevance within this convenience-driven occasion. Given the importance of this business, we are expanding our initial drive-through test to include an additional six units in Q4 for a total of seven dedicated Applebee's pickup windows. Now, this off-premise mix includes our Cosmic Wings virtual brand, which we were planning to expand to DoorDash, as you recall, in early May. However, due to significant chicken wing supply challenges across America, we postponed our DoorDash expansion to a date to be determined, contingent upon supply availability. We anticipate meaningful incremental demand with this expansion, and we want to ensure sufficient supply to properly satisfy this demand. In the meantime, I'll hold off commenting further on Cosmic Wing's results, until we pull this lever with DoorDash hopefully at the end of Q4. Turning to restaurant execution, Applebee's continues to resonate with our guests on key operational metrics such as guest satisfaction, brand affinity, and visit intent. This is noteworthy given persistent labor challenges throughout the industry. To address this challenge, we executed our first National Hiring Day back on May 17th, leveraging our extensive digital assets we offered a free appetizer in return for an application and an interview, something we playfully branded Applebee's App for an App. Hoping to generate 10,000 applications, our franchise partners ended up securing more than 40,000 applications with a single-day event, ultimately hiring about 5,000 new team members that week, a terrific result. And our success here once again illustrates the benefits of scale, and brand reputation in navigating this tough labor environment. Applebee's continues to lead the casual dining category on affordability, menu variety, to-go awareness, brand awareness, and advertising awareness, which remain important attributes for us in this competitive landscape. With smart and strategic media allocation, our teams introduced a balance of new salads, bowls, and beverage innovation throughout Q2 with our newest menu hitting restaurants in two weeks. We also shifted our brand messaging to focus on the genuine emotional connection Applebee's has with its guests, a connection we believe is more important and relevant than ever, given all this country has endured over the past 16 or 17 months. Our talented marketing team has done a terrific job conveying Applebee's unique brand essence in conjunction with the theme songs to Cheers and Welcome Back, Cotter, almost as though those lyrics were written for Applebee's at this particular point in time. I'm proud of the authenticity and resonance this work delivered in Q2. And since music is so much a part of our brand DNA, I also wanted to highlight that the current number one song on iTunes in Billboard's Top Country Music is titled Fancy Like from artist Walker Hayes. And this is important because this song, lyrically, is all about Date Night at Applebee's, and it's gone viral in a big way on social media, TikTok, Instagram, and YouTube, providing great buzz for the Applebee's brand. Additionally, we entered into a very exciting relationship with the Walt Disney Company in support of their current number one film, Jungle Cruise, as a way to celebrate and encourage the return to dinner and a movie this summer, a wonderfully familiar part of Americana that we all weren't really able to enjoy for a very long time. Hopefully, you've had a chance to see our advertising featuring Dwayne the Rock Johnson and Emily Blunt set to the classic tunes Rock the Boat and Born to be Wild. Both of those debuted in the NBA championship game on July 20th. And to capitalize on this synergy, we've also developed a business partnership with Dwayne Johnson, the entrepreneur, to introduce his new and fastest-growing premium tequila brand, Terra Mana, into all Applebee's restaurants in July. Duane has proven to be a tremendous partner as these signature $7 amana margaritas are now available everywhere and proving to be extremely popular with our guests. As we look forward, you can expect our Q3 and Q4 media spending to remain substantial and favorable when compared with the same quarters in 2019. To wrap up, while Applebee's momentum remains strong, it would be unrealistic to expect these unprecedented double-digit sales to sustain in the back half of this year. With that said, eating good in the neighborhood has never been more relevant than it is today, and I'm confident in Applebee's ability to continue to thrive in this environment. I'll now turn it to Jay Johns for an overview of the IHOP business.

