Q3 2020 Dine Brands Global Inc Earnings Call
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Hello, and welcome to <unk> third quarter 2029 Grand Global earnings Conference call.
They need a sleek and I'll be your conference operator for today.
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After the speakers from yet question and answer session. If you would like to ask a question during that time simply press Star then the number one on your telephone keypad. If you would like to draw your question Craig The pound key. Please note that this conference call is being recorded.
I'll now turn the call over to Mr., Ken Duffy Executive director of Investor Relations, Sir you may begin.
Good morning, and welcome I'm Gran <unk> third quarter Conference call I'm joined by Steve Joyce CEO, Tom Tom CFO change on pricing.
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John Chiminski President of Applebees.
Before I turn the call over to Steve for opening remarks, please remember our safe Harbor regarding forward looking information.
During the call management May discuss information that is forward looking and are both known and unknown risks uncertainties.
He is presently and 10-Q filed.
The forward looking statements are as of today and assumes no obligation to update or supplement these statements.
We may also refer to certain non-GAAP financial measures, which are described in our press release and.
And also available on our Investor Relations website with that I'll turn the call over to Steve. Thank.
Thank you Ken good morning, everyone and thank you for joining us today.
Under our safe and doing well.
As the industry gradually settles into a new normal for the foreseeable future. The challenges we faced have brought out the best in our franchisees and team members I'm extremely proud of their commitment and fortitude. Additionally, their alignment with our strategy to stabilize our business ever store growth.
Contributed to both brands delivering continued sequential improvements in quarterly comp sales.
I'm very pleased to report that our all premise business at both brands posted strong growth in the third quarter, even as states gradually reopened.
Premise comp sales increased by an impressive 144% at applebee's and 154% and I know.
The pandemic has caused a shift in consumer behavior and change how guests access our brands. We believe the convenience of takeout and delivery will remain appealing to our guess even as dining room restrictions are east across the country.
According to a recent Mckinsey and company consumer poll survey related to coated.
56% of respondents intend to continue using restaurant delivery and 46% intend to continue using restaurants curbside pickup.
The survey also showed that 40% of respondents right dining indoors at a restaurant or a bar as one of their top three activities. They are eager eager to resume following getting together with friends and getting together with family, which are obviously closely linked.
In some states that don't have restaurant capacity restrictions, but still requires social distancing, we're seeing consumer demand exceed capacity in certain cases.
With that said, we believe the guest returning to our restaurants for dine in service will complement an already robust off premise business and provide additional upside to sales.
As we navigate through the pandemic dies operations team remains fully engaged with local state and federal authorities during the reopening process.
I would like to highlight that the end of the third quarter approximately 3200 of our domestic restaurants for 97% of the domestic system was open for business.
This is up from 95% for the second quarter.
We are committed to providing our guests with a welcoming and safe environments to dine with their friends and family while in accordance with guidelines provided by the CDC as well as state and local governments the safety of our guests and team members will always be a high priority.
To that end both brands are utilizing best in class sanitation practices, including the use of an EPA registered to win one cleaner and sanitizer.
Not only will this reduced the number of products shoes, we expect greater efficiencies for our franchisees.
In addition to say food handling procedures and reducing the number of guest touch points in the restaurants. This is just one of the several measures taken to help protect the communities in which we operate.
We understand that consumers are eager to safely return to indoor dialing in fact black box sales data shows significant sales improvement since April 2020 in both categories in which we operate.
This trend bodes well for our brands, which outperformed their respective categories in each month of the third quarter as well as the full quarter.
Jay and John will provide additional details on their respective brands later.
While the restaurant industry continues to recover we believe that both applebee's and IHOP are well positioned to stabilize sales and return to growth.
I'm very confident in our plans, which resulted in significant progress over the last two quarters will continue offering our guests an omni channel experience to meet their dining preferences, whether in restaurant or off premise.
