Dine Brands Global, Inc.

Good day. Thank you for standing by. Welcome to the DynBrands Global Third Quarter 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'll need to press star 1-1 on your telephone. You'll then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today. Please go ahead.

Good morning, and welcome to Dyn Brands Global's third 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 Dine Brand's Investor Relations website. For calendar planning purposes, we are tentatively scheduled to release our Q4 2023 earnings before the market opened on February 28, 2024, and to host a conference call that morning to discuss the results. With that, it is my pleasure to turn the call over to Dine Brand's CEO, John Payton.

Thanks, Brett, and good morning, everyone. Thanks for joining us. Today, we'll provide updates on DIME's Q3 results and how we're advancing our strategic growth agenda, or as we call it, our recipe for growth. Vance will then provide a detailed financial update, including an update to our full-year guidance metrics. And following those comments, Tony and Jay will join us for Q&A. To start, I'll share some thoughts on what we're seeing with respect to guest behavior and the consumer mindset. During the quarter, we noticed that guests are limiting their discretionary spending and have become more selective with where they choose to spend their money. Despite this, we believe that eating out continues to be an occasion our guests value across our brands. We're seeing our guests maintain spend in family and casual dining brands while tightening their wallets on quick service brands. We're also seeing guest traffic on weekends and key holidays outperform the competition. further indicating that guests prioritize a full-service experience, even if it means they'll have to skip out on their next quick-service dining occasion. At the same time, we believe that decreased personal budgets are leading guests to ask, where should we go to eat less, and should we just cook at home more? This means we're not only competing with other restaurant brands, but also with home-cooked meals. In general, we see guests prioritizing dining in and enjoying a full restaurant experience, which aligns with Dines' core strengths of providing abundant value and exceptional experiences, qualities deeply ingrained in the DNA of each of our brands. This is particularly important during the upcoming holiday season when restaurant visits increase. So now, turning to our results. Our third quarter results highlight the resilience of Dines' franchise model. Despite lapping strong comps, and an increasingly competitive landscape, we posted solid EBITDA results. First, Q3 revenue of approximately $203 million versus $230 million in the prior year. The difference is largely a result of the refranchising of 69 company-owned restaurants in October of last year to a franchisee. While company-owned revenues are now zero because of the refranchising, we benefit from the consistency of royalty income combined with reduced operations-related expenses. Second adjusted EBITDA of $60.6 million compared to $63.6 million in Q3 of 2022. The difference, again, is due to the re-franchising of the company-owned restaurants. IHOP posted its 10th consecutive quarter of comp sales growth, up 2% year-over-year, and outperformed the family dining segment on sales for 8 out of the 13 weeks of the quarter. Average Q3 weekly sales for IHOP were $37,800, exceeding pre-pandemic highs. And Applebee's same-store sales declined 2.4%. However, average Q3 weekly sales for Applebee's were over $52,000, which also surpassed pre-pandemic highs. Throughout the quarter, we continued to focus on initiatives to drive growth and efficiency. First, we leveraged investments in technology, marketing, and training to improve both guest experiences and loyalty programs. Second, we introduced menu innovations and supported marketing initiatives to further engage our guests and better understand what they're looking for in our brands. This has been a huge area of focus with activity across both IHOP and Applebee's as we advance culinary innovation and the opportunities to lean into abundant value. And third, we remain highly focused on new development initiatives, and we're driving ahead with plans in this area to support unit growth over time. These three areas make up our recipe for growth. Now, let's review the quarter highlights for each brand, starting with Applebee's. As I mentioned at the start of the call, Applebee's comp sales were down 2.4%. However, Applebee's continued to maintain sales volumes by executing promotional tactics such as all-you-can-eat wings, to increase demand throughout the quarter while still looking to advance its plans to drive traffic over the long term. Applebee's guests want compelling value and a great dining experience at an affordable price. Our strategy leverages fan-favorite menu items, new culinary options, and promotional offerings that appeal to both new and existing guests. Although there's been a decline in guest traffic, our check levels have shown an increase compared to 2022. In Q3, Applebee's offered several promotions to drive profitable traffic. For example, during our seven-week All-You-Can-Eat Wings program, we sold 7.1 million pounds of boneless wings. That's about 114 million individual wings. The campaign performed better than our internal expectations, driving incremental sales, tickets, and franchisee margin dollars, and introducing new guests, particularly Gen Z, to our brand. In October, we brought back the iconic Dollarita for the first time since 2020. And while we'll wait to speak to the full results of this