Thanks, John. Congratulations on another great quarter. Good morning, everyone. I'm pleased to report that IHOP's solid trajectory continued this quarter. Our second quarter comp sales improved sequentially by 17.8 percentage points compared to the first quarter and outperformed the family dining category as well by 150 basis points according to Black Box. Another indication of the health and stamina of our business is the growth in domestic average weekly sales every month in the first half of the year. For the second quarter, average weekly sales were 28% higher than Q1. Average weekly sales per week were approximately 38,000 in April and increased to just over 39,000 by June, reaching a high for the quarter of approximately $40,000. As dining room capacity restrictions were eased and consumers satisfied their longing for a sit-down meal at the favorite IHOP, our off-premise sales mix moderated as anticipated. Off-premise sales accounted for 26.1% of sales mix for the second quarter compared to 33.3% for the first quarter. However, we continue to believe that we'll retain the majority of the off-premise sales growth attained over the last 15 months, partly due to changes in consumer behavior. According to a May 2021 survey by McKinsey & Company, consumers intend to continue with many digital behaviors even after COVID-19 subsides, including restaurant curbside pickup. In fact, our net off-premise sales in dollars improved each month in the second quarter. Additionally, off-premise comp sales increased 169% in the second quarter of 2021 compared to the same period of 2019. For the second quarter, our sales mix consists of 73.9% dine-in, 13.9% delivery, and 12.2% to-go. Approximately 85% of our domestic restaurants are open for standard operating hours or greater, and approximately 27% are operating 24-7. We believe that having more restaurants operating on standard hours or longer, reduced capacity restrictions, and higher vaccination rates could be a potential tailwind in the second half of the year. To drive traffic and sustainable long-term growth, we're executing against a multi-pronged strategy. This includes our new approach to marketing, launching a loyalty program, developments, and virtual brands. I'll provide some color on each of these, starting with marketing. We're adopting a new marketing tone aimed at leveraging the emotional connection of our guests that they have for IHOP. Our new creative is designed to remind consumers why they love the brand. We're taking a multi-channel approach to better utilize our resources, such as increasing our digital exposure. We believe doing so will allow for more effective one-to-one marketing and better targeted messaging to different audiences. I'm pleased to say the marketing transformation is already underway. Regarding our loyalty program, we plan to launch a loyalty program in the fourth quarter to increase guest engagement. Our goal is to drive trial and, importantly, incremental visits from existing IHOP guests. At IHOP, the pandemic forced us to reflect and refocus on our relationships with our guests within a transforming restaurant industry. At the same time, we actually grew our investments in CRM and customer-facing technologies, doubling down on our commitment to modernize our guest relationships. Over the past 12 months, we've invested in CRM, loyalty, and digital experiences. While much of this work has been foundational, we expect to see some of these elements coming to life later this year. Regarding development, we're focused on returning to strong unit growth. I highlighted last quarter we have the advantage of being able to provide our franchisees with four platforms to accommodate their development needs. These include our traditional platforms, non-traditional, a new small prototype that's scheduled to test this year, and our first flipped by IHOP locations, which we plan to open in the next few months. Regarding flipped, we now plan to open our first location in Lawrence, Kansas, in the third quarter. This location will be approximately 3,500 square feet and is a freestanding structure with 55 seats. Our second flipped location is now scheduled to open late in the third quarter in New York City. This location is a conversion space that will be approximately 1,800 square feet with only 25 seats. Both locations will have the same menu that will address all three day parts while leveraging the equity of IHOP to guest love. Importantly, IHOP provides franchisees with conversion opportunities across all of these platforms, which can be very cost-effective. Of the sites we've approved for the future this year, approximately 42% are conversions. For 2021, we believe the brand can develop 40 to 50 new restaurants. Looking ahead to the next three years, our development strategy includes a blend of our four development platforms. And with the addition of Flipped and the introduction of small prototypes, we believe the brand can significantly exceed its historical annual run rate over the last decade. Turning to virtual brands. While our focus so far this year has been on restarting and allowing strong development, we believe the time is appropriate to start evaluating third parties with several brands to partner with. Given that approximately 70% of our domestic restaurants have two full kitchens, we have capacity that can accommodate multiple virtual brands. We're currently reviewing our day part strategy and assessing how to best utilize our existing capacity. Due to the fact we're in the preliminary stage of this, it's too early to discuss who we may work with as a virtual brand partner. We've made good progress over the last year. Our business has improved significantly. Off-premise sales remain strong, even as dining room capacity restrictions We're generally eased. The majority of our domestic restaurants are operating on standard hours or longer, and we believe there's additional upside as well as restaurants resume standard operating hours later in the year. We have a multi-pronged plan in place for long-term growth. The road ahead for IHOP looks bright, and I'm very pleased with our position. I'll now turn the call back over to John Payton. John?