At the di level, our business conditions have improved since the first quarter of this year. This coupled with our disciplined approach to Gionee management, and an asset light business model enable us to end the quarter with approximately $389.6 million in cash.
With that I will turn the call over to Tom to provide an overview of the third quarter results. Tom. Thank you, Steve Good morning, everyone I hope.
During the early stages of the pin down that we took certain precautionary measures to augment or financial flexibility during a time of great uncertainty to that end, we drew 220.
$2 million in March of 2020 from a revolving credit facility all of which remains outstanding as of September Thirtyth.
As a result of this and other proactive steps nine continues to have speech strong liquidity position and significant cash on our balance sheet as end of the third quarter as Steve mentioned, we had total cash of 390 million, including restricted cash of 80 million I'd.
I'd like to highlight that if you exclude the 220 million that was drawn our total cash is nearly the same level of total cash we had at year end 2019.
This is a notable milestone.
As restaurants continue to reopen for dine in service weekly comp sales trends improved for both brands during the quarter just to compare at the beginning of the third quarter Applebee's was down 22.3% and I hope was down 40.4% in comps for the weekend of July.
In comparison for the final week of the quarter ended September 27, Applebee's increased 40 basis points and I have decreased 23.5%. These comp sales figures represent improvement to 23 and 17 percentage points during the quarter.
Applebee's and IHOP, respectively.
During September both brands posted their best weekly comp sales performance since the week ended March 1st.
The solid improvement in comp sales trajectory is primarily due to the progressive reopening of our domestic restaurants as well as a significant growth in off premise business.
That Steve mentioned earlier.
Now, let's turn to our third quarter financial results for the third quarter, We reported adjusted earnings per diluted share of 80 cents per share compared to $1.55 per share for the same period of 2019, we reported $36.9 million in DNA expenses of which six.
Million dollars was non cash our leverage ratio as of September Thirtyth was 6.7 times compared to 6.3 times as of June Thirtyth.
We anticipate making an initial quarterly payment.
Three in a quarter million dollars on December seven in a sub subsequent payment in the first quarter of next year.
I'd like to highlight that we continue to have ample cushion in our debt service coverage ratio or D. SCR at 3.2 times as of September Thirtyth.
The first two DSC yard measurement is trip when the ratio is below 1.75 times.
In March of this year in light of the code 19 pandemic.
Standard and Poor's placed the company on credit watch negative with respect to our 2019 class eight two notes in September so S&P remove the company from credit watch and reaffirmed or Triple B rating. We're pleased with this outcome as it reflects the.
Strength of our business and our business very strong brands, we will continue to diligently manage our business as it recovers from the Panda.
Regarding our tax rate.
Our GAAP effective tax rate for the third quarter 2020 was a 9.5% tax benefit compared to 24.6% expense for the third quarter of last year.
The primary reason for the variance was due to the release of unrecognized tax benefits incurred in the third quarter of this year.
Just to note our fourth quarter.
Three months effective tax rate is expected to be significantly higher than the statutory tax rate. Since overall, we expect a low single digit effective tax expense for the full year.
Our adjusted EBITDA for the third quarter, Twentytwenty was 42.7 million compared to $63.4 million for the same period of 2018.
Turning to our cash flow statement cash from operations for the first nine months of 2020 was $36.7 million compared to $105.6 million for the same period, a 2019, while the difference was primarily due to the lower gross profit. We also had an increase in receivables related to the franchisees.
Systems programs, which provided approximately $56 million or royalty advertising fees and rent payment deferrals to our franchisees primarily in the month of March and April 2020.
Total 30, franchisees, representing 94% of applebee's restaurants deferred payments with repayments scheduled over up to nine months. These repayments began in the third quarter of 2020.
As of September Thirtyth outstanding balance for Applebee's was approximately $24.4 million with for franchisees, having repaid their deferred balances in fourq.
We offered IHOP franchisees the opportunity to defer their royalty advertising equipment rental and sub lease rent payments primary for primarily for the months of March and April a total of 193 franchisees, representing 58% of our house restaurants participated in this deferral.
