Q1 2020 Earnings Call
Good morning, and welcome to time Brands' fourth quarter Conference call I'm joined by Richard Dol Chairman of the Board, Steve Joyce CEO Tom.
Oh Gee job.
John to Wenski President about would be.
Before I turn the call over to Richard for opening remarks, Please remember our safe Harbor regarding forward looking information.
During the call management May discuss information that is forward looking involve known and unknown risks uncertainties and other factors, which my call. It the actual results to be different than those expressed.
Right.
Please evaluate the forward looking information in the context of peace factor, which are detailed in today's press release and 10-Q filed.
The forward looking statements are as of today and assumes no obligation to update supplement you statement.
We may also refer a certain non-GAAP financial measure, which are described in our press release and also available on thoughts website with that I'll turn the call have a terrific.
Thank you Karen good morning.
I Hope you Andy.
Oh no.
Let's.
Take a moment this fall.
No.
Clearly the primary focus company the management and the board is a crisis brought on by the Corona virus send them as.
Well being of our guests employees franchisees and investors is of utmost importance and concern.
Wish to assure you that the board and management are working ever so closely.
Sure that everyone's expertise is brought to this war.
The board is constantly abreast of the ever changing situation and is participating in all the major decision making.
No you read our earnings announcement.
We have made some very tough decisions and the board is completely supportive of these actions.
We appreciate in respect to strike can do attitude of our team members, our franchisees and our vendors knowing that together we will succeed.
I'm very proud to be a part of this company and his team.
Thank them and Olivia for your support.
Now I'll turn the call over to Steve.
Thank you Richard Good morning, Thank you for joining us today.
Before we begin I would like to say that I hope everyone participating on the call a safe and doing well and your family.
These are truly unprecedented times the country in our industry as we know what has changed drastically.
The physical distancing measures and government mandates requiring restaurants to close dieters will only allowing off premise to go and delivery has had a significant impact on our industry as a whole.
During the unceasing challenges, we faced this past month I.
I have been tremendously proud of the resiliency focus and commitment of our teams our franchisees and the thousands of restaurant team members across the country in the communities in which we serve.
Each where stepped up to work tirelessly on behalf of our company and brands. During these trying times.
Clearly seen the best of our people.
Our board of directors. He is actively engaged with me and the management team and is confident that we have the leadership resources and agility to manage through these various scenarios, where the steady hand, and a clear path.
Our response to the impact of the Corona virus is ongoing.
Cross functional crisis team has been fully engaged with the authorities at all levels to obtain timely information, which has enabled us to maintain business continuity and make informed.
Personal decisions related to operations across the organization as well as our company operated restaurants.
Also the safety of our team members and guess remains our number one priority.
We have been monitoring the virus around the clock, maybe making up to the minute decisions on how best to stay safe and our work and in our restaurants, while also keeping critical operations running.
To our franchisees I'm pleased to say that despite mandatory dining restrictions and other restrictions that mainly limited business to off premise only.
Approximately 82% for domestic restaurants remained open for to go and delivery services at the end of the first quarter.
In fact.
Those brands have experienced meaningful growth across these sales channels, particularly in delivery.
After transitioning to the on premise only model, we have seen or domestic system wide off premise sales grow by 71% between the weekend at March 1st and the weekend at April 26.
[noise] growing our on premise business at both Applebee's and IHOP has been part of our long term growth plans over the last three years as a result, our franchisees were able to pivot to way to go and delivery only model with minimal operational disruptions.
Technology and innovation a play important roles in our off premise strategy.
While before the pandemic, we launched several digital initiatives across both brands, including building, new and enhanced ordering capabilities to make it easier forgets to order and to support the expansion of our catering business.
[noise] I hopped off premise platform was already strong before cobot 19, but with increased demand for takeout, we introduce curbside pickup at <unk>.
Which is completely new for the brand.
Well continue to leverage technology that we've already developed with guests safety in mine.
When dining service resumes and our restaurants more rapidly move to offer gets the option to use their personal device to order pad.
I'm pleased to say that the performance of our off premise business has enabled many franchisees to cover their variable costs and this reduced capacity.
Tom will provide an overview of franchisee economic shortly.
Both John and Jay will also provide more details on their respective brands a little later.
To help minimize the impact to franchisees significantly affected by the mandated restrictions we have offered financial support by deferring royalty advertising and other fees lease payments and remodel obligations on a case by case basis.
Please remember that these situations are very fluid. So that we will continue to work closely with our franchisees on support measures and operational challenges.
Additionally, we believe that the new established programs under the cares Act I provided substantial liquidity support for those franchisees, who were able to access the funding.
The crisis has created some uncertainties and just as other brands and businesses work to manage their operations, we must do the same.
To help get through this period, we had to make some incredibly hard decisions to reduce our operating costs and this included following some of our support team members.
We came to this decision as a last only resort after several other efforts to reduce cost and cut non employee expenses over the past several weeks, we have de prioritize discretionary spending have implemented cost savings, including a freeze on new hires and substantial reductions in contractors we.
I believe these tough decisions will help us get through these difficult times and emerge from this crisis in a positive position to bring back our furlough team members as conditions improve.
We remain optimistic that dine in our two strong brands will be able to safely navigate the road ahead and look for him to welcoming our guess back into our restaurants.
With that I'm, not going to turn the call it or Tom to provide an overview of first quarter results Tom.
Thank you Steve Good morning, everyone and thank you for participating today I hope that you're all doing well.
Our industry is certainly an uncharted territory I'll begin by discussing how we responded to depend on that and the steps taken to reinforce our financial flexibility.
Last month, we drew down a total of $220 million from our revolving financing facility or variable funding notes, which was issued as part of the securitization we completed in 2019.
