Dine Brands Global, Inc.

Good day and thank you for standing by. Welcome to the third quarter DynBrands Global Inc. Earnings Conference Call. At this time, all participants are in 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 will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Executive Director of Investor Relations, Ken Zipty. Please go ahead.

Thank you. Good morning, and welcome to Dime Grant's third quarter 2021 conference call. I'm joined by John Payton, CEO, Vance Chang, CFO, Jay Johns, President of IHOP, and John Sawinski, President of Applebee's. Before I turn the call 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 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 our website. With that, I'll turn the call over to John.

Thanks, Ken, and good morning, everyone. John, Jay, Vance, Ken, and I appreciate you taking the time to join us this morning. Q3 was another terrific quarter for dime brands. For the second consecutive quarter, both brands beat their competitive sets, Average weekly sales for IHOP and Applebee's exceeded 29 pre-pandemic levels for the first time, and we recorded a 48% increase in quarter-over-quarter EBITDA. Dyn's posting results like this for two reasons, the resilience of our two world-class brands and the value of our asset-light model. And Q3 reinforced, again, the benefits of our highly franchised business in driving our strong performance versus our peers. Let me explain why that is. First, our model reduces complexity and is a significant generator of cash. It allows us to keep our operations lean and our movements agile. And during moments like this, when labor and commodity costs are rising and guest behavior is uncertain due to the pandemic, we deliver less volatile results from period to period. Said another way, AssetLight allows us to invest in what we do best, which is menu innovation, marketing, and building technology. And at the same time, Applebee's and IHOP continue to gain share because guests trust us, they love us, and they appreciate that we're focused on delivering delicious food at great value while also providing experiences that are enjoyable and safe. And just like I said to all of you when I first joined Dine, brands that win are different, better, and special. And they're able to create emotional connections with guests, particularly during tough times. And that's exactly what our brands have been doing all year. So today, I'll share highlights of our fantastic Q3 results. I'll talk about our view of this moment in time in the industry, and I'll address our thoughts on capital allocation and long-term growth. On this call, as all year, we'll be comparing comp sales to the same period in 2019 due to the pandemic's distortion of 2020 sales. So here we go. I'll recap Q3 highlights, including comp sales, EBITDA, cash flow, and development. First, according to BlackBox, Applebee's and IHOP again outperformed their segments in Q3, and for the first time in 2021, both brands' average weekly unit sales exceeded pre-pandemic levels. We recognized revenue of $229 million and EBITDA of $63.3 million, which reflects the compelling resilience of our brands, our franchise model, and continued progress towards a return to steady state. For the nine months ended September 2021, we generated approximately $141.6 million of adjusted free cash. We opened 11 restaurants, which signals our franchisees continued confidence in putting their capital investments back into the business. And we're particularly thrilled that Sun Holdings, the third largest owner of restaurants in the U.S., joined the Applebee's family via its acquisition of 131 restaurants through a transaction with Akon Investments, another signal of Applebee's strong performance. So now let's put our results in the context of this very unique moment in time. We're certainly enjoying meaningful tailwinds. First, Americans continue to dine out, and our numbers indicate that the Delta variant did not have a material adverse effect on that trend. Also, our guests continued their recent habits of takeout and delivery. And while it's certainly unfortunate that 110,000 U.S. restaurants permanently closed, This did lead to five points of market share shift from independence to the national chains, according to the Boston Consulting Group. And as you all know so well, we're also navigating unprecedented headwinds, such as the shortage of workers and the rising cost of labor, the scarcity and rising cost of certain commodities, and, of course, the lingering uncertainty related to vaccine testing and mask mandates. Yet, I've got to tell you, despite this extraordinary moment in time, we are unequivocally bullish on our long-term strategy. I'll tell you why. First, the restaurant industry remains a $485 billion market, and the casual and family segments are expected to fully recover by 2023. Second, U.S. consumers are increasingly optimistic as we emerge from COVID. Research tells us that 44% of consumers report that they will increase their visits to restaurants as COVID recedes, and an additional 35% tell us they'll go just as often as they did before the pandemic. And third, franchising remains an entrepreneurial engine for launching a business, creating wealth, and growing jobs in our country. At Dine and Loan, we have 345 franchisees operating more than 3,400 restaurants across the country and around the globe, And these entrepreneurs employ approximately 125,000 team members, supporting their state and local economies. Now that we're beginning to see the light at the end of the tunnel, our teams are focused on our plans for long-term growth. Our approach is simple and straightforward. It's to set audacious goals, and I'll touch on four of those goals right now. First is the development of new restaurants. We see a path to Applebee's returning to net unit growth in 2023 and beyond. and we see IHOP doubling its historical unit growth also by 2023. We'll achieve those goals through a combination of bricks and mortar stores and ghost kitchens. To drive this growth, we've recently hired two new VPs of development, Jake Barden and Don Rayburn, who come with terrific experience from RBI, Intercontinental, Starwood Hotels, Brinker, and Yum. And these new VPs will be shepherding our new prototypes that reflect the learnings and new consumer behaviors that emerged during COVID. Our second focus is meaningful investments in loyalty programs, our digital ecosystem, and CRM. These tech investments, in addition to our industry-leading menu and marketing innovation, will drive consistent same-store sales growth year over year. And as I've told you before, we're leaning into our scale. Our strategy is to build one common digital architecture for both brands that enables us to do more than either brand could invest on its own. And we remain on track to have approximately 75% of our digital technology tools modernized or new by the end of the year. And we expect this advantage and innovation to accelerate in 2022. In fact, this quarter, our digital sales resulted in 20% of total system sales compared to only 6% in the third quarter of 2019. Third, we're investing in new sources of revenue. Think virtual brands, ghost kitchens, and consumer products. that will contribute to our growth and to our franchisees' bottom line. And finally, we have a renewed focus on our very profitable international business and the potential to significantly grow our footprint. Here, too, we've hired a new VP of International Development, Enrique Cofer, with global experience from GNC and Jamba Juice. He'll be focusing on expanding in four core markets where we currently enjoy momentum and scale. We're looking forward to sharing more details on these and other initiatives during our investor conference in New York City in spring of next year. So in 2022 and beyond, you'll see us invest in growth initiatives to a greater extent than we have in the past. As a result, you can expect a balanced approach to capital allocation that incorporates returning cash to shareholders, judicious ROI-driven investments in both organic and strategic growth, diligent management of our debt, and maintaining the financial flexibility needed right now to address any remaining uncertainty from the pandemic, as well as potential opportunities to pursue scalable acquisitions at the right time. With that as context, our performance year to date and our cautiously optimistic view of the remainder of 21 and 2022 enables us to reinstate both our quarterly dividend in Q4 and our share buyback program. We're also able to share EBITDA guidance for the remainder of 2021 and Vance will discuss details on both our guidance and our dividend and share repurchase programs in just a few moments. I'd like to conclude with an update on our ESG efforts. We've recently issued our initial ESG report entitled Dying Together, which can be found on our Dying Brands website. As we've grown our business, we've broadened our vision to include our impact on the environment and society. This makes good business sense as it resonates with team members and guests who increasingly are looking closely at how businesses and brands contribute to society. Our ESG strategy and report is devoted to four focus areas. They're our planet, our people, our food, and our governance. And for us, our business and our social responsibilities are inextricably linked. And while I'm encouraged by the progress we've made, we've got a lot more to do to meet our goals, deepen our impact, and innovate our systems. And with that, I'll turn it over to Vance to discuss our financial performance.