Repayment of deferred amounts scheduled all over up to 36 weeks beginning in the third quarter of 2020 as well as of September Thirtyth outstanding balance was approximately $20.4 million with 37 franchisees, having repaid the deferred balances in full.
Overall, a total of $11 million of the original deferral southern repaid.
I'd like to note that our bad debt expense for the third quarter was 2.8 million as compared to $5.1 million in the second quarter of this year.
Adjusted free cash flow for the first nine months of 2020 was $35.6 million and we expect to generate positive adjusted free cash flow during the remaining remaining three months of 2020.
Now, let's turn to our financial performance guidance for the fourth quarter of 2020. This guidance is based on information. We currently have been due to the tremendous uncertainty or dependent depend on if we continue to believe that our results could be materially impacted.
We expect our domestic system wide comparable sales same restaurant sales for applebee's and IHOP to gradually improve for the quarter domestic development at Applebee's.
By Applebee's franchisees is expected to result in net closures of approximately 15 restaurants.
We are currently evaluating significantly underperforming domestic IHOP restaurants, due to the Pandemics impact and unit level economics, and Jay will provide more information a bit later on the call DNA for the fourth quarter is expected to be approximately $45 million, including non cash stock based.
Patient and depreciation expenses totaling approximately $7 million, while we deferred many expenses in furloughed significant staff over the past several months, we are now fully resource to support our franchisees in the 97% of restaurants that are open.
To sum up Apple.
Applebee's and IHOP made significant progress in improving the trajectory of the respective comp sales our off premise business drove solid growth remains robust even as dining rooms continue to reopen with restrictions across the country Lastly, our cash position and liquidity remains strong with that.
I'll now turn the call over to John Thanks, Tom and good morning, everyone. Good afternoon, if you're on the East Coast I've.
Often stated that applebee's is at its best in times of adversity in this couldn't be any more evident.
Than it is today after seven extraordinarily challenging months, we've come full circle from closing our dining rooms in March to achieving our first week of positive comp sales in September.
This has been a remarkable story of overcoming adversity, and returning applebee's to its vibrant leadership position in casual dining after being down 49.4% in Q2 Applebee's comp sales were down 13.3% in Q3 sequential improvement throughout the quarter was very clear as we.
Moved from minus 18.4% in July to minus 15.2% in August to minus 7.4% in September.
And I'm very pleased to report that this strong trajectory has accelerated here in early Q4 with comp sales at minus 1.9% through the first four weeks of October.
Now to put this performance in proper context. According to Black box intelligence Applebee's has now outperformed the casual dining category over the past 17 consecutive weeks.
Terrific momentum coincides with our return to National marketing if you recall back in mid June after a self imposed 90 day hiatus at the peak of the pandemic.
This is also a strong indicator as to the current health of the brand recognizing we still have several geographies impacted by Cobas lockdowns, creating natural variability throughout the system as you might expect.
Additionally, our franchisees have been remarkably consistent in paying the royalty and advertising fees, including our March April deferrals, which are being paid back over nine months as Tom referenced beginning in August.
Importantly, our 99% collection rates beginning in May has allowed us to quickly reestablish our economic model very important to us as well as our ongoing national media presence.
While I'm certainly proud of Applebee's performance, what I'm. Most proud of is our franchise partners and their relentless fixation around restaurant execution sanitation guest safety and guest reassurance drops pandemic.
This is most evident in our very favorable brand affinity and visit intense metrics from my perspective, the most important currency in the restaurant industry right. Now is trust in our franchise partners have earned the trust of their teams and the trust of their guests with each and every restaurant visit well.
So thats, a dining room experience or car side to go occasion.
Simply stated America Trust Applebee's now more than ever and that's perhaps the single most important point of difference of brand can have in this environment as we look to 2021.
At present, we have approximately 1600 us restaurants opened for business, averaging between 44 and $45000 per week with the mix of about 70% dine in 20% par side to go and 10% delivery.