Well, we did have an immediate need for additional cash. This action was taken as a precautionary measure given a given the uncertainty caused by cobot 19.
In doing so we shored up our balance sheet at the end of the first quarter 2020, we had $395 million attach with 345 million being unrestricted.
I'd like to highlight that this includes cash held related the IOP advertising funds and the company's gift card programs.
Given our solid cash position minimal capex requirements and asset light business model. We believe we have strong liquidity to manage our brands and operations through the crisis.
Regarding our quarterly cash needs the company estimates as cash general and administrative expenses to be approximately $35 million per quarter.
The company has 16.4 million of quarterly interest payments on a securitization and the Vietnam DFN draw.
I just mentioned.
These projections exclude gross lease exposure of approximately $1.3 million per quarter on franchise restaurants that are currently closed and being monitored.
Our cash DNA forecast represent a one third reduction controllable costs, it's time for the remainder of the year.
In addition, we have reduced for capital expenditures by one half to approximately $6 million for the remainder of the year.
Covering our securitization, we're currently paying interest only and the quarterly principal payments would only be mandatory our leverage ratio goes above five in a quarter times.
These quarterly payments would be 3.25 million, if we exceeded that leverage as of March 31st the leverage ratio was 4.79 times.
I want to highlight the debt service ratio, which was 3.93 times as of March 31st.
Now, let's turn to assistance for franchisees.
The dine level, we've implemented several programs to help ensure the stability of our franchisees both brands, we're evaluating as Steve mentioned on a case by case, but basis.
Quest for royalty in advertising payment assistance, which includes the boroughs of near term payments.
And specifically for IHOP franchisees, we reviewed request for rent and financing deferrals.
And engage with landlords on behalf of some franchisees regarding rent concessions.
Switching gears briefly the franchise economics, our analysis has shown that unit economics under restricted off premise only conditions were generally consistent across both brands. Many franchisees have been able to substantially reduce costs and cover variable costs and sometimes rent with the current sales levels.
Under the off premise only model, which is comprised of two Doe and delivery service.
This is why we've been very pleased with the aggregate number of open restaurants, which is a testament to the quality of our franchise operators, we have and there are impressive ability to tackle the severe conditions.
As Steve mentioned at the end of the first quarter, 82% of or domestic system across both brands. We're open for business. The vast majority of which offered off premise service only due to the state and local government restrictions on dining room service as of April 27, 84% of our domestic system was open.
This increase in openings is due to the meaningful sequential growth in both takeout and delivery sales at Applebee's and IHOP in April compared to the first quarter 2020.
John and Jay will provide more details on or off premise operations.
Now I'll briefly recap our first quarter financial results.
Adjusted EPS for the first quarter 2020, $1.45 cents compared to $1.90 cents for the first quarter of last year. The decline was due to the lower gross profit as a result, the significant decrease in guest traffic as these state and local government.
Restrictions were implemented on dine in service in mandated stay at home or orders.
Regarding our DNA, we continued to drive year over year improvement in DNA for the first quarter 2019, DNA was 37.5 million compared to 42.5 million for the same period of 2019.
The decrease was mainly due to lower compensation expenses the decline in cost of research in professional services.
Turning to our tax rate, our GAAP effective tax rate was 23.2% for the first quarter 2020, which was essentially flat to the 23.1% for the same period 2019.
And with respect to our cash flows for the first quarter 2020 cash from operations increased to 29.6 million from 20.9 million for the first quarter last year. We're very pleased with the fact that despite the challenging start to this crisis in March or adjusted free cash flow was relatively stable.
At 27.5 million for the first quarter 2020, compared to the same period of 2019.
Adjusted EBITDA for the first quarter 2020 was 61.7 million compared to 74.7 million last year.
Regarding capital allocation.
As disclosed last month.
There's uncertainty caused by Copel 19, the need to take precautionary measures. The company is terminated all outstanding orders for repurchases of common stock in the open market for the foreseeable future.
Our board of Directors has also suspended our cash dividends, we will read re evaluate our capital allocation strategy as industry conditions improve the normal restaurant operations resumed.
At this time, we're not updating our guidance beyond my previous comments related to our expected expenses.
Well, we anticipate that we will revisit this as restrictions hardwood.
With that I'll now turn call over to John.
Thanks, Tom and Hello, everyone. My objective here today is to share as much detail as possible as to the current state of the Applebee's business.
For context, let's start with Q1 performance before the crisis emerge.
As outlined in the release Applebee's had tremendous momentum prior to the various government restrictions.
Placed upon restaurants comp sales results to the week getting March eight were positive 3.2% rolling a positive 1.4% from the same timeframe year ago.
In total Applebee's posted 10 consecutive weeks positive comp sales to start the year and meaningfully outperformed the casual dining category before the downturn began the week ending March 15th.
This downturn along with local dining restrictions led franchisees to quickly shift to the off premise business model, we have today and given the uncertainty at the time franchisees temporarily closed 251 of our 1600 57 domestic restaurants in mid March now.
The good news here is the number of temporarily closed restaurants is getting smaller with each passing date as franchisees reopened they're off premise operations at present, approximately a 175 domestic locations remained closed and we expect that number to become even smaller over the next 10 days.
Yes.
In total we have about 1400 82, applebee's restaurants opened for off premise business and we anticipate all of these restaurants as well as most of our temporarily closed restaurants to reopen their dining rooms. Once once the local municipalities provide the green light.
Now I'd like to share comp sales detail from the point in time the crisis emerged screw this past week.
After being up 3.2% year to date through March eight we progressed from minus 15.8%. The weakening March 15 to minus 76.0% the weakening March 22nd to minus 80.6%. The weekend in March 29, with this representing our lowest power.
