Dine Brands Global, Inc.

Good morning and welcome to Dyn Brands Global's second quarter 2023 conference call. I'm Brett Levy, Dyn's Vice President of Investor Relations and Treasury. This morning's call will include prepared remarks from John Payton, CEO, and Vance Chang, CFO. Following those prepared remarks, Tony Moralejo, President of Applebee's, and Jay Johns, President of IHOP, will also be available to address questions from the investment community during the Q&A portion of the call. please remember our safe harbor regarding forward looking information. During the call, Management will 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 we assume no obligation to update or supplement these statements. We will also refer to certain non-GAAP financial measures, which are described in our press release and also available on DynBrand's Investor Relations website. For calendar planning purposes, we are tentatively scheduled to release our Q3 2023 earnings before the market open on November 1, 2023. With that, it is my pleasure to turn the call over to DynBrand's CEO, John Payton.

Thanks, Brett, and good morning, everyone, and thanks for joining us. Today we'll provide updates on Dyn's Q2 results, our investment initiatives and progress on new unit development. Vance will provide a more detailed financial update, including balance sheet progress. And Tony and Jay will join us for Q&A on the back half of our call. So I'll begin today with a few comments about the mindset and behavior of our consumer. We've spoken at length about the remarkable resilience of our target guest in 2022 and early 2023. In late Q1, we began to see some hints that our guests were growing a bit more cautious in their spending. This continued into the second quarter as the percentage of guests selecting from limited time offerings and the value offerings on our Applebee's menu grew from approximately 15% to 19% quarter over quarter. And across the industry, we noticed our competition leaning heavily into promotions, which also contributed to the headwinds this quarter. Yet, while we saw a slight decline in traffic, average check remained consistent year to date. This suggests that consumers are more likely to cut back on restaurant visits than trade down to a less expensive alternative to fight inflation. And finally, while our off-premise sales volume remains strong, we saw a shift in mix from delivery to pickup, a deliberate decision to avoid extra costs associated with delivery and fees. All of this indicates that the pandemic reopening boom of 2022 may now be returning to historically normal and more sustainable levels. Turning to our results. Our Q2 performance reflected a modest slowdown when looking at comparable year-over-year same-store sales, driven primarily by traffic, and this relates in particular to Applebee's. You may recall Applebee's Q2 2022 results were heavily influenced by pent-up demand from Omicron, which fueled Q2 sales growth. However, it's worth noting that our current quarter's average weekly sales remain stable and are roughly 12% above pre-pandemic levels. That said, here are the highlights from the quarter, which Vance will provide more details on in a moment. Q2 revenue, excluding the re-franchised Applebee's restaurants, grew to $206 million from $198 million, and adjusted EBITDA grew 2% to over $67 million. IHOP posted its ninth consecutive quarter of comp sales growth, a 2.1% increase year over year. Applebee's same-store sales declined 1% in Q2, influenced, as I mentioned, by strong sales volumes last year. Importantly, though, average weekly sales for Applebee's was over $54,000, and average weekly sales for IHOP was approximately $39,000. And we're encouraged to see that average weekly sales for both Applebee's and IHOP were above 2019 levels. Now, we continue to advance our strategic growth agenda, which includes investments across enhanced technology, marketing, and training tools, all needed to provide the overall guest experience and our loyalty programs. This includes a robust technology agenda that introduces a new POS for IHOP and Applebee's, server handhelds, flyby, and functionality for our apps with enhanced capabilities for dine-in order in advance, joining wait lists for seating, and different payment options and reviews. Second, we are investing in engaging in relevant menu and marketing innovations to drive comp sales growth. For example, we'll continue to build IHOP's portfolio of virtual brands and leverage IHOP's brand equity into national consumer packaged goods partnerships. And finally, continued investments in new development initiatives, such as new brick-and-mortar concepts like dual-branded restaurants, conversions, and new restaurant prototypes, as well as offering compelling financial incentives for franchisees to accelerate the construction of new restaurants. So now turning to Applebee's. As I mentioned at the start, comp sales were down 1% due to traffic trends, difficult comps, and a slightly more hesitant consumer. Nevertheless, Applebee's continues to focus on quality food and a better guest experience, allowing them to maintain sustained sales volume. Despite the increasingly competitive and promotional environment, Applebee's system-wide AUVs are approaching $3 million this quarter. Agility was the key to the quarter and will continue to be important going forward. For example, the brand responded to initial signs of consumer softness by elevating its everyday value platform of $2 for $25 to include a premium offer with steak, which helped drive improvements to both sales and traffic. And Applebee's summer partnership with Disney, Lucasfilm, and Fandango to promote the latest installment of the Indiana Jones franchise is a great example of the brand's excellence in nontraditional marketing. Now, an update on Applebee's development. Under Tony's leadership, we are executing a three-part plan. First, we've taken a fresh look at underperforming restaurants and ways in which we can improve profitability, leading to some additional closures. These closures were based on a number of factors, including some older restaurants or areas becoming unsustainable due to changes across trading area dynamics in a post-COVID world. However, we're still looking into opportunities to relocate some of these underperforming restaurants. Second, the brand is finding success in conversions and recent new builds. Average unit volumes for the class of 2022 restaurant