Thank you, John, and good morning, everyone. I'll start with a review of our operating results. Franchise revenues for the third quarter were $161.1 million, compared to $121.8 million for the same quarter of 2020. Excluding advertising revenue, franchise revenues increased 30%, primarily driven by higher domestic franchise restaurant same-store sales. Turning to the company restaurant segment, sales for the third quarter were $35.3 million compared to $27.4 million for the third quarter of 2020, improvement of 29%. The improvement was mainly due to an increase in customer traffic. Rental segment revenues for the third quarter of 2021 were $31.3 million compared to $26.2 million for the same quarter of 2020, an increase of $5.1 million. This included an increase in percent rental income based on franchisees' retail sales and a decline in level rent adjustments. Adjusted EPS for the third quarter of 2021 was $1.55 compared to adjusted EPS of $0.80 for the same quarter of 2020. The increase was primarily due to higher gross profit, partially offset by higher G&A expenses. Now, regarding G&A, G&A for the third quarter of 2021 was $43.7 million compared to $36.9 million for the third quarter of 2020. The increase was primarily due to higher personnel costs associated with our incentive compensation accrual, which will fluctuate based on company's performance. Regarding our GAAP effective tax rate, Our effective tax rate for the third quarter of 2021 was 24.9% expense compared to a 9.4% benefit for the same period of last year. Our effective tax rate for the third quarter of 2021 varied from the rate for the same period of last year, primarily due to the one-time recognition of income tax benefits from the release of unrecognized tax benefits in the third quarter of 2020. I'll now provide highlights from the cash flow statements. Our highly franchised model generated adjusted free cash flow of $146.1 million for the first nine months of 2021 compared to $35.6 million for the same period of last year. Cash from operations for the first nine months of 2021 was $145.6 million compared to $36.7 million for the comparable period of 2020. The improvement in both was primarily due to a favorable change in working capital and improvement in gross profits. partially offset by an increase in G&A expenses and the recognition of excess tax benefits on stock-based comp. As of September 30th, almost all of the $62 million in royalty advertising fees and rent payment deferrals that DynBrands provided to 223 franchisees has been repaid. Repayment of deferred amounts started in the third quarter of 2020. The collection of these balances during the first nine months of the year had a favorable impact on cash from operations for the first nine months of 2021. A few comments on our balance sheet and capital structure. The continued improvement in our business has helped us maintain our strong cash position and financial flexibility. We ended the third quarter with a total unrestricted cash of $304.2 million. This compares to unrestricted cash of $259.5 million at the end of the second quarter. Our leverage ratio as of September 30th was 4.36 times compared to 4.94 times as of June 30th. With our leverage ratio well below 5.25 times, the quarterly principal payments on a company's senior secured notes are no longer required. Our debt service coverage ratio also improved to 4.8 times as of September 30th from 4.6 times as of June 30th. Turning to the outlook for commodity inflation and labor challenges, we're seeing its effects on the cost of pork, eggs, poultry, paper, and packaging products. And based on current conditions, we now expect commodity inflation in the range of approximately 6% on average across both brands for 2021. This compares to our previous expectation for inflation of approximately 4% to 5% for the year. Increases in commodity and labor costs at our franchisee-owned restaurants could impact us if our franchisees are faced with a sustained decline in the operating margins. At company-owned restaurants, these costs impact us directly. As of Q3 2021, we own and operated 69 Applebee restaurants, representing 2% of the 3,439 restaurants in our system. Now I'll briefly discuss our 2021 financial performance guidance. Our guidance for G&A and capital expenditures remain unchanged. We reiterate expectations for G&A to range between approximately $168 million and $178 million. We expect G&A to be near the high end of the range, with Q4 being the quarter reflecting previously discussed deferred G&A costs, including professional services and travel expenses, and continuing incentive compensation accruals based on company performance. We also reiterate expectations for capital expenditures to be approximately $19 million inclusive of approximately $7 million related to the company restaurant segment. Given the strong recovery in our business, we now have better visibility to provide additional guidance. Please see our press release issued this morning for complete details. We're introducing guidance on one additional metric, adjusted EBITDA. Consolidated adjusted EBITDA for the year is expected to range between approximately $245 million and $250 million. demonstrating the continuous strong recovery from 2020 that we have been experiencing in the last few quarters. Moving to capital allocation, as John discussed earlier, we have seen several quarters of improvement in performance, which has positioned us to declare a quarterly cash dividend of $0.40 per share for the fourth quarter. Our capital allocation priorities are to maintain an attractive dividend yield while concurrently making additional CapEx and G&A investments in the business to support long-term growth. We also intend to opportunistically repurchase our shares. Our level of repurchases will primarily be based on our analysis of the company's intrinsic value. At the end of the third quarter, there was $70.2 million remaining on our current repurchase authorization. We believe our strategic priorities will continue to drive additional shareholder value. To close, we're very encouraged by our strong results this year through the third quarter. including the improvement in our comp sales, our robust off-premise business, and significant generation of adjusted free cash flow. Now I'll turn the call over to John Swinsky, who will provide an update on the progress at Applebee's.