Now regarding government imposed capacity constraints, we feel this impact most notably with Friday, and Saturday dinner, where demand is abundant but restrictions have limited our ability to fully satisfy this demand. This of course varies by geography.
It is also worth noting that applebee's is disproportionately penetrated in the Midwest and northeast where these restrictions are most prevalent.
Now the good news here is that many geographies have been gradually easing. These restrictions with 20 states having removed all capacity restrictions as of this call, while our own rigorous safety and sanitation standards remain firmly in place. However, as we've certainly seen lately the landscape remains volatile and.
Subject to change.
On the off premise front, we continue to innovate in the form of relevant occasion based digital marketing. We're also launching tamper evident delivery packaging throughout the system coming up here in November is a new brand benefit and yet another form of guest reassurance on the rapidly evolving beverage front.
Applebee's signature Mojo cocktails to go are now available digitally in about 30 states and as you might expect have become very popular given the surge in off premise dining.
As an example, our proprietary CP sips are feature here in October in our branded Mucho to go 20 ounce cups properly mixed and properly garnish and ready to take home as part of your bundled meal.
Our off premise innovation will also extend to our virtual brand.
Currently call neighborhood wings by Applebee's, which is currently being piloted in about 700 restaurants in partnership with revenue up.
As of Q1 next year. This initiative will be meaningfully reposition for greater relevance and visibility and then expanded throughout the entire system.
Additionally, I'd like to thank our supply chain organization, which has been simply been a tremendous asset in mitigating suppliers for both brands in this turbulent environment, while enabling a pipeline of innovation with truly impressive agility and rock solid expertise.
Also after following a portion of our team and early Q2 Im very thankful. This exceptionally talented applebees in dine team is once again reunited as we head into our annual franchise meeting next week of course that would be a virtual meeting.
Who would have thought that we'd be celebrating applebee's 40th anniversary in the middle of a global pandemic, but thats precisely where we are today and I'm proud of our team's response to this ongoing challenge also.
I'm also excited about next week's franchisees session because of our accelerating business momentum as well as early alignment around our 2021 strategic plan, albeit with significant built in flexibility given the current environment.
Importantly, I should also note that Applebee's franchise business Council and franchise marketing Committee have unanimously agreed to continuing our 4.25% National AD fund contribution throughout 2021, and I anticipate aligning all of our franchise partners on this subject in early November.
This is terrific news for the brand.
In summary, we are extraordinarily well positioned moving forward, while the effects of Cove. It remain uncertain I genuinely expect applebee's to thrive next year as we fully leverage our sizable brand scale Buzzworthy innovation in restaurant excellence of course in partnership with our franchisees who are.
Really exhibited remarkable courage resilience, most importantly belief in navigating the past seven plus months.
And after being knocked down I believe applebees is truly symbolic of America as we get back up dust ourselves off and get back on Air Force and on behalf of the entire team.
Sure feels good to be back in that settling in and with that I will turn it to Jay.
Thank you John Good morning, everyone I hope, you're all doing well on staying safe out there.
Third quarter comp sales declined 30.2%, which represents a sequential improvement of 28.9 percentage points compared to the second quarter of 2020.
The brands performance continued to be impacted by the effects of governmental mandated restrictions on dining room operations and soft traffic across dayparts as consumers continue to mainly work from home.
I'd like to highlight that the overall breakfast category in general remains challenged as the morning meal has been oftentimes we placed the home due to the diminished work transit.
At the start of the third quarter performance in July reflected the resurgence of front of virus cases, and dining room restrictions put in place by state and local governments due to the spine.
Also we did not utilize national media through the first three weeks of July as a reminder, we opted to discontinue our marketing late in the first quarter, except for some basic local marketing and a brief off premise campaign.
Our weekly comp sales and traffic both improved 10 out of 13 weeks, respectively. During the 13 week period ending September 27th.