Joint of demand since the crisis began.
April comp sales were minus 72.6%.
Nice minus 76.2% weakening April 5th and minus 76.5% the weekend in April well, but it's important to note here that 838 restaurants were closed on Easter Sunday, making this a very tough week to read our comp sales been improved to minus 64.9% the.
Weekend in April 19, and minus 64.4% the weekend in April 26, representing our best performance yet as I believe we also benefited from stimulus checks are writing across the country over the same timeframe.
For additional geographic context system sales ranged from minus 70 to minus 80% in California, and Texas to minus 52 minus 60% in the Midwest and northeast over the past two weeks. So in total Applebee's is currently capturing approximately 35% of.
Last years average restaurant volume again, depending upon the geography.
From an absolute dollar perspective, Applebee's average weekly off premise sales have now almost tripled from about $6500 per restaurant at the start of the Q1, two approximately $17700. This past week keeping in mind, our average restaurant volume of approximately two point.
$4 million at the end of 2019.
Interestingly car side to go has moved from 70% of mix in mid March to 76% currently with delivery representing the balance at 24% of mix.
Well in this off premise mode, all restaurants are operating.
Obviously with a very small team reduced hours and a limited core menu to ensure operational excellence I'm also pleased that our franchise partners are reporting that they have successfully retained the restaurant management teams, which will help us significantly with reopening of dining rooms.
Now.
I'd like to shift gears in frame our actions from a marketing perspective.
Effective March 18th we chose to discontinue all applebee's National media spending and Weve remained on hiatus throughout the crisis. The only modest activity currently taking place is through our own postings on Twitter, Facebook and Instagram as well as our database activation and of course.
Local restaurants signage to make our guests where that were indeed open for takeout and delivery.
In addition, we successfully canceled 100% of our Q2 media commitments, although we certainly have access to media inventory once we decide to reintroduce national marketing.
As I review the past several weeks, it's clear to me that our guests are favoring car side to go over third party delivery in part because they trust the applebee's brand. They can pick it up themselves and they don't have to worry about additional third party handling plus after a bit of prolong the cabin fever, I believe our guests really enjoyed getting out of there.
Homes and hopping in their cars for a little indulgent escape to the neighborhood Applebee's, we're seeing this across the country. I'm also pleased to report that our first dining room Reopenings occurred this week.
Monday, and Tuesday in Georgia, and Tennessee in accordance with local regulations and strict adherence to safety sanitation and social distancing parameters as well as our new service protocols as of this call. We're applying best practice learning before we begin a smart measured and seek.
Against expansion in Texas, Oklahoma.
Ian Utah, Alaska, North Dakota, Montana, Missouri, and as of this morning. It appears in Nebraska, we'll be opening up as well with other geographies to be determined.
It's certainly conceivable we have more than 200 full service restaurants open next week, including dining rooms, with the Cascade of additional restaurants to follow contingent of course upon guidance from state and local governments.
My expectation that are off premise business will remain robust and continue to play a critically important role in the lives of our guests moving forward I should also note that our supply chain remains in very good shade and is poised to satisfy demand throughout this growing cascade of openings.
Quick note on franchisee engagement in this environment, we initiated interactive Townhall calls beginning in mid March for all franchisee leadership as well as the entire applebee's team. This cascade of communication in connection has proven invaluable as our primary means of real time engagement strategy in line.
In total we had held 17 of these calls over the past six weeks finally, I'd like to take a moment here to thank our franchise partners as well as our very talented applebee's and dine teams for the remarkable resilience perseverance and certainly entrepreneurial spirit throughout this crisis.
It's my personal experience that these leaders are often at the best in tough times.
We have become even more unified in determined as a result of this adversity and I'm confident we'll come out stronger than ever and sooner than most folks expect with that I'll turn it to Jane.
Thank you John Good morning, everyone Hope you, all doing well and staying safe during these tough times.
Hi, its first quarter performance was significantly impacted by the effects of cobot 19, and mandated restrictions on restaurant operations as other restaurant companies has also disclosed.
It's comp sales declined 14.7% in the first quarter is traffic fell sharply in March due in part to restrictions on dine in service statewide mandates for our guests to stay home and temporary restaurant closures.
Since the beginning of the second quarter, we started to see consistent improvement in April's weekly sales.
For the weakening April 5th sales were down 81.5%.
The weakening April 26 sales were down 75.4% improvement of 600 basis points.
As the restrictions on dine in service and statewide mandates were implemented we were able to pivot quickly I want to recognize and thank the countless team members franchisees and the restaurant teams, who continue to work tirelessly to adapt to this ever changing landscape.
Brand remain nimble and ship to turn off premise only model over just a few weeks based on state by state implementations of stay at home protocols.
Additionally to meets convenience needs of our guests in the support safe distancing practices and ultimately do our part to help flatten the curve we rapidly develop developed curbside pickup in over a thousand domestic restaurants.
This new option for gas is performing very well and we're pleased with the results.
Curbside pickup doubled to 6.3% as a percentage of total off premise sales for the weekend in April 5th compared to the prior we continue to see the progressive growth increasing to 7.2% of off from the sales the week of April 12.
And 8% for the week ending April 19th.
Most of our domestic restaurants remain open and operate under this off premise only model and doing so we're able to help the communities in which we serve by providing gas would that brief despite from being in doors to come pick up a great meal or having the convenience of that delivery rights of the door.
In fact delivery sales for the first quarter of 2020 increased 57%.
In the first quarter of 2019, and now account for 39% of total off premise sales.
The restrictions on I mean occasions were partially offset by the continued healthy growth in our off premise business in the first quarter, which is driven by an even mix of traffic and check.