Thank you, Jay. Great results. Thank you, John, in advance. and your entire teams for all the great work you did this past quarter to lead to our terrific results. And with that, we're looking forward to taking your questions, and we'll turn the call back over to the operator.

Well, ladies and gentlemen, if you have a question or a comment at this time, please press the star, then the one key on your touchtone telephone. If your question has been answered, you wish to move yourself from the queue, please press the pound key. And we also ask that you limit yourself to one question and one follow-up. Our first question comes from Brian Mullen with Deutsche Bank.

Hey, thanks, everyone. Congrats on a good quarter. You know, John Payton, last call you shared some really helpful goals or numbers that you've challenged each brand president to get to from a gross openings perspective over the next several years. So with those longer-term goals out there, John, I'm wondering if we could zero in on your net unit growth expectations rather than gross. Do you expect Dyn to experience domestic net unit growth in 2022? And do you expect it at each brand? And then longer term, what's the right way to think about the net unit growth potential? Is it 2%? Is it 3%? Just any thoughts would be great.

Yeah, thanks, Brian. So when it comes to net unit growth, what I mentioned last time and, you know, can reinforce this time is that particularly when it comes to IHOP, you know, I believe that they can improve on the pace that they've done, which is historically about 40 or 50%. new restaurants a year, and that net unit growth for IHOP and for dining overall will be positive in 2022. When it comes to Applebee's, you know, we are concluding, you know, a purposeful three-year effort to work with our franchisees to, you know, close those restaurants that or underperforming or, you know, the market had moved away from them. We're now at the end of that process that John Kalinsky really has expertly managed over the last three years and would expect Applebee's to begin to return to net positive growth more like 2023 and beyond versus IHOP in 2022.

Great. Thank you. And then as a follow-up, IHOP, it was great to see the brand get close to 2019 levels in June on that two-year stack. You know, I believe California only fully opened on June 15th. Just wondering if it's safe to assume that you maybe exited the month of June better than that and might even be back to flatter better at this point in July.

Well, you know, at this point, we're not going to talk anything beyond the end of the second quarter as far as how things are trending or anything. But I think your facts are right that California was not open the entire quarter. So it clearly helped us when we got to June and everything did open up.

All right. Thanks.

Congrats again.

Thank you.

Our next question comes from Jake Bartlett with True Securities.

Great. Thanks for taking the question. You know, my first one was on, or I guess I have one in the follow-up, but my question is just on IHOP. And you're trying to understand... the impact of the more limited operating hours and having less 24-7. Can you remind us kind of what your normalized late-night sales mix is and what you're seeing now and maybe just so we can understand the opportunity as staffing levels improve and you regain those sales?

Hey, Jake. This is Jay John. You know, at IHOP, obviously, we have some restaurants that are still not fully back to their standard operating hours. And most of that is the later time of the day. It's evening and our overnight. So we don't have as many restaurants doing 24-7 as we did in 2019. So those aren't the opportunities for us. And we're making progress every week, slowly but surely, as people are staffed and capable of expanding their hours. The franchisees are doing that. and we're confident we'll get fully back there. But I can't predict for you exactly when that's going to happen, et cetera. But we're doing very well at the breakfast day part, even at the lunch day part. And remember, for us, lunch is oftentimes late breakfast. So everything up through lunch, we're doing really well. It is just the hours at some of the restaurants that we've got to get back before we can get food. you know, fully back to those PM and overnight hours to help our business.