openings are annualizing at nearly $4 million, well above the brand's average of nearly $3 million, reflecting the compelling relevance of the brand when it competes in the right market. Finally, and most importantly, we continue to work on a smarter, more efficient design that we plan to unveil next year. This prototype will incorporate the post-pandemic business model and operations efficiencies and will address the inflation and the cost to build a new restaurant. In the meantime, we continue to work on improving store-level margins, which is of keen interest to developers. Working together, Applebee's, our franchisees, and CSCS, our brands purchasing cooperative, have made progress toward our restaurant profitability initiative, and during the quarter, we implemented 50 basis points of annualized savings, and the work continues. Applebee's competes in an increasingly competitive segment of the restaurant space, and it continues to lead in value, affordability, and brand awareness. These are attributes that have been built and nurtured over the past decade and underpin the brand's resilience and ongoing appeal to its loyal guests. Moving on to IHOP, it continued its momentum in Q2, reporting its ninth consecutive quarter of same-store sales growth. And IHOP is delivering on its renewed focus on innovation, particularly around its menu, consumer products, and technology. So, first, starting with menu innovation. In Q2, IHOP launched its largest menu refresh in many years, which includes Eggs Benedict, Sweet and Savory Crepes, and other items. All the changes were driven by extensive customer research in which guests told us they want more breakfast favorites. fresh ingredients, and great value. Our new menu leans into our expertise in breakfast and introduces new items and flavors that guests and families crave at any time of the day. Since our launch in April and initial promotional activities, these new items have maintained sales volumes, which signals sustained demand. This innovation continued into Q3 with IHOP's latest LTO, Pancake Tacos, which is a testament to the brand's creativity. And we've just begun to celebrate IHOP's 65th anniversary, featuring all-you-can-eat pancakes for $5 and kids eat free. As we look to the back half of the year, we have a full pipeline of marketing and menu activations to roll out, including a mix of new menu innovations and value offerings. IHOP remains bullish on virtual brands, which allow us to leverage our scale and kitchen space to add incremental sales. Our target windows are dinner and late-night hours, and we have several exciting brands coming very soon. During the quarter, we launched IHOP-branded coffee at grocery and online retailers. In partnership with Kraft Heinz, IHOP Coffee achieved national distribution across more than 25,000 retail locations. We are pleased with the initial sales performance, and Kraft Heinz will continue to invest in comprehensive media support and retailer campaigns through year-end. IHOP's loyalty program, the International Bank of Pancakes, continues to be an important channel to connect with guests and now has almost 6.5 million members, which accounts for approximately 6% of sales. IHOP continued with its restaurant profitability initiative and during the quarter identified 35 basis points of annualized savings and the work to identify additional savings continues. And finally, as we've discussed in previous quarters, Development is an important growth engine for the IHOP brand. At the end of Q2, roughly three-quarters of our 2023 domestic openings are conversions, in-line or end caps, and our openings have spanned across more than a dozen states and franchisees. While we're not reporting on Fuzzy's financial results quite yet, I'd like to share a few highlights about Fuzzy's from the quarter. First, One of the most compelling reasons for acquiring Fuzzy's is that we believed it would appeal to our existing franchisees and that their interest would accelerate development. To that end, last month, the Fuzzy's team executed a 20 restaurant development deal with one of our largest IHOP franchisees. In addition, one of our Fuzzy's franchisees purchased an existing Applebee's portfolio. Since our acquisition in December, the Fuzzy's pipeline continues to grow, fueled by both our existing franchisees and the recruitment of new developers. Second, we continue to be impressed by the team's marketing and menu innovation prowess. For example, Fuzzy's Cinco de Mayo celebration, an important holiday for the brand, posted a 19% increase in year-over-year sales. And we're very pleased with the progress Fuzzy's has achieved in seamlessly integrating into the Dyn system. And finally, moving on to our international business, we continue to focus on opportunities in our core international markets, Puerto Rico and the Caribbean, Latin America, the Middle East, and Canada. During the quarter, we signed a multi-unit IHOP development deal in Central America. Last quarter, we shared that we opened our first-ever dual-branded Applebee's IHOP location in the Middle East, in Dubai, and this model is proving to be a success in its first few months of operation. Since then, we've added three more dual-branded units in the Middle East, and we expect to have approximately six to eight open by the end of the year. We're proving that dual-branded restaurants present compelling benefits, like having a shared kitchen that allows for more efficient staffing, and most importantly, consistent sales across all four day parts due to the complementary business periods of the two brands. We're also making progress with our ghost kitchen development plans. Ghost Kitchens are an efficient, innovative, and low-capital way for our brands and licensed partners to enter new markets. We expect to open approximately 30 new distribution points by end of year, bringing our global Ghost Kitchen total to over 80, and we've recently signed agreements to bring our brands to new markets, including Spain, Colombia, and Japan, which we expect all to be active by year-end. To wrap up, while we saw a somewhat more hesitant guess during the quarter, our brands and our asset-light model proved to be resilient. We're encouraged by the progress we've made over the last three years, and we're ready to adapt to the changing climate with new menus, updated technology, clever and compelling marketing, and new sources of revenue. And so now we'll turn it over to Vance.