Furnace accounted for 13% of sales in Q1, an increase of approximately 200 basis points compared to the fourth quarter 2019.
We may have fundamentally lease that consumer awareness of not just start to go and delivery capabilities, but also how portable our food is as the gas are becoming increasingly familiar with our off premise platform.
Approximately 80% of our domestic restaurants remain open at the ended the quarter primarily for off from a service only with few exceptions.
As of this week approximately 79% our domestic restaurants remain open.
Looking at the road ahead, our goal is to return to a sense normalcy and to resume full service operations when first and foremost in its safe to do so.
At the onset of the pandemic the management team acted swiftly and we remain fully engage working with around the clock with our dine brands Cross functional team and Iops internal teams our franchise leadership Council, our franchisees and our supplier partners as we've implemented a crisis plans.
Our immediate actions remain focused on stabilizing the business. This is 80% operations focused with two main goals, keeping our team and guess safe and making restaurants easier more cost effective to run under these unique conditions.
In parallel these immediate operational stabilization efforts. We're also planning on Relaunching the brands when current conditions subside.
From an operation standpoint, we understand the restaurant industry will be impacted significantly coming out of this and the guest experience will be difference.
No we will not be business as usual pre cobot 19 going forward more than value will be top of mind with our gas and we're taking this into consideration when our restaurants, we open.
We believe that personal safety is now up there with value and Craveability.
And I hopped this means going beyond standard operating procedures and mandates to include more over clues of cleanliness.
And our view guests will have a higher level of scrutiny than ever before restaurants at all for the most reinsurance well we'll win when they reopen.
Leaves us say that we have alignment with Iops franchisees on wanted open for business strategy as we want to safely drive traffic back into our restaurants as soon as we can.
Operational actions that we've implemented includes training and current virus protocol to ensure proactive and reacted measures. If a team members suspected of being exposed or confirmed the code 19th.
Providing team members with CDC recommended guidelines for financial coverings, and implementation of social distancing standards that follow CDC recommended guidelines.
With nearly 1400 restaurants were open.
More than 14 or restaurants were up in primarily for to go in delivery and as a means to serve our guests. We developed a comprehensive guide for franchisees to use to prepare the restaurants to welcome guest star to dine at their favorite I have locations as the state start to shift the state how mandates.
Some of our key relaunch tactics include this development and rollout of curbside pickup to provide a means for guests have significantly less gas exposure with team members were also implementing changes in the dining room, such as not having items on the table until the gas arrive.
These changes are being made with the safety of orgasm team members in mind.
Wrap up.
We're currently face with industry challenges, we have a strategy in place for the path forward. We believe the strength and appeal of I hop will remain intact as guest demand ramps up once again.
I'll turn the call back over to Steve for closing comments Steve.
Thanks, Jay to close.
These are these are difficult times.
Precedent.
I strongly believe though the dines fundamentals remain strong we will continue to execute against our strategy and manage the business with a long term view.
In doing so I have full confidence we will get through this together.
Now we'd be pleased to open the call for any questions you may have operator.
Thank you and ladies and gentlemen, maybe I'll comment or question just press Star then one on your telephone keypad.
Withdraw your question just press the pound or high school.
Please standby, while we compile that you're now roster.
Our first question is from Jake Bartlett with Suntrust. Please go ahead.
Great. Thanks, Thanks for taking the question.
My first one is on.
The health of the franchisees in.
For two parts to that I think it to one of them more in the biggest kind of unknowns that investors are facing is really key concern. So one question is can you give us any insight as to the level of leverage within the franchise system any kind of broad indication would be helpful and in the second part of that question is.
You mentioned that franchisees are generally able to cover their variable costs at these levels, but can you give a including fixed costs at the restaurant level, what what sales level or what what sales decreased from normal is breakeven at the unit level, including variable and fixed costs.
Yes, so obviously.
Leverage levels are shifting.
However, having said that.
What I've asked Tom to do is kind of give you some insight into four wall profitability and how we look at that at various revenue level. So Tom you want to walk him through that normally across both brands Jake.
Our restaurants do about six to 7000 sales per day again, theres a lot of variability, but that tends to be kind of the average between the between the two brands.
So we notice is that an extreme stress level.
Around $700 per day, we noticed in a lot of restaurants will will make it work, it's worthwhile for them to keep the doors open for.
Off premise with the skeleton crew.
But having said that what we're now seeing is more in the neighborhood of two to $3000 of sales per day and would that starts to do is on the lower into that spectrum that starts to cover variable costs and rent at the higher into the spectrum that starts to cover variable costs in more of your fixed costs.
And so that $3000 per day level.
It's about 1.1.
Millions of the.
Per year and.
If you listen to kind of our view on frames are you financial health that is a.
That is a sustenance level that.
On the lower end supports an open restaurant.
Got it but that's really helpful.
Had a question really about the difference between the performance of IHOP and Applebee's.
I have had a.
Fairly robust.
Off premise business is well kind of going going into this split the performance has been on sales have fallen more and then there hasn't been as much of the open increase.
Since the kind of the trough.
Maybe if you can discuss some of the reason for that and whether it's just particularly exposure to breakfast.
Or any anything else that that's going on that we should be aware of.
So I'm going to ask Jay to fill this and obviously pre crisis applebee's.
Started earlier on bringing car side to go back.
Had had had a lift up over where IOP was iops the business, though has been growing rapidly.
And so it has seen really great growth through this crisis, Jay you want to talk a little bit in detail.
Yeah, I think that we've seen great results on growth of this.
Initially patterns very similar to what John saw from US trajectory standpoint, we initially went way down but then immediately started gaining week after week consistently for weeks.
As we.
Implement it protocols and all the restaurants, we rolled out curb curbside without much marketing really just local marketing and email clubs and things like that to get people to know about an as experience. Obviously the word of mouth is starting to happen and people are learning about it.