Okay. And then I had a question on just the operating cost inflation that you're seeing in the business in the back half of the year. You know, you gave guidance for commodity inflation for the year. Can you let us know what commodity inflation was in the first half so we can understand what you expected in the back half? And then if you could talk about any sort of cost efficiencies that you expect to offset some of those pressures, especially from the perspective of franchisees so that we can feel good that their margins are solid enough to reaccelerate growth? And maybe within that question, what kind of pricing level you're expecting?

Hey, Jake, this is Vance.

So I think John made reference to this earlier, but we're expecting our inflation costs 4% to 5% for the year versus last year on a whole. That is part of the headwind that we're facing. On the savings side, we talked about tablets, we talked about just the technology innovation. All those things, step by step, will help with the operating costs for the franchisees. A lot of these initiatives are New York, so we're still monitoring, but we're making progress toward that.

And Jake, this is John Sawinski with Applebee's. You asked a question about franchisees. You know, we've eased a bit on what I'll characterize as discounting, and we've been leaning into core equities with full margin. The return to dine-in, and in particular, guests who are choosing to indulge a bit with appetizers and drinks, you know, Terramana I referenced, has helped our check. And that's really without the late-night business coming back on weekends. And so they've been able to mitigate to the best of their ability. They've always been very responsible on pricing. They understand it's a long-term game, and in particular, Apple uses a value-oriented brand with value-oriented demographics. So we'll navigate this just fine.

Just to clarify, what was the commodity inflation in the first half of the year?

Yeah, the first half of the year, we said it was about 2%.

2%. Great. Thanks a lot.

Our next question comes from... I should mention one other point that I think applies to both brands. Anticipating the environment that we've been in, both brands aggressively simplified their operation and their menu, which eliminated those products and complexities that challenged margins. And so we hedged well in advance of what we're seeing right now on the commodity front, which has helped a great deal.

Thank you. Our next question comes from Brian Vaccaro with Raymond James.

Thanks, and good morning. On Applebee's, John, I think you said you don't expect to sustain double-digit comps in the second half. And I guess it seems like segment trends remain pretty robust through the July period. I'm just trying to understand why the brand wouldn't continue to outperform. Can you just help us understand what some of the puts and takes are in that second half comment? And are you seeing that in the quarter-to-day period, or is it just sort of layering in a degree of conservatism?

Brian, you always have a – this is John – you always have a wonderful way of edging into a question we want to answer. So we'll decline, respectfully, on any Q2 or Q3 visibility, certainly with July. It's so hard to forecast. I mean, we talk a lot about this as a team in this environment, given that these – $53,000 sales volumes per week are unprecedented. It's hard to gauge. We're outperforming the category by 600 basis points, so we know that execution and innovation are driving a lot of that. But there's also, you know, there's some benefit from the environment and government stimulus and all of that. And to run at a double-digit rate would be – would be unprecedented. It's hard to forecast. We're naturally conservative in our view. And I know I'm not answering your question directly, but, you know, as John and I and the team talk about this, it's hard to frame a specific expectation on Q3 and Q4 at this stage. With that said, we love Q2.

Yeah. John Payne, actually, I think that was a good answer. I think you did answer the question, John. which is, you know, Brian and folks, is Q2 was a fantastic quarter when it came to our results, particularly at Applebee's. And, you know, we're recognizing the fact that there was a lot of stimulus in the economy at that time from the Fed, as well as from Americans leaving their homes en masse and the restrictions ending. So we have... We have strong expectations the remainder of the year. We just want to send the message that Q2 was particularly strong.

All right, understood. And, Vance, just to follow up, I think in your comments you mentioned a lower unit count in the second half, and I think you said given recent closures. So I just wanted to clarify it. Was that something that was recent, say quarter to date, or are you just more so referencing what you saw moving through the first half in terms of closures?

It's mostly quarter to date or year to date. And going forward, we expect the closure rate to be the same pace as in the past, nothing standing out.

All right. Thank you. I'll pass it along.

Our next question comes from Eric Gonzalez with KeyBank Capital.