month-long promotion on our Q4 earnings call, we're pleased with the preliminary results. On the technology side, Applebee's is far along in its effort to redesign and relaunch its website and app, details of which will be revealed in the coming weeks. Two months ago, we launched Applebee's Guest Experience Program using Qualtrics' experience management platform to gather valuable feedback from our guests. We're pleased guest participation surpassed industry benchmarks and our own expectations, and this positive engagement highlights our guests' strong connection with the brand and provides us with valuable insights to meet and exceed their expectations. During the last five months, Applebee's culinary team has tested more than 200 new menu concepts, ranging from different cuisines to innovation of current menu items. We also have new beverage concepts rolling out in 2024, which are also generating positive anticipation throughout the franchise system. During the quarter, Tony strengthened his leadership team by hiring two industry veterans, a new vice president of culinary who brings a contemporary and innovative mindset to our menu, and a new leader of development focused on conversions, developing our new prototype, and our remodel program. Menu innovation and development are key focus areas for the brand, and we look forward to providing progress on these initiatives soon. Now on to IHOP. The quarter's comp sales growth was fueled by the introduction of the brand's new menu combined with compelling offers. The data we're gathering from our loyalty program enables us to methodically plan promotions and menu offers that are most likely to appeal to our guests. As a result, we continue to see the brand gaining traction amongst a younger demographic. During the quarter, we focused on breakfast equities that span day parts, balancing both sweet and savory options to meet all cravings. First, in early July, we introduced pancake tacos, which came in sweet and savory flavors for a limited time with three pancake tacos for $6. We sold nearly 2 million pancake tacos in just four weeks, and they were a hit in the restaurants and on social media. Overall, the campaign had over 1 billion media impressions. At the end of August, we introduced biscuits with flavors like fresh strawberries and cream and bacon, egg, and cheese. Our biscuits premiered with a special introductory offer of breakfast biscuits with a side for $7 before becoming part of our core menu in September. During the quarter, we also expanded our waffle category. Our original chicken and waffles is one of our top-selling menu items for dine-in and to-go, and after receiving guest feedback asking for more variety, we expanded to add new flavors, including our new Nashville hot chicken and waffles. And finally, As we discussed on our Q2 call, we launched one of our most comprehensive menu updates in Q2, and the new and expanded categories of benedicts and crepes are performing well. IHOP has always been known for its family-oriented menu and guest experience. So to celebrate the brand's 65th anniversary, IHOP brought back its Kids Eat Free promotion during the month of August, and it's all-you-can-eat pancakes for $5, both helping IHOP outperform the Black Box Family Dining Index and comp sales check, and traffic during the promotion. The brand continues to build its consumer packaged goods program. In partnership with Kraft Heinz, we're selling our 100% Arabica coffee in approximately 25,000 retail stores. Additionally, in July, we introduced a new IHOP iced latte with cold foam at Walmart with planned expansion to other retailers in Q1. Shifting to technology, we're on track for the new point-of-sale system to be completed by early 2024, and the tablet rollout is progressing accordingly. Our loyalty program, the International Bank of Pancakes, is steadily growing, now with 7 million members. More information will be provided next quarter. Quickly touching on fuzzies. We added Fuzzy's to our existing portfolio because it's a young, compelling brand with a potential for substantial growth over the next decade by capitalizing on the scale and resources of Dine. In September, I attended the Fuzzy's annual franchisee conference called Family Reunion. I was blown away by the terrific energy from the franchisees, who all seemed energized by the brand and its plan for new menu offerings, future restaurant designs, and marketing innovation. One of the biggest moments from the franchisee conference was the unveiling of Fuzzy's new Baja strategy, a comprehensive plan and state of mind that takes the brand back to its roots, embracing the Baja lifestyle and cuisine. It includes new restaurant design elements, a menu refresh, and enhancements to the overall guest experience. Testing will begin in Q4 with a full national rollout planned in Q1 of 2024. On the international side of the business, We opened 16 units so far this year. Our main focus remains on opportunities in our core international markets of Puerto Rico and the Caribbean, Latin America, the Middle East, and Canada. The international division delivered strong comp sales growth and is the incubator for our dual-branded IHOP Applebee's restaurants, of which there are now six open in the Middle East and Canada. Before I turn it over to Vance, I want to emphasize that our brand teams and franchisees are expertly navigating a still challenging economic environment through smart, compelling marketing, engaging promotions, and best-in-class service. Their commitment to upholding the highest standards is central to our recipe for growth, and it will continue to steer us forward. And with that, I'll turn it over to Vance.