John. Thank you, Vance, and good morning, everyone. I'm really proud of our team and our franchise partners as they delivered another exceptional quarter for the Applebee's brand. After posting a 10.5% comp sales increase in Q2, Applebee's delivered a 12.5% increase in Q3 when compared with our 2019 baseline. This marks Applebee's best quarterly comp sales performance under Dine Brands' ownership, highlighted by sequential improvement throughout the quarter. Additionally, our Q3 year-to-date comp sales increase of 5.3% has surpassed our record-setting 2018 performance. I'm also pleased to report that our company restaurant portfolio is now our number four ranking comp sales performer throughout the system. To put all this in proper perspective, according to Black Box Intelligence, Applebee's has now outperformed the casual dining category for 35 consecutive weeks by an average margin of more than 600 basis points. I attribute our sustained success to three primary factors, superior restaurant-level execution, breakthrough marketing innovation, and our genuinely relevant brand positioning. Applebee's is that affordable little escape from your everyday, in a turbulent world where that familiar and comfortable place right around the corner where you can simply come as you are. In many respects, we're kind of like a good friend, which clearly resonates with America and this environment. Most importantly, America trusts Applebee's. We consistently see this in our data, and it's certainly evident in these unprecedented results. This momentum is also reflected in our brand attributes, where Applebee's continues to rank number one within casual dining on brand awareness, affordability, menu variety, convenience, to-go and delivery awareness, and advertising awareness. In addition, Applebee's continues to outperform the category average on key metrics such as overall experience, staff makes me feel valued, family friendly, great tasting food, brand affinity, and importantly, visit intent. As I break down the quarter, weekly restaurant sales averaged $51,000. In fact, March through September sales have been remarkably consistent with each month delivering record high volumes under dine-in ownership. Applebee's Q3 sales mix consisted of 73% dine-in, 15% car side to go, and 12% delivery. Of particular note is the fact that our weekly off-premise volume continues to hold very steady at about $14,000 per restaurant. This off-premise volume is more than double our pre-pandemic level and supported by ongoing technology investments in our call center, I've arrived notification, and new kitchen printers, which significantly assist team members with order accuracy while reassuring our guests that we have it right. I should also note that dining room volumes continue to escalate as they are now approximately 90% of pre-pandemic levels reflecting guest demand for dining out again. Our dine-in business is also bolstered by relevant investments in QR code menus, pay-and-go mobile payment, and handheld server tablets, making it easier for our guests and our team members as we expand these initiatives in 2022. Additionally, one of the interesting insights from my perspective throughout the pandemic is the shift in our age demographic. Dining guests have become even younger, while not surprisingly, our Boomer guests have shifted their behavior to more off-premise dining. At present, about 51% of Applebee's guests are under the age of 35, with Millennials being our largest segment at 33%. Looking forward to next year, we still have a meaningful headroom with our late-night weekend business, which remains a bit constrained due to labor challenges after midnight, in about 500 restaurants. I fully expect this current late-night headwind to become a meaningful opportunity and a very leverageable tailwind in 2022. As I stated previously, having a sophisticated supply chain is a huge point of difference in this environment. Our supply chain organization is indeed best in class and a real difference maker in navigating the current challenges facing the industry, Bottom line, those with scale and strong supply chains will likely prosper moving forward, while others struggle to compete. This is more evident today than ever before, and one of the reasons I absolutely love Dine's position in the market. Now, a big part of our Q3 success was the innovation behind Disney's Jungle Cruise, Dwayne Johnson's Terra Mana Tequila, and what the Today Show dubbed the Song of the Summer, Fancy Like, which has since become known as the Applebee's Song. It's rare that an artist writes a song about your brand and its relevance in everyday life, but that's precisely what happened this summer as Walker Hayes showcased Date Night at Applebee's, and it connected with America like nothing I've seen before. After 18 months of lockdowns, our objective was simple, make America smile. So we partnered with Walker, created a couple of ads featuring real folks across the country letting loose and having some fun, and as they say, the rest is history. It's a lucky strike extra that Walker Hayes and his family have always been loyal Applebee's guests. That's a fact. And I honestly can't think of a better embodiment of who we are and what we stand for as a brand than the lyrics to this song. For a little context on the media front, Q3 included a favorable spending comparison versus Q3 of 2019, and I expect a favorable comparison in Q4 as well to close out the year. Needless to say, because of sales performance and collections, we are well positioned heading into next year from a national media perspective. As John referenced on the development front, 2021 represents the conclusion of our planned portfolio optimization. Looking forward, we plan to close less than 1% of our restaurants in 2022, while returning Applebee's to net new unit growth in 2023, with annual acceleration thereafter. In closing, Applebee's business momentum is steady and strong, and our fundamentals remain rock solid. Franchisee financial health, confidence, and optimism in our future are equally strong, even in the face of labor and supply challenges. Bottom line, Applebee's is exceedingly well positioned to thrive in this environment, and we very much look forward to 2022. With that, I'll turn to my partner, Jay, for an overview of the IHOP business.