Hey, just as a follow-up to maybe Jake's question earlier, I was wondering if you can comment for each brand, just the same-for-sale performance in the stores that are open late night or maybe the IHOP stores that are open 24 hours. How much of a delta is there in comp performance between those two versions?

This is Jay. I just speak from the IHOP business. Obviously, we've got 24-hour restaurants, and I think we're back to 27% or something like that. They're going 24-7. Now, clearly, their performance is much better. They've just got more hours. They're operating. So when you look at the delta between those open 24-7 and those not, you do see a delta between those two, but that's pretty natural. I mean, when you're going to be open more hours to operate and you're taking in more business, your sales are going to be higher and That was true pre-pandemic. That will be true post-pandemic. You know, 24-7 is not SOP for us. It is not a contractual requirement that people are open 24-7. That is something the franchisees decide to do if they believe that this is beneficial for them. So we think we'll have a lot more to get back to that. compared to where we have right now. But slowly but surely those are coming online. Like I said before, every week we're getting just a few more restaurants that tick into 24-7. And then we also call it 24-2. We have another place that we're missing some restaurants from 2019 is we have people that don't do 24-7 all week, but they'll do 24 hours on the weekends. So we're missing a few of those right now as well. So if those come back, those will help also.

And Eric, this is John, on the Applebee's side, while each day part, lunch, afternoon, dinner, is performing quite well, that late-night day part is impacted in particular by Friday night and Saturday night, I think kind of 11 to 2 a.m., in particular kind of after midnight. That incremental lift will come. Much of that is driven by operator judgment related to – labor challenges. And so it'd be hard to specify when that may fully be realized or captured. It will be, and I'll resist quantifying that, but there's a lift there when it does happen.

Got it. If I can just lob a question in to Vance. You talked about how you may unveil a capital allocation strategy in the third quarter. Just wondering, What the decision was maybe to not bring back the dividend, you have $260 million in unrestricted cash and balance sheet. I'm just curious, you know, is there still any, you know, reluctancy to bring back that dividend, anything you're seeing in the business that, you know, may cause you to hold off on that at the current, you know, where we are today? And then as you think about that dividend and the payout ratio, in the past it was, you know, 40-plus percent. I'm wondering if you're thinking about moving back to that level or if you may start off something less than that.

Yeah, I would like to first just highlight that we've had a strong track record returning capital to our shareholders, and that will remain one of our top priorities. Now, although, as you pointed out, we do have a healthy cash position, there are still uncertainties remaining due to the emergence of Delta variant and the potential impact that could surge in the back half of the year. So, you know, with that said, I think that the approach, we'll have more details for you next quarter, but the approach is going to be balancing between the use of, you know, such reinvestments in the business, technology, innovation, and returning capital to shareholders. It's a holistic approach that we will take. Again, I'm not answering your question specifically, and we'll have more details in the next quarter, but that's going to be our approach going forward.

Fair enough. Our next question comes from Brett Levy with MKM Partners.

Thanks for taking my question. You actually just touched on where I wanted to go, the balance of investments in technology. When you think about that, how should we think about it in terms of magnitude and the pacing of the investments and what's going to be – what obligation do the franchisees have in terms of how they're investing in it, how they're contributing to it, what kind of partnerships you're seeing on those fronts? And also, have you seen any lifts that you want to share from any of the tests?

So, Brett and Sean, I'll take the beginning of that question. So we talked last quarter about that we did increase our, you know, our CapEx investment in technology this year. And, you know, we're now at a CapEx run rate of about $19 million a year, which includes, you know, the physical restaurants in the Carolinas. But we added about, of that ad last time, $3 or $4 million of it was in addition to our tech spend. We'll be able to be more clear in another quarter about what our tech spend for 22 and beyond looks like, although I think we've got more work to do in that area. When it comes to the way in which the investment is shared or not with our franchisees, when it comes to the centralized systems, like I alluded to, our new apps, our upgraded apps, our upgraded websites, our new CRM platform, our data analytics platform, That's all a dying investment that we make that, you know, our teams here use and benefits the brand. When it comes to something physical like the handhelds in Applebee's or the new point-of-sale system in IHOP, you know, that installation is borne by the franchisees.