So we're growing rapidly and we're real pleased with the trajectory I think a couple of things to remember when you compare the two brands Applebee's has a much longer runway of how long they've been doing off premise and car side for a decade practically and just the last two or three years, when we really started ramping up on the iops.
Side, So I think there's a little bit of an advantage from that and I do think too to your point about breakfast.
We feel that probably is a difference in what the what the guests are using the meals for their they're not working there's there at offices are staying at home so sometimes that stopping on the way to work to get breakfast et cetera that Neil has now gone. It's a very easy meal for parents that are busy working at home watch.
And the kids to give them cereal or.
Mr Pastries et cetera, so it's an easy meal to replace yourself, if you're doing your own cooking now so that probably has a little bit impact.
Home meal replacement, if you recall, if you're only going to order out one time of day.
The places that are doing dinner replacements are look like they're winning more than some of the other so I think there's a little bit of all of that right. Now that's that's probably caused the difference between the two brands.
Great I appreciate it.
Thank you end up having lined our ladies and gentlemen.
Question Just press Star then one.
Our next question is from Nick Setyan with Wedbush.
Thank you and thank you for all the detail you guys provided today.
One clarification, but the comp calculation does that include the closures.
And then the question is.
I'll be stores opened up both IHOP and Applebee's, how are you thinking about.
In dining sort of incremental margins do we see.
Maybe cash flows turned a little bit more negative as you step up again before to sales come up come back.
What percentage of sales.
Given the capacity constraints early on.
Can we think about sort of breakeven within the dining room as opposed to sort of the difference between radical them off premise only model.
Are we seeing.
These kind of higher labor, given sort of the benefits versus wage rates that.
I wasn't talking about in the background Pete could you address some of those things that would that would be very much appreciate it. Thank you.
Yes, So let me lead off and then why don't you talk a little bit about.
Where we think profitability goes so.
So so first of all our approach is pretty uniform across both brands and across.
Not only the restaurants, we operate but once our franchisees operate.
So the way that we're seeing the path forward is one in which we're reopening restaurants and literally.
We open we've got restaurants opened for two days.
And so but.
The interesting thing people came in and eight in the restaurant that drinks and that drinks and.
Hey, you know pancakes and so.
So, we're obviously not going to share numbers, because they would mean anything at this point.
But I can tell you said team members were happy to be back there was a lot of people that were that we're glad to be back at work I think.
And so I think over time the way, we're going to do it and we're sure the French as into the same thing is they are going to add staff. So there's a certain number that you need to open a restaurant. So that is that there's a there's a limited fixed but remember we're going with a lot of managers because we kept a lot of the managers around so.
They'll be doing what normally would be considered some hourly work and so there will be a combination that and the goal is to add staff back as you have the.
Revenues to supported.
And so what we don't know because we've just started is how many people are interested in common into restaurants at this point, where where it's allowed by the municipality and what that number will look like clearly our hope is that we remain at elevated off premise levels and that begins to be added to it.
For mentally.
With in restaurant sales and that those in restaurant sales are adding profitability to the overall.
The overall components so that.
We're going from a point, where on you know and I think for most of our franchisees. This is true and for US. It's true is that what we were covering fixed costs and we were covering.
Recovered variable costs overcoming covering some of our fixed costs at levels were at as we add back restaurant sales. We believe we'll continue to cover variable costs, but that also begin covering more of the fixed costs and Tom laid out sort of the levels of which we think you.
Probably start covering your lease.
And so what we what we don't have a lot of villas visibility into and we're going to try to stay to what we know because I think speculation at this point is not very valuable.
And so well we'll learn over the next month is at this point in the crisis. How many people are comfortable coming to the restaurant, we are going above and beyond to demonstrate visibly add in reality safety in the restaurants. So we have made a number of changes.
That you would expect us to make so gloves and masses everywhere nothing on the table everything comes from the kitchen.
He is white down in between stage spacing in the restaurants, all the things that people were mentioning earlier, so I think I think.
I think what we'll learn over the next month is okay. At this point in the in in the crisis. There's a certain number of the population that wants to come out neat restaurants in the certain part of the population is want to continue to pick it up and so and then our expectation obviously is that shifts over time.
We do not have any insight into how quickly it shifts and how sentiment changes and how soon we get back to a relatively normalized level in the restaurant.
We are preparing for all of it whether it comes back quickly or whether it comes back a little slower we're going to try to manage our costs and were franchisees are doing the same two to measure really.
Bring back costs come measure it with revenues being generated as a result of the reopening of the bulk of these restaurants and you know.
And so Tom want to talk a little bit about sort of how how we're viewing those incremental sales in the process I will see let me Nick good question on closures.
At the restaurant was closed for the duration of the week then obviously, it's not included in comps but.
No other way to think about it is it restaurant had sales during the week.
During the prior period or this period as is included in the comps. So in this type of.
Changing environment as you had some closures that happen as we're reporting these comments I think it's a little bit more conservative the way we did it within exclude.
Those those restaurants, and so hopefully that answers your question and closures for the second.
Question on an incremental margins I think Steve went through it pretty thoroughly but another way to think about at this point. He made the way. These restaurants are staff currently is a bit had the year on the managers and so that is a lot of your fixed costs. So when you bring that staff.
And again, we're still in the early phases of bringing that staff that staff is for the most part highly variable as as food costs.
In Nick This is John I just.
Very specifically to keep in mind as Steve said two days of data here, but for in Georgia, and Tennessee, we'll call sample sizes, but 60 ish restaurants, all of our dine in business during those two days versus the weekend prior.
Is incremental said differently are off premise business didn't take a hit.