Thanks, John, and congratulations on the impressive results again this quarter. Good morning, everyone. IHOP's business continued to improve. Third quarter comp sales were essentially flat relative to the same quarter of 2019. This reflects a sequential improvement of three percentage points compared to the previous quarter. Our strong results led to IHOP outperforming the family dining category for the second consecutive quarter, according to BlackBox. I'm excited to report that domestic average weekly sales unit sales are back above our pre-pandemic levels for the first time this year. Average weekly sales for the third quarter were slightly above $36,000 per week, exceeding the average for the same quarter of 2019. Approximately 83% of our domestic restaurants are open for standard operating hours or greater, and approximately 27% are operating 24-7. which trails pre-pandemic levels of approximately 45% that were operating 24-7 previously. We believe that's additional upside as more restaurants resume standard operating hours as well as overnight. For the third quarter, off-premise sales accounted for 23% of sales mix, which is more than double the mix for the third quarter of 2019 and reflects significant retention compared to the same quarter of 2020 when restricted indoor capacity restrictions and governmental mandates related to COVID-19 were in effect. We believe we can retain most of our off-premise dollar volume and we're confident that our strong off-premise business will be complemented by the demand for in-restaurant dining. For the third quarter, our sales mix consisted of 76.7% dine-in, 13.1% delivery, and 10.2% to-go. To build on our achievements and remain the leader in family dining, we're going to continue to focus on what we can control. This framework includes a new approach to marketing, launching a loyalty program, developments, and virtual brands. I'll briefly touch on each of these, starting with marketing. Consumers are generally more tech-savvy now than ever before. We believe the shift in our media strategy to place a greater emphasis on digital marketing will greatly leverage our guest connection to IHOP and drive incremental visitation. This brings me to our engaging loyalty program. According to a study by Data Essential, nearly 50% of those surveyed said that loyalty incentives are critical when choosing a brand. We're focused on leveraging our investments in CRM and consumer-facing technology, doubling down on our commitment to modernize our guest relationships, and importantly, drive incremental visits. We're optimistic about our very creative and fun loyalty program, which we plan to launch over the next few months. Regarding development, Since early 2020, consumers' dining behaviors have changed significantly. As a result, IHOP has been able to quickly pivot and adapt. Simply put, we're focused on meeting guests in the channels that they frequent and trust either in our restaurants or off-premise. Our guests want to access the brand in ways that are most convenient for them. We believe that Flipped by IHOP, our new innovative fast casual concept that leverages IHOP equities and brand affinity is will meet the evolving needs of guests. I'm happy to report that our first Flip by IHOP opened on September 21st in Lawrence, Kansas. And while it's too early to share any of the results, we look forward to providing more information in the month ahead. We expect to open our second location in New York City in the very near future. We've expanded our pilot strategy for Flip, which was originally focused on locations only in large metropolitan cities, to now include suburban areas and non-traditional venues as well. We're laser focused on doubling our historic unit growth and believe that FLIP will nicely complement our three other development vehicles, which include our traditional formats, non-traditional, and a new small prototype scheduled to test later this year. Importantly, all of these formats can be done in conversions, which we believe amplifies the opportunity. Due to the impact of the pandemic, there are more potential sites to develop in areas we may not have had prior. Turning out of virtual brands. We see a lot of potential and flexibility with virtual. We continue to see this as a huge industry trend with the opportunity to drive incremental sales in a cost-effective manner, especially at non-peak hours like PM. We'll have more details as our progress continues on testing. Changing gears to technology innovation at IHOP. It's imperative that we reach our guests on their terms, and with approximately 56% of IHOP's guests being age 34 or younger, Technology is a key factor in becoming and staying more relevant. Today's guests expect us to offer services that make their lives easier, such as the ability to pay with their own phones and IHOP being available on all the major delivery service providers' platforms. We've invested in innovation to enhance the guest experience, whether they're in our restaurants, off-premise, and across all day parts. One of our biggest opportunities is to become more relevant for more occasions. Great food and menu innovation are permanent staples at IHOP. We're known for providing freshly served, high-quality food while also allowing guests the option to customize their orders, particularly breakfast items. With that, I'm very pleased to report that our breakfast day park comp sales for the third quarter increased 8% relative to the same period of 2019. This is a testament to the execution of our strategy. We focused on providing abundant value in a variety of while also increasing IHOP's appeal across other day parts besides breakfast. There's room, I think, to providing guests with great value. Understandably, value plays an increasingly major role in dining decisions, in part because many consumers still remain under financial pressure due to the pandemic. We have research that shows that our guests equate value with affordability. A great example of this is our IHOP ER menu, which was introduced in September 2020 – This is IHOP's first ever afternoon and evening focused value-oriented menu. I'm pleased to say it's been well-received and generated incremental traffic for our franchisees. Last September marked the one-year anniversary of IHOP-ER, which continues to drive incremental traffic, generating approximately 8 percentage point lift in traffic and sales during the available hours. This actually equates to a low to mid-single-digit increase in overall sales. Lastly, in conjunction with our Halloween pancakes promotion, we announced that Rayon was the winner of our third annual Kid Chef Contest, which is coordinated with Children's Miracle Network Hospital. The event was a huge success and supports a great cause. To close, we have several reasons to be optimistic. Off-premise sales dollar volume remains robust. We outperformed the family dining category, according to Black Box, for the second consecutive quarter. We're focused on strong unit growth. And overall, we've made great progress this year, and I'm looking forward to returning to positive comp sales. And I'll turn the call back over to John Payton for his closing comments.

Thanks, Jay, and congratulations to Kid Chef Rayon. We're super proud of him. And thanks, John, and thanks, Vance, and to your entire team for all the hard work in delivering on our solid quarter. The road to recovery from the pandemic has certainly been a winding one for all of us. And despite the twists and turns, we at Dye know where we're going, We're focused on both the here and now of supporting our franchisees and giving guests the experiences they know and love, and we're also focused on the long-term plans and actions that we need to undertake to accelerate our growth. Most importantly, we never lose sight of the fact that the key to hospitality is those very special, intimate, human connections between our guests and our team members, however and wherever those connections occur. And with that, we're looking forward to taking your questions.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please limit your question to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from the line of Brian Mullen with Deutsche Bank. Your line is now open.