And I would say, Brad, this is John C., I agree with John's comment. Everything we do from a technology perspective, we pilot and validate in partnership with our franchisees, and together we develop a business case, and they have always proven to be tremendous partners and will invest in any initiative that provides a return. In this case, these technology initiatives enable innovation. They improve the guest experience. They favorably impact food and labor and restaurant-level P&L And it just requires a little bit of time to validate because we like to do so over a 12-month time frame as opposed to a shorter time frame. And we do so in partnership. So anticipate, as John referenced, some investments coming forward that will really unlock and enable some cool activity from the brands.

I think your next question comes from Nick Setgen with Redbush Securities.

Thank you. This is for John C., if I may. You commented on the strong dollars in terms of marketing spend in the second half. Yeah, it may be too early, but do you anticipate 22 growing in terms of marketing dollars versus 21?

So, Nick, insightful question. As you know, regarding 21, we pulled back in Q1, given the environment, given the resurgence of the virus. And so back half is in a pretty favorable position. Collections are outstanding, meaning ad fund collections from our franchise partners. I anticipate that continuing in 22. We did have the benefit of some carryover from last year in 20. money we didn't spend because we also pulled back in marketing to 21, may not have that benefit in 22. I expect us to be in great shape, Nick, with respect to the ad fund on a comparable basis.

Hey, Nick, this is Jay Jones. As far as IHOP, same thing. We had pulled back the first part of the year. It didn't make any sense to spend a lot of marketing driving people to restaurants that were partially open and maybe not staffed wonderfully. So, So the timing had to be right to do that. We obviously picked that back up in the second quarter. I think if you think about how the ad fund morphs and changes, how we do a budget for our marketing, it's relative to how much ad fund dollars we're going to have. We get a percentage of the sales. As sales go up, you have more money to spend. So as you know our sales for the first quarter, we didn't have as much spend. We didn't have as much money. As sales have improved, our ad fund spending has increased. And for the second half of the year and on into next year, it'll be, you know, relative to what our sales are. The higher the sales go, the more ad fund money we've got.

Perfect. And, Jay, you know, I hate to come back to this, but it's important just because, you know, off-premise, over-invest is too late night so much. Can you maybe just contextualize, and I think you said 27% now, 24-7. What was that percent pre-COVID?

On a typical basis, we've got half to a little over half of our restaurants that operate at 24-7. And then there's another percentage that – another small percentage on top of that that do 24-2.

Okay. Okay. And, I mean, the assumption is that, you know, virtual brands, et cetera, I mean, they're going to benefit, you know, from the late-night hours. That's just why I think a lot of us want to, you know, get our arms around this question. Okay. And then just lastly, you know, I think you said, you know, obviously you gave us the gross opening number on IHOP in Clyde's second half, positive net openings. Do you think Q3 will be positive net openings, or is that going to be largely weighted to Q4?

I don't think we're going to disclose kind of the timetable on all of this. Obviously I did just say for the first time that I think we're going to get to between 40 and 50 new restaurants this year. And you already know our closures from the first two quarters. So you know all of that math. And you also heard Van say that our closures going forward would be at more of a typical run rate that we always do. There's no, you know, bulk of closure. We already did that. You know, I announced we thought we'd do 100. We really only did 41. And so we're in good shape. And that event that happened to do those big closures, that's behind us now. So we'll be back to kind of normal closure rates. And, again, my growth rate looks like 40 to 50 for the year is what we're looking at. So hopefully you can kind of use that to think about what that looks like.

Fair enough.

Thank you. And I'm not showing any further questions at this time, but I'd like to turn the call back to John Payton for closing comments.

Okay. Thanks, guys. We appreciate your questions, as always. Great conversation. Thanks also to Ken and Jay and John and Vance for a great quarter. And take care, everybody. Have a great day.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.