When we opened up or dining rooms, and our team members.
Perhaps surprisingly very enthusiastic about coming back Kevin that hit any issues whatsoever on that front.
So one other thought your question about bringing employees back.
So we are employees were not laid off they were furloughed.
And so in the case, where a lot of these folks they have a lot of our franchisees have long time tenured employees.
And in general, we think lower turnover than than the industry.
And so a lot of these organizations have been around for a long time.
Clearly.
The programs are out there to help people will change some of the employment picture.
And we will will have to see whether or not as business levels build whether or not we have.
Challenges, bringing folks back our expectation is and it's.
But obviously topic conversation, but our expectation is we think we're going to be able to add people back as we need to based on those revenue levels and that.
Theres a significant amount of our folks that we think want to come back to work and so so we'll see how that plays out but.
Actually I think that clearly is something we're monitoring but.
Our senses.
That we will we will overtime gradually build back to two.
The higher obviously, a higher level of reemployment all the folks.
And but I think our general sense is that we will be able to add those folks as we need them based on revenue levels.
Thank you very much.
Thank you.
Next question is from Brian Vaccaro Rep Raymond James.
Hi, Thanks, and good morning, good afternoon.
So I want to grant.
Wanted to just circle back to your earlier comments on daily sales volumes sort of necessary to cover the variable and fixed costs than my phone was glitch and so I apologize, but I think you said the upper end the sort of two to 3000, a day range and my question is does that materially differ between the two brands and I guess I ask it in the context.
The current sales volumes I think some quick back beyond the math would suggest current sales volumes at IHOP or in the low ones at Applebees sorta in the low twos.
And just trying to understand what type of sales improvement you need to see from current levels to stabilize store level EBITDA at the franchise.
Yes, So I was speaking to both brands, Brian and you just kind of keep in mind.
Huge variability when it comes to sales results and so it's.
So what I'm trying to speak to is the average in the system.
We're seeing some good evidence that.
In particular on that will be side.
The folks that are able to get a higher into that range and as you noted on IHOP side, you're starting out with lower sales volumes to starwood anyway. So.
But but we feel pretty good that.
The best indicator of sustainability is an open restaurant and we're trying to encourage and help our franchisees obviously keep as many restaurants opened as possible.
Okay, and I guess switching gears, a little bit the franchisee really.
The company's provided I understand it's fluid dynamic, but could you drill down a little further on on say what percentage of franchisees may have received relief whether it be royalty relief the AD fund or rate relief on the.
Side, and maybe as part of that just to make sure everyone's on the same page Tom could you review any differences and booked revenue versus cash cash collections that occurred in Q1, or what you might expect in the coming months until business conditions normalize.
Yes, let me take the first part of that.
I think I think it's it's fair to say when it's all said and done and we're still working through this with the franchisees bone. It's all said and done most of the franchisees are going to get some level of relief from us.
Through deferral of as Tom mentioned in lot of cases, it would be obviously royalties and AD fund.
But then other fees as well so.
So and I think.
We have looked at a 60 day deferral.
And then a payback period income.
Subsequent to that with a little bit of Grayson, there and so.
We're still working through that with.
Documenting it pulling it all together as a program, but in general I think when it's all said and done most of the franchisees are going to be part of that program and Thats. The assistance, we provided them today and we'll look at as that goes through.
Where franchisees are and then as we've done in the past, we'll work with individual companies to see.
What needs, what if anything needs to be done to help assist them.
Reopening their restaurants, it's interesting when we talk to the franchisees, though and we are doing it daily.
There's a there's a fair amount of we're going to get through this with the franchisees there they're not you're not hearing a lot of gloom and doom from from our from our our core group of folks and they are they are positioning themselves for reopening.
They are preparing to to get back to normalized levels at some point, both employment and revenues and so and there you know there actually looking forward to things kind of coming back and so.
I think theres a lot of obviously uncertainty still remaining as to how long this how long less than whats consumer sentiment about dining at restaurants and.
In a lot of lot of the things that that need to be need to be.
Experienced over the next month or two as we start seeing what patterns emerge, but I think that I think for the most part I think our sense is what.
To put charter pain at home. So I think people are going to want to start venturing out more and how many people feel good about coming out we're doing everything we can so that people view our brands as protecting their safety.
And that so for example, all the serve containers are gone from the tables at IHOP right. So that's coming out an individual containers for the foreseeable future.
So people know that no one's touch anything, but they are touching and so.
Everything coming straight from the kitchen fewer people handling we're hoping to move rapidly to you can even pay on your end device. So you're not pushing other buttons and so theres a lot of things that we're going to do to try to reinforce the fact that we're doing everything we possibly can to make this a safe and great experience and you know as we get the restaurants open.
Good.
We will want to jumpstart the.
Some of the some of the restaurant business by starting to go back into doing some advertising and marketing.
And we'll work through with franchisees how to how to advance spend but then collected back and so.
So we're expecting to be able to sort of begin to.
Well, a new story that opens one that we're that we're obviously doing everything we can protect your safety, but here's a great off for you to come in at the restaurant and so so we're going to continue to work along those lines. Tom you want to Hey, Brian you one more details on the franchise relief program we've offered.
I'm, sorry, what was that some.
One more details on the franchise really program, we offered yeah, and just where there was there any deferral of royalties in the first quarter I mean looking at the financial just thinking about booked versus cash collections and yes, you could walk us through some of the more meaningful yes. So so really it started in March because that's when.
Pat really hit our franchisees.
And so the.
The way to think about it is some portion of March between the two brands is subject to deferral.
April is subject to deferral and just again, there's differences and payment timings between the two brands and so one store one has subject.
Royalties and fees that are there offset a little bit by couple of weeks and so.