Hey, thank you. Congrats on a good quarter. John, in the prepared remarks you referenced, you recently hired a VP of Development at IHOP. Can you maybe remind us, is this a new position at Dine or is this replacing someone who was at IHOP when you joined? And then related, you know, can you just talk about your expectations for the position, what the person brings to the table, just highlight a few things you'd like to see him help change moving forward? I know you want to double the historical unit growth pace by 2023. You know, any tangible action items you could highlight for us?

Sure, Brian. Thanks for the question. I mentioned we hired three vice presidents of development, so I'll specify on all three. The VP of development at Applebee's is a new position. It was a shared position in the past, a person with multiple responsibilities. We're now devoting one senior role only to development. The same is true for international. We've had an international leader of the business that was responsible for both development and operations. Now we've added in a senior leader who is only responsible for development. And at IHOP, to your point, it was a replacement of a leader who we had. And our hopes and expectations for Jake and for all of our VPs is to bring a strategic approach to the way in which we develop our restaurants and the way in which we work with our franchisees. And when I say strategic, I think that we can be much more assertive as an organization in bringing opportunities to our franchisees, in doing extensive analyses of the markets to demonstrate the potential for new restaurants, and that we can move from being order takers to bringing the market and the opportunities to our franchisees. That's my expectation not only of Jake, but of our other two development leaders as well.

Yeah, this is Jay Johns at IHOP. As John had said, it is a replacement position, and we really want to become more strategic with our development. It's not just about hitting certain numbers. It's about how are we doing the market planning to add additional restaurants to the markets we're already in? How do we start developing in territories maybe we haven't been in before? This is where some of our new vehicles may come into play. You think about flipped, the smaller prototypes. this starts to open up some other territories that we may not have gone to before. So we needed some new thinking, some fresh thinking, and that's where we're going with that.

Okay, thank you. And then to follow up on IHOP, Jay, you mentioned I think 27% of the locations are now 24-7. I think you said it was 45% prior to the pandemic. And my question is, do you anticipate that going all the way back to where it was? And is staffing the only issue here, or are there perhaps other considerations for franchisees Are there some franchisees who maybe don't want to for whatever their reasons may be? Any color would be great. Thanks.

Oh, thanks, Brian. I think that it's a combination of a few factors. Obviously, staffing is part of it. Just the economics is part of it as well, right? When the pandemic happened, people were trying to cut costs. They're trying to make things easier to execute. Because you have less staff, that's also important that things are easier to do and and they tightened down on what hours they were operating. I think we've seen it slowly coming back, but it's not going to all come back at once. This is going to be location by location and franchisee by franchisee. As they get staffed, as they see the ability to get back open more hours, you'll see that. I think what typically would happen, no different than sometimes in a new restaurant opening, That's almost what this has been like. The franchisees have had to almost reopen their restaurants from doing to-go and off-premise only to now you get the dining room open. The next stage will be how do you get to usually what we call 24-2, which is stay open 24 hours on just Friday and Saturday night where the busiest opportunity is, and then you expand from there. So I think we'll get back a lot closer to where we were. I just can't give you a timeline on when that's going to be, but It will continue week by week and month by month as we move forward until we get back much closer to where we were in the past.

Thank you.

Our next question comes from the line of Jake Mortlett with Truist Securities. Your line is now open.

Great. Thanks for taking the questions. You know, my first was on the comment on Applebee's and I'm not sure if I got it right, but I think you mentioned quarter to date since your sales were 5.3%. Maybe if you can just confirm the comments on the fourth quarter to date sales level. And if that's right, what would have driven the deceleration? We saw a pretty consistent monthly improvement throughout the third quarter. So maybe just some comments there. And then also on the IHOP side, anything to share on the quarter to date would be helpful.

Hey, Jake. Good morning. This is John. The year-to-date through Q3 comp sales figure for Apple is plus 5.3%. Within the quarter, 12.5% increase versus 19. Those are both versus 19. And sequential improvement throughout. We love the trajectory and the momentum, and it's what we expected and is obviously – creating a very healthy environment for our franchise partners.

This is Jay. On the IHOP side, again, we've been making improvements throughout the year and getting very close to flat this past quarter. We're still down a little over 8% for the total year. First quarter was still pretty tough for us, but we've been making progress ever since. and would look for, you know, that to continue to improve as staffing improves, et cetera. But, you know, we're not sharing anything about fourth quarter right now.

Got it, got it. And just as I look, this is on the Applebee's side, as I look at the cadence throughout the quarter, there was an improvement, you know, as I mentioned, as you guys mentioned, which is different than other concepts I've seen. So, you know, trying to understand what drove that, you mentioned the summer marketing kind of viral hit there. Any reason to think that that wouldn't continue to accelerate, given your marketing plan, or was there something unusual in the quarter from a marketing perspective that maybe shouldn't be replicated?

Jake, the progression was solid from the low 12% range to the high 12% range. As I mentioned, remarkably consistent since March. All-time highs under Dyn ownership It's fundamentally restaurant execution and innovation, not just marketing innovation, culinary innovation, technology innovation, advertising, media, you name it. The team is locked in in partnership with their franchisees, and we have visibility to a 2022 plan, and it, quite frankly, fires us up. So I'm not going to speculate on a future look. But suffice it to say, the brand has probably a tighter partnership and a more optimistic partnership with its franchisees than I've seen in my five-year tenure.