This included our best performing weeks since early March encore.
Im pleased with our trajectory and the good progress that we've made.
I asked third quarter comp sales continue to be in line with the overall family dining category. According to Black box I'm delighted to report that I have outperformed family dining after trailing the category for the second quarter.
We're very focused on recouping, the remaining 25% decline in comp sales the opportunities. We're addressing to restore sales include reopening units safely, reaching higher capacity in our restaurants driving traffic to the non ppm dayparts plus continuing to push our to go business channels.
So Brian Iops appeal to consumers across day parts other than breakfast, we launched ice happy hour on September 28.
This is the brand's first ever afternoon, and evening focused value oriented menu.
Offers available every day between two P.M. and champion or longer depending on the location.
Guest can choose from a variety of meals at an attractive price when $5 or $6 depending on the market.
The value platform as part of IHOP Daypart expansion strategy to build on the breakfast innovation, we're known for while strengthening and expanding our pm business.
While the launch is still in its early stages, we are seeing very encouraging results.
We believe high happy hour will attract guests into our restaurants and increased traffic as governmental restrictions on dining rooms are easy and states gradually reopen.
I happy hour is a strategic longer term play for us which focuses on influencing gas to think about IHOP for great value options during non peak periods. When we typically don't have capacity issues.
One of our goals for the platforms to drive frequency and loyalty.
We've done a great deal of work and research research on high happy hour for over a year.
Now we have most of our domestic dining rooms open for business it made sense to launch it.
I'm pleased to say that as of September thirtyth, approximately 95% of domestic system is open with some restrictions as many states and gradually ease capacity limits. This.
This compares to approximately 92% of our domestic system opened for business as of June Thirtyth.
As Steve mentioned earlier surveys have shown that some consumers are eager eager to indoor dining in fact were seeing certain cases of consumer demand outpacing restaurant capacity restrictions, especially during the weekend breakfast day part we.
We estimate that the weekend past the impact is over 5% on total sales for the week.
No fair percentage of respondents also find it appealing to use delivery or restaurant curbside pickup to meet their dining needs.
During today's essential part of our study 76% of respondents said, they feel safe and comfortable getting restaurant food curbside pickup or delivery.
While we look forward to welcoming guests back into our diners in accordance with governmental guidelines as well as our own strict procedures. This consumer sentiment on off premise cambia potential tailwind for IOP.
Turning to our to go business I hopped off premise comp sales experience continued solid growth in third quarter, increasing a 154.1% driven primarily by traffic.
Our online sales remained strong even as diners gradually reopened making up 22% of total sales.
Delivery accounted for 15.7% of third quarter sales mix and take out accounted for 18.3% of sales mix.
Due to consumers, becoming more familiar and comfortable with I hopped off premise channels. We believe we can retain much of the sales even as dining room restrictions or east overtime.
Turning briefly to our unit guidance for IHOP closures disclosed in today's press release.
Even the impact of the pandemic on individual restaurant level economics, we're evaluating only greatly underperforming restaurants, but we currently believe our non viable coming out of the pandemic. These restaurants are generally some of the lowest performing units in the system based on sales and franchisee profitability.
As Tom mentioned based on our current information we expect the evaluation could result in the closure of less than 100 restaurants over the next six months.
However, we're confident we will eventually to replace these severely underperforming locations with better performing restaurants that have volumes closer to our pre covered 80 of approximately $1.9 million.
To close I hope remains in a position of strength, we have a strong marketing plan for the remainder of the year and into 2021 to support our seasonal promotional windows. Looking ahead, we're focused on restoring sales and traffic to pre cobot levels by first providing guests with a safe and comfortable environment in our restaurants.
We understand that more than ever gasser, placing greater emphasis on restaurant cleanliness and safety.
Secondly, we will continue to grow our off premise business, which we believe will be complemented by the return on in restaurant dime.