So for the most part is March and April and the deferral period is is.
Fairly substantial where the payment spread out over an extended period of time, when we benchmark this Brian against other franchise worse in the restaurant industry, we found that to be.
One of the best programs being offered and so we realized that.
Or the impact on our franchisees was greater due to the dine in restrictions and so we wanted to get out there was a.
With a good program to start with.
All right. Thank you I'll pass along.
Thank you Sir our next question is from Jeffrey Bernstein with Barclays.
Okay.
Okay.
Thank you very much.
Two questions just one as I think about specifically the applebee's system.
The the comps were seeing and we appreciate the the week to week color.
The recovery, while it has progressed it seems like it might be slower than peers I'm, just wondering as you're thinking about.
Applebee's, most recently comping down 65% or so.
Another some peers at a comping down 40, or 50, and therefore, perhaps have progressed little more quickly and wondering if there's any differences between brands. The differences between initiative that you guys have pushed versus peers or perhaps you're being more conservative in terms of what you're offering just trying to get your feel for the pace of the recovery and whether you think the stimulus or tax refund benefit.
To comp was significant or was more modest and then I had one follow up.
Sure. So let me let me start than laws change on a comment individually. So I think I think in general.
We're looking at at our peer groups.
I would say that we would highlight the difference between some of their performance and ours based on marketing spend so were they stayed on the airwaves longer than we did.
As we looked at whether or not we felt that the spending would justify.
The incremental revenue.
Our sense was we're better off waiting and then having strong campaigns as people are coming back and the restaurants opened so that so our senses, yes, we might we might.
I have.
I have some individual competitor brands that are doing.
Somewhat better than us, but but we're kind of thinking that's going to be eradicated as we go forward and begin to begin to market again.
To folks and I think.
We're quite pleased with the growth of what we've gotten off premise and our hope is that we hold that that level of business and add to it on a highly incremental basis. The restaurant business in restaurant business back so John or Jay thoughts sure Steve I think.
Jeff Stevens primary point the.
Difference in strategy during this.
Hi is the 18th the Acmes brand went off air and discontinued all marketing I think Thats primary point number two.
Couple of those brands, you're referencing public company.
Predominantly company owned start with a higher percentage off premise mix to begin with so when you're looking ahead.
Off premise sales versus year ago full sales, you'll see a delta there to start with a larger base. If you will and then a couple of those brands are very heavily reliant upon delivery and had been aggressively marketing and offering free delivery throughout this crisis. So I think those would be probably the three variables that would.
Specifically address the question you're asking.
Okay.
Yes, I think very high outside so very very similar very similar to two what they had both said is we immediately did two weeks we pulled our regular campaign. We're doing it we've really went to two weeks of off premise campaign, knowing that we were newer to newer to the off premise game and some of the other people we were competing.
Again, so we wanted to see that message. So we did that for a couple of weeks and then we.
Shutdown all the rest of the marketing outside of just some basic local marketing.
Save our money for later for re launch so very similar tactic.
Yes, I think the other thing that.
As we entered into the crisis.
The thing is really disappointing is applebee's was having an amazing quarter IOP is doing just fine at Applebees was just blowing and going.
And you know it felt like Oh, great now Weve now we're on the Formula like we said we were going to we're back executing against what we're going to do and here. We go another another 18 and that work really great right out to about same Patty's day, and then the kind of the air came out of the tire so.
So we're actually hope and that when we get back into this and that there were obviously hope in the consumers get comfortable committing to restaurants more quickly than not and I've seen a dozen prognostications, none of which matched anything. So we're not so we're not going to get into speculating because that's all it is at this point, but let me take some we were.
Having a hell of a quarter. So it's just Shane.
That does happen when it did and and I think that gives us confidence going forward that when we reopened that we just keep doing what we're supposed to be doing will do just fine. That's a very aligned the applebee's franchisees are bright as very in line and look these calls we have one of the benefits is the restaurants that just opened.
In Georgia intense seat we were on a two hour call yesterday and those geographies that open up next will be on a call on Friday going into the weekend were sharing best practices and nuanced detail around what to expect from atomic guest pulls on.
And so the collaboration across these 30 or so franchise groups and the same can be said Friday this tremendous.
And and to clarify Tom I know you were asked earlier about the stores that are closed obviously comps could be distorted if you're factoring in a large number of stores comping down 100%, presumably but just to clarify what your comment was that if the stores closed for the week. It's excluded from the cost base is that right now.
No. So if it's close for the entire weekends.
It's excluded but if it did record sales for the we is included for those days as an example that Easter we hundred and just shy of 850 Applebee's restaurants closed on that day, that's in the comp number and so far larger number that was in the cup number a year ago and Thats why that's a tough it's.
Good question to ask all folks that we get a good.
Most apples comparison of how they're treating their comps yep and my other question was just Tom I'm just wondering if in terms of sensitivity as we are still early in calendar 2020.
Can you give a frame of reference in terms of annual benefit earnings or contribution to earnings from however, you look at it whether it's a point of comp or from margin perspective, just trying to as we think about modeling out 2020, and 2021, a sensitivity or a framework as your comps do recover over coming months in quarters. Thanks.
I think it's it's still a little too early to say.
In General you two for comps you can still user prior guidelines.
But for.
With respect to guidance as I mentioned before we're sticking to the cost guidance for now, yes, because our sense I know, it's frustrating, but our sense is theres. So many.
Variables that could impact the recovery.
That we're going to have to make so many assumptions to even that that it becomes sort of a speculative exercise I don't think that provides value I think if you have a view as to how the recovery occurs.
I think what you should assume as our guidance would be we would run.