Great. And then the last question is just on really getting down to franchise profitability and some of the drivers there. You mentioned your 6% commodity inflation for the year. Could you remind us what inflation was for the third quarter, what that implies for the fourth quarter? And then, you know, given, I assume, the accelerating pressure, you know, what are franchisees doing to offset that? How much pricing might they be taking? You know, how is their – do you have a sense as to whether their profitability is taking a hit here or there's offsets such as less discounting or pricing or what have you?

Thanks for the question, Jake. So, look, on inflation, generally speaking – I'd say it takes about two to two and a half points of menu pricing to cover 10% of commodity inflation for our franchisees. I mean, you know, we do provide pricing elasticity tools to our franchisee partners to help them with pricing decisions. And depending on the franchisee, they've been tracking anywhere between 1% to 3% of menu pricing increase per year in the past two years to cover inflation.

Yeah, and Jake, this is John. On the Applebee's side, I would say, you know, if you look, generally speaking, full year inflation, 21 versus a year ago, 6% bump in commodity costs. Franchisees continue, and they're independent operators, so they take independent actions. They tend to be highly strategic and measured in how they apply pricing. And if I look at 21 versus 20 as an example, the average price increase throughout Applebee's from our franchisees would be about 3%. And historically, as Vance referenced, typically between 1% and 2% on an annual basis.

Got it. Thank you very much. Appreciate it.

Our next question comes from the line of Brian Vaccaro with Raymond James. Your line is now open.

Thanks, and good morning. I wanted to start out on the Applebee's advertising, and I obviously saw some huge successes this quarter. But, John, can you help also just frame how much the spend was up, say, versus Q3 at 19, and just ballpark your expectations on where spend levels might shake out moving through 22? I imagine Q1 22 will be up a lot versus Q1 of 21 because you didn't spend much this year. But just any context you can provide on the year overall would be appreciated.

Hey, Brian. Yeah, good question. I probably won't quantify for you to the extent you'd like me to. Recall in Q1, we pulled back on spending in 21. So naturally, the full year is kind of back-loaded Q2, Q3, and Q4, elevated versus – actually, not so much Q2, but certainly Q3 and Q4, elevated versus that 19 baseline – And then on a full year basis, a pretty comparable media allocation. Again, we pull back in Q1, we're well positioned, balance of year. And then as I look forward, for the reasons I've referenced, I anticipate the brand being in really great shape as we move into 22 from a media perspective. I like our position.

All right, that's helpful. And I guess shifting gears a little bit, just a little context on staffing levels at each brand. Maybe you can provide some perspective on where average levels are, but also help us with the pockets of tightness. Maybe what percent of units might still be meaningfully below 19 levels, however you might define that. And is it possible to frame kind of a comp drag you might be seeing at either brand due to staffing challenges? Sure.

Hey Brian, this is Jay Johns. I'll start with IHOP and then turn over to John. You know, the franchisees, they're still having staffing issues and there's probably several hundred restaurants that are more impacted than others and you can see that in some of, they still have some reduced hours of operations and most of that is because of staffing levels. So once they can get enough staff, they fully intend to get back to regular operating hours and and that is causing a little bit of a drag on our business. You think about earlier, we were talking about the overnight hours, where I'm still missing almost half of my overnight hours, so we're probably impacted by a couple of percentage points just on reduction of hours compared to 2019, and that is staffing related. They're making progress, and we get more restaurants that open a few more hours weekly, but again, it's somewhat of a slow process right now that And it's very fluid. You get ahead, and the next week you're back behind as another restaurant across the street is also short-staffed. And it's a competitive, very competitive world out there, and people will move quickly for an extra dollar an hour in this marketplace. So it's going to take a little more time before this gets back. But right now I would say that our restaurants are probably in the 85% staff range.

And I would say, Brian, on the Applebee's side, very similar. Where we feel it most... quite naturally, as you'd expect. It would be on Friday and Saturday nights, late night, I think 11 o'clock, 12 o'clock, even into the 1 a.m. hour, tough parts of the weekend to staff. It's coming back, and I would argue that brands with, it's not just trust from a guest perspective. Brands who have a clear reputation in the market and are trusted by team members. And franchisees who have very strong culture, and I would say our 30 partners have exceptional culture, they're sophisticated. They know how to recruit and retain with the best of them. But I'd be lying to suggest we're 100% staffed. We're not at the moment. Weekend late nights is where we feel it. It's getting better, but it remains a priority and a challenge throughout the industry.

Okay, and then more broadly just on the labor environment, are you hearing in kind of the recent conditions, are you hearing from your franchisees that they're starting to see any green shoots of improvement as Delta concerns seem to be easing? Are you seeing application flow increase or maybe turnover declining? Any color on those dynamics?

I wouldn't, this is John, I wouldn't quantify anything, Brian. The marketplace is improving, generally speaking. And in those late night hours is where we specifically see the challenge. And one would have to imagine that each and every brand in this industry approaches this challenge differently. I do love the fact that we have strong culture, we have an aspirational brand, and we have sophisticated franchisees who know how to navigate. So I believe we are very well positioned on this front. relative to others in the category.

Okay, and then just one quick clarification, if I could, just on the franchisee profitability comment you made. You know, at Applebee's, is it right that the strong sales leverage you're seeing versus 19 and some of the ops improvements, I think you rolled that as well, is it right that that's sufficient to offset sort of the near-term COGS and labor pressures we're all aware of where store margins and profitability can sustain solidly above 19 levels, in your view, moving through next year?

Yeah, Brian, cash is flowing well, and certainly revenue is a big part of that. We're working both sides of the equation. Revenue growth puts our franchisees in a terrific position, but we're also working the cost side, productivity, throughput, efficiency, technology, taking steps to reduce cost. You've heard us reference in the past some PWC work that we've done historically at Applebee's that has removed 200 basis points of cost from the P&L. We very much took a hiatus on that initiative over the past 18 months. We will be activating that again in 2022, which represents meaningful opportunities. Revenue would be the biggest lever there, and As a result, they're in very good shape.

All right, I'll pass it along. Thank you. Thanks, Brian.