Thank you, John. As you have all just heard, we had a mixed quarter in terms of comp sales. But despite this, our restaurants are generating consistent average weekly sales volume above our pre-pandemic levels. On the top line, consolidated total revenues, excluding the re-franchised Applebee's restaurants, increased to over $206 million in Q2 versus $198 million in the prior year. Our total revenues reflected strong franchise revenues which grew 5.7% to $177.9 million compared to $168.3 million for the same quarter of 2022. The improvement was due to comp sales growth at IHOP and the inclusion of Fuzzy's Taco Shop results. If we exclude advertising revenues, franchise revenues actually increase 8.3%. Rental segment revenues for the second quarter of 2023 improved by 1.3% to $29.4 million. compared to $29.1 million for the same quarter of 2022. The rental segment margin remained flat. Our company restaurant operations sales were approximately $.5 million for the second quarter, compared to $39.5 million for the same period of last year. This decrease was mainly due to the re-franchising of our Applebee's company operated restaurants in October of 2022, offset by contributions from three Fuzzy's company-operated restaurants, two of which we also refranchised during the quarter. G&A expenses increased nearly 9% to $47.9 million in Q2 of 2023, up from $44.1 million in the same period last year, mostly due to one-time costs associated with IHOP's FLIP initiative. Excluding IHOP flips cost of $3.3 million, G&A was consistent with the prior year period. Adjusted EBITDA for Q2 of 2023 increased to $67.3 million from $66.1 million in Q2 of 2022, which also was consistent with the prior year period. Adjusted diluted EPS for the second quarter of 2023 was $1.82, compared to adjusted diluted EPS of $1.65 for the same period of 2022. Turning to the statement of cash flows, we had adjusted free cash flow of $24 million for the first half of 2023 compared to $23 million for the same period of last year. Cash provided by operations for the first half of 2023 was $43 million, compared to cash provided from operations of roughly $30 million for the same period of 2022. The variance in operations cash flow was primarily due to a favorable change in working capital resulting from changes to bonus payments and the timing of disbursements. CapEx for the first half of 2023 was $23 million compared to nearly $13 million for the same period of 2022. We finished the second quarter with total unrestricted cash of $98 million. compared with unrestricted cash of $182 million at the end of the first quarter, as we utilize our balance sheet to lower our outstanding debt balance with the issuance of our $500 million 2023 A-2 securitization. Additionally, we continue to return capital to equity and bond investors through dividends, and share repurchases, as well as debt pay down. Altogether, we returned over $180 million of capital back to equity and bond investors in the first half of 2023. This demonstrates Stein's prudent capital allocation strategy with high cash flow generation ability. Turning to Applebee's performance, Q2 was a more volatile quarter in terms of comp sales, as we compared against strong pent-up demand after Omicron in Q1 of 2022. However, as John mentioned earlier, Applebee's sales results have remained steady, and our average weekly sales were above pre-pandemic levels at over $54,000. including over $12,000 from off-premise. That's roughly 23% of total sales, of which 11% is from to-go and 12% is from delivery. IHOP sales results were also consistent throughout the quarter. Average weekly sales were roughly $39,000, around 6% above 2019 levels. including over $8,000 from off-premise sales. That's over 20% of total sales, of which 7% is from to-go and 13% is from delivery. Along with the sales results, our franchisees are reporting that the labor situation has improved as workers return to the restaurants and labor shortages are reduced. Continued improvement is expected by our franchisees, and this gives us confidence in the overall improvement of their operating conditions. Franchisees should also see benefits to their food costs. The second half of 2023 is expected to turn deflationary for both brands. Applebee's commodity basket is estimated to be over 1.5% cheaper versus last year. And IHOP's basket is expected to be over 3% cheaper in cost year over year. With the overall commodity outlook turning favorable for both brands, Our supply chain co-op is now expecting a full year commodity outlook in the flat to low single digits range, further reduced from a low to mid single digit range previously expected. Along with these macro level improvements, our system is working on other ways to drive productivity and profitability for our franchisees, as mentioned by John earlier. These initiatives are not limited to better pricing, but include the potential to reduce waste, improve packaging, and help our system optimize labor. We're confident in our ability to deliver on our long-term priorities, but a still challenge backdrop will continue to impact our operations in the near term, and has led us to make an adjustment in Applebee's development guidance for 2023, As John mentioned earlier, we've taken a closer look at underperforming Applebee's restaurants as the new Applebee's development and leadership team continues to refine its prototype and work on relocating the remaining restaurants impacted by local market changes. As results, we're now expecting 25 to 35 net fewer Applebee's locations in 2023, down from 10 to 20 net fewer locations previously expected. The rest of our guidance stays unchanged. We remain focused on driving and supporting long-term growth in our franchise community while optimizing our balance sheet and returning capital to our shareholders. So now I'll hand the call back to John for some closing remarks before we open it up for Q&A. John.