Versus our competition and versus previous based on the variables that you think theres going to happen. If you think the customer's going to come rushing back and we're going to four restaurants in the fall, which would be great by the way. Then then our numbers we'd be very different if you think it's a gradual slow build you know into 21.
Before you kind of get to back to relatively normalized levels and I'm sure you add just as I've seen I've seen all of those as forecasts. So the idea of trying to thread the needle with 15 different assumptions all of which are too early to really have insight to we get we just don't.
I think adds a lot of value.
Understood. Thank you.
Thank you. Our next question is from Brett Levy with 10-K and partner.
Great. Thank you appreciate all of the color throughout the releasing the call and I hope everyone out there is doing well if I could just ask him a little bit of I guess, taking shakes question from a different perspective, and also just how you're thinking about.
When it's appropriate to spend at the corporate level and just the incremental costs that the franchisees are seeing.
If you think of it this way.
You've obviously talked about some deferrals and.
Easing the pressure right now at sales are slowing, but you're also going to get to a point, where there could be more off premise impacting margin theres going to be more incremental cost theres a lot theres the potential for incremental cost on the labor front for for restaurants, as they try to marry sales and and the algorithm.
How are you thinking about.
Additional eight over leave or reduce stress on your franchisees as they start to see how these incremental cost hitting their pn out after going through a period, where the faced challenges and then I'll ask the question of corporate.
All right. So on a gross picture, we think we provided the assistance the franchisees that's required at this point and we have no plans to do anything else obviously as we've done in the past will work with individual franchisees are there specific situations that that we can help and that makes sense them. We will obviously continue to do that.
Tom you will talk a little bit about.
The cost picture from a variable yes.
The second part of your question Brent was on the corporate side right and so.
So we've laid out what our cash quarterly cash DNA represents it represented actually quite quite the reduction.
We would like right now we're focused on supporting the franchisees with.
For example, technology initiatives led off premise.
And as.
As we see a better sign of the trajectory.
The Reopenings and we're going to continue to bring that not only are furloughed staff as we find that demand, but also will be ramping back up some of our corporate investments.
But for now.
The numbers I cited our order run rate that we plan on but let's be clear the ramp up of those costs and bringing back furloughed team members will be co measure it with the revenues that were generating and collected so there is not an expectation.
We've got a big upfront spend that we've got to do.
That will predate the revenues so our senses to balance between good cost management and working what we've got we've got to we've got a strong framework of teammates still on board, they're able to help with a lot of what needs to be done to reopen the restaurants.
We will obviously as we reopened more will bring more staff back, but we're going to do it in a way that we think matches revenue with cost and so we're not expecting to see a big spike in cost without revenues and collections offsetting that.
Great. Thank you and if I could just ask one more question that franchise community.
Have you gotten a sense that.
There could be some movement within within the structure either.
Franchisees looking to get out of the system for franchisees not being able to stay head above water. After this and how would you think about that either bringing them back into the fold like you did with Apple the applebee's system or at the consolidation within the system or from outside the system.
Well, so clearly our goal is to retain.
As many of our restaurants as we possibly can.
This does obviously is has the potential to create some change we have all of that at our disposal and we will and we will continue to do that we have the ability to bring those restaurants in house, we have the ability to bring in new ownership for those restaurants.
And so at this point, we're carefully working with all the franchisees were monitoring.
Carefully where they are for liquidity standpoints in and.
And in matching with their cost structures and their debt and so the good news is we've been doing this for quite some time, so we're actually.
In a good place with our franchisees about working and sharing data back and forth. So that we can help.
And in some cases, it will be assistance on an individual basis to certain franchisees. So in some cases it may mean us taking over in some cases. It may mean us facilitating restaurant is going to new ownership.
Obviously, we expect some pickup in that over over the next several months.
We don't really have at this point the ability to say Oh, yes, we're going to we're going to retain 99% of the restaurants, and we're going to and we're going to be able to add some more in the one thing that that's clear is.
That this could also create some opportunity because there's some things on a positive side that we haven't talked about and that's that the inventory for our categories is going to decline how much I've seen lots of guesses, but we'll see so that'd be less competition thats a good thing the ability to pick up on some conversions may may pick up.
And so we've got it's too early for us to see net net what we end up with in terms of overall inventory. If we tried to look towards middle of next year.
But we'll get more more knowledge and more awareness of where we are and whats available and what can be saved and what wall and what does that due to our our net our net.
Restaurant ads for the year.
That's all kind of going to play out I think over the next.
Six months and we'll see how that would be able to give you a much better clearer picture I think.
Probably as we get into the fall and a couple of points. There just add on Brett as John the our franchisees. This is good as they acted very quickly I'm talking greater on March 15 to preserve cash. So they took actions implemented furloughs those that decided to temporarily closed.
Closed almost immediately.
I mentioned, we were at about 257 closures were at 175 today.
That number is rapidly declining and every time I talk to our franchisees they intend to reopen the ones that temporarily closed and they're anxious to do so.
Great.
The best to you all your families and the rest the Don family. Thanks for the help on the call.
Thank you Andy.
Right. So thank you again for your time obviously.
Hey, just unprecedented set of events that were facing.
However, I will tell you that I've never Im proud of the team that and the way that theyre operating of our franchisees and what they're doing.
Not only not only to preserve their businesses and their jobs for the team members, but also what they're doing in the communities. The stories are overwhelming sometimes when you hear the so it.
It's one of these things where.
I've been I've been in this business almost 40 years never seen anything like it but.
Been through a number of things that had some of these characteristics and we always came out the other end and that's our expectation. So I hope everybody stay safe from we'll look forward to talking to you in the future. When we've got a lot more insight into where things are going thanks.
And with that ladies and gentlemen, we conclude todays program. Thank you for participating you may now disconnect.
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