Our next question comes from the line of Eric Gonzalez from KeyBank Capital Markets. Your line is now open.

Hey, thanks, and great results out of Square. Just wondering if I could ask about the recently announced cap allocation strategy. The payout ratio is, you know, maybe towards the lower end of what one might expect from a highly franchised business. So should we think about that as a starting point, or is that 25% or so payout ratio likely to be maintained over the next few quarters? And maybe you can give us a little more color on how we should think about the share repurchase, the level of share repurchases we should think about as we model going forward. Thanks.

Thanks for the question, Eric. So, you know, as you know, we've added a really strong track record of returning capital to our shareholders, and that will remain one of our top priorities. You know, for dividends, we think that the 40 cents quarterly dividend represents a healthy dividend yield and payout ratio as a starting point to grow from, as you pointed out. Going forward, we will continue to evaluate and balance our capital allocation strategy, focusing on the things that John talked about earlier, which is investments in business and technology and other growth initiatives, returning capital to shareholders, debt management, and more importantly, maintaining financial flexibility to address any remaining uncertainty from the pandemic. Now, on the buybacks, our goal is to support the stock opportunistically with ROI in mind, right, based on our view of the intrinsic value of dying, and we'll do that with our 10B51 plan and will be out there consistently supporting our stock.

Yeah, Eric, it's John P. I would add that the key word is our approach here is to be prudent. And I said to you in the last couple of quarters, when we got comfortable that we've had some sequential quarters of predictable and sustainable performance, we would return to the dividend, and that's what we did. And now we want to see another couple of quarters of predictable and sustainable growth as we think we're on the other side of the pandemic. and that will enable us to look at the dividend and potentially increase it over time. But we think it's best to be prudent right now given this point of time.

Understood. Earlier in the call, I think maybe it was Jake who asked about the inflation, implied inflation for the fourth quarter. So maybe you can comment on that and maybe an early outlook on what you think inflation might be into next year, including any comments on hedging or? contracts that you have outstanding?

You know, based on what we can see, second half inflation is about 10%. And, you know, I talked about it earlier, just generally speaking, you know, it takes about two to two and a half points of menu pricing increase to cover a 10% hit on commodity inflation pricing. So, So, you know, John and Jay both talked about the fact that in the past year or two, our franchisees have been taking anywhere between 1% to 3% of pricing increase per year. So that's covered what we've seen so far.

And the second part of your question about next year, we're going to wait until next quarter, Eric, when we do our guidance for 2022 to talk about, you know, costs and all of our guidance as part of one conversation.

Great. Thanks. I'll pass it along.

Our next question comes from the line of Brett Levy with MKM Partnership. Your line is now open.

Great. Thanks for taking the call. On the development side, when you think about your approach, how are you thinking in terms of new versus existing? Are you thinking about anything in terms of with your capital allocation maybe buying in franchisees to drive some consolidation. And how are you thinking about company ownership?

Well, Brett, I'll speak on the Applebee's front since we're kind of newest to the game. As you know, we've spent the better part of the past four years optimizing the brand, pruning out the system. We closed about 300 underperforming low-volume restaurants. So we're ready for growth. We plan to close... fewer than 1% of our portfolio next year. We've lined up a number of franchise partners and plan to build 15 plus new restaurants in the near term as soon as we can activate those sites with our new development partner, Don Rayburn, as John referenced. And some of those will be traditional. Some of those will be conversions There's a high level of enthusiasm there, and then I do expect that to accelerate moving forward for the Applebee's brand, which is refreshing. We've been building to this and setting the system up for this new level of growth and this very modest closure rate for quite a while. Pandemic got in the way of us activating it, but we're ready now, and we're moving forward beginning next year.

Brett, this is Jay at IHOP. Obviously, we've been doing development quite some time. As I just referenced earlier, we're going to try to be more strategic about this and how we develop markets. We have franchisees that already have multi-story development agreements. Obviously, there'll be some of that. There's territories where there are no development agreements at this point. That's a possibility in those areas. We have a lot of existing franchisees that we believe will like to get into the development game post-pandemic, especially if the economics are right to do that and the amount of conversion opportunities that are out here. Obviously, the economics are very good on conversions, and we've been seeing about half of the pipeline over the last year or so has been conversion opportunities. We've got about 600 restaurants in our system now that are conversions. So we're very good at doing this. We've got a lot of experience doing it. And then we've got our new platforms I've been talking about, you know, with Flipped and our small prototype. And I think that's going to open up more territory still. And I think in some markets there's a lot of opportunity to bring in some new franchisees as well into the system besides the ones that we already have.

And, Brett, it's John P. I just wanted to address two of the questions that you asked as well, which is you asked about our own funding and if we would use that to potentially, you know, consolidate funds. And the answer to that is no. We're much more likely to use our funding, though, to encourage franchisees to develop in the form of key money or incentives. And we've got a program like that already in the marketplace for flipped. You also asked about our inclination to own restaurants. And there, too, I would say we're not inclined to own additional restaurants. One of the reasons we're performing so well this year is because of the asset-light model that I mentioned in the opening comments, and our intention is to remain a highly franchised business.

Right, just following up on that, with the existing units that you have in place, what are your thoughts on your company operating? Is that something you see as a good, fertile testing ground and you want to hold onto it, or is that something that you'd look to get yourselves back to the 100% level?

Yeah, it's certainly a fertile testing ground while we have them. And we'll have them because of COVID, right? Our intention to sell them has been delayed. What we're proud of is we purchased a portfolio that was underperforming, and because of the management team that's been in place there, it's now one of our top five performing portfolios, both in terms of same-store sales improvement as well as guest improvement. You know, originally the company said we'll hold them for two or three years, Two years of COVID has delayed that, and so we've got another year or two to go, and then we'll report back on where we are.

And then just on moving into another direction, can you talk a little bit more about how you're thinking about the pacing of your loyalty rollout, not just at IHOP, but also as it makes its way over into Applebee's?

This is Jay. As far as IHOP goes, we're actually going to be in test and piloting this at the end of the year here in the fourth quarter, and our intention is to roll this out system-wide probably first half of next year.

And, Brett, on the Applebee's front, we have significant investments on the, you know, in terms of personalization and customization from a CRM perspective. We continue to believe the best form of loyalty is wow that guest every hour, hour and a half that they're there, and ensure a high degree of affinity for the brand and loyalty and repeat visitation. So we believe in restaurant execution, and it's one of the reasons the brand is performing so well. Thank you.

Thank you. Our next question comes from the line of Nick Setien. with Wedbush Securities. Your line is now open.

Thank you, and congrats on an incredible quarter. You know, just given the momentum we're seeing here, you know, in Q3 and, you know, out of Q3, you know, the EBITDA guidance, you know, just given the year-to-date EBITDA in Q4 implies a step down in Q4, maybe even a little bit above the step up in GNA. So, I guess I just wanted to kind of get the puts and takes around the implied Q4 EBITDA.

Sure, Nick. Good question. We do expect Q4 performance to hold strong, but we also do anticipate higher G&A costs from activities such as consumer research and product development, franchisee support services and headcounts, travel expenses, et cetera, that we anticipate. more or less paused until now. And plus the continuing incentive compensation accrual based on company performance. So you're reading it right, and that's our guidance so far for this year.

Yeah, it's John P. I'll give you a good example that we're happy to have, which is our Applebee's annual conference is back on in November. We'll have 350 people who are really excited to come together and celebrate the brand. They haven't gotten together in almost two years. And, you know, Nick, in my mind, that's an expense worth having in the fourth quarter to bring the team back together and all of our franchisees after a two-year absence.

Yeah, it makes sense. When you talk about sort of doubling the IHOP historical unit growth rate by 23%, Can you just give us, just point to what that exactly means? 2019 I think it was sub 1%, but before that it was 3%. So are we talking about 5, 6% potentially net unit growth in 23, or are we talking about a different number?

Well, I've talked about this typically, this is Jay, I've talked about this typically in our units we've developed. So to put it in perspective, I think historically over the last decade, we've developed about 40 new restaurants a year. So to double that, you're looking at more like 80 restaurants by the time you get to 23. So, you know, we're not doing future guidance that far out on exactly what those numbers look like, but that gives you a ballpark idea of what we're talking about as far as amount of development.

That's very helpful. Thank you. And just last question, you know, Cosmic Wings, any update there?

Nick, I knew you'd be asking about that. This is John. We love Cosmic Wings. I referenced that we held off on a very meaningful expansion to DoorDash, the number one delivery player, because of supply challenges, in particular around boneless wings and bone-in wings. I anticipate expanding Cosmic Wings from a delivery perspective to DoorDash in very early Q1. That supply of product will be there, and the reason we're being prudent and thoughtful on that front is we're going to generate some incremental demand there. We want to be able to satisfy it. And then the final point I'll leave you with is a little tease, that in a couple weeks there's going to be some meaningful news on the Cosmic Wings front. So stay tuned, and there'll be something buzzworthy that comes across the Transom very soon.

Sounds good. Looking forward to it. Thank you very much. Thank you.

Our next question comes from the line of Jeffrey Bernstein with Barclays. Your line is now open.

That's quite a teaser. Look forward to the news on cosmic wings. Two bigger picture questions. John P., I think you mentioned that research showed 110,000 restaurant closures. My guess is that's a number since the start of the pandemic. That would work out to be north of 15% of the industry. By my math, just curious if you would say that's a similar mix. I'm just wondering what your thoughts are as the operator of two of the biggest brands in America in terms of the outlook for reopenings of a lot of those closed restaurants. Maybe an outsized acceleration for growth in 22% just wondering your kind of bigger picture thoughts being your contacts in real estate and development and just your touch around the country. Any thoughts on the reopening opportunity for all those units across the industry?

Yeah, Jeff, thanks for the question. So, number one, your math is right. You know, there's multiple sources on restaurant closures since the beginning of the pandemic, and it's about 10 to 15 percent. The number I cited on the call today was from BCG. The numbers the sources of data will also show that, unfortunately, it was disproportionately independents that closed during the pandemic. And so it's less likely that those restaurants will reopen because of what we know about the economic nature of independents. And we see that while our heart breaks for the independents, it is an opportunity for the big chains like ours. And that's why we are leaning into development. And that's why we've hired three new development leaders that we think are world-class and upgraded talent that we have, and it's taking advantage of an opportunity at this moment in time.

Understood. And then my other question is just as you think about the broader portfolio, obviously 2021, good luck trying to find any rhyme or reason to trends that we saw, like you said. But as we think about 2022, 2023, just thinking about a more normalized, I mean, we can kind of forecast our own comps, and you gave some color on the unit growth, but assuming there's some modest G&A leverage, which I'm just curious your thoughts on, but what we should think about over the next few years in terms of more normalized EBITDA and EPS growth, not looking for specific guidance per se, but just what you think the model can generate over the next couple of years on a more steady state basis on the bottom line. Thank you.

Yeah, Jeff, we will get into more guidance in our Q4 announcement, but we are taking a more balanced approach going forward in terms of how we manage our G&A investments. And the goal is to invest in organic and strategic growth and also continue to look at acquisitions. So this is an asset-light model. There is leverage to be had with our infrastructure, but there is potentially more that we see with prudent investment and growth.

In terms of potential for bottom line growth over the next few years in terms of the portfolio?

Both, top line and bottom line. But without getting into specific guidance on numbers, we think there is growth because this is, again, this is an asset-like model. Our GMA infrastructure can't be leveraged. You're exactly right. Thank you.

All right.

Thanks, guys.

All right. Thanks, guys. We appreciate the time and your questions and look forward to speaking with you next quarter. Have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.