Third provide compelling value and innovation propositions to attract guests back into our restaurants with that I'll now turn the call back over to Steve for closing comments. Thanks, Jay to wrap up we've achieved meaningful improvements in both applebee's and IHOP comp sales, but we know that more more needs to be done.
Our off premise business continued to drive solid growth, which we believe the majority of we can retain and still as consumers continue to take advantage of our to go services.
We again ended the quarter with a strong cash position and liquidity, which positions us to meet our debt obligations and withstand current industry conditions. Lastly, we have a plan in place to restore dimes growth trajectory I have great confidence that our management team with the continued support of the board will successful.
We achieve our goals.
I'm very optimistic about the road ahead for dying for our franchisees and for our team members.
Now with that we'd be pleased to open the call to any questions you may have operator.
Ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your Touchtone telephone.
Your question has been answered argue with certain needs yourself from the queue. Kris Thompson, we'll pause for just a moment to see if there any question.
And your first.
And your first question comes from the line of Jake Bartlett from Travis Your line is now open.
Great. Thanks for taking the questions.
My first is on Applebees in just the strong trajectory of the improvement weekly same store sales.
What do you attribute that to maybe if you could give some some examples about what's really driving that trajectory no I'm wondering whether the addition of plexiglass providers. The addition of outdoor dining.
The marketing obviously has helps in some since mid June but what is the trajectory what's driving the trajectory since then.
Sure. Jason This is John Good question I think you referenced a couple of the points there.
First and foremost I'd say, our franchisees in restaurant teams have been very overt.
In visibly demonstrating safety and sanitation practices.
Through our internal research clearly is building a level of trust that's essential in this environment.
Referenced I believe in my remarks brand affinity and revisit intense we see those we track those metrics versus year ago, we track them versus a subset of competition and in both cases, we're seeing significant improvement.
So I guess our final point the the marketing activity has certainly resonated. It we started out with a very.
Kind of appropriate tone in welcoming America back to Applebee's. If you recall, we featured welcome back Kotter music and then theme.
Same song from Cheers, we coupled that with value propositions that we're broadly appealing we narrowed our menu makes it easier for our restaurants to execute you add all that up and in the face of these headwinds that that all brands space we have.
A very solid trajectory and a very optimistic.
And hopeful franchisee community as we look to next year.
Great that's helpful and obviously.
Obviously, a focus for investors.
Today in the market, but just just assessing the risk of impose new restrictions on being imposed on restaurants could you tell us what the performance has been at same store sales performance has been at stores that have indoor dining and stores that do not have been new dining seats you have that.
How are the imposition of restrictions could could impact results.
I think from an applebee's perspective Jake.
We we are fundamentally indoor dining at this point, we have we have restrictions there.
And there's variability that is tied directly to the.
The restrictions and so you'll see a delta from one state to the next.
That delta the good news is.
All metrics are moving in a northerly direction and that delta between those with heavy restrictions and those with.
Almost no restrictions is getting tighter and tighter so I won't quantify beyond that hey, Jade.
Jay This is Jay Johnson I hop I'll answer the same question I think it's probably pertinent.
You know, it's very different across the board as you know if you just look kind of state by state right now Weve got about.
18 states that we would pay or 50% or less and restrictions, so, particularly that 15 or 25% you've got about nine states that are over 50%. So basically there at 75%. Most of the time then you get about 22 states with no restrictions, but theres still social distance restrictions.
In these locations so even though they may be fully open depending on the social distance six foot of your table, that's still kind of limits. It's about a 50% capacity. When you think of it like that and then California is the X factor, it's it's very regional and very different we've got a very big footprint in California. So some places have 25%.
Summer 50, a large part of California, still completely closed down and and outdoor dining only.
We have as far as our footprint, we've got about 20, 25% of our restaurants predominantly in warm weather states that the prototypes already had patios on them. So they already had the advantage of a patio and if they're all the time, we probably have another 20% or so.
That added on some type of supplemental patio again, most of those were in warmer weather climates, which you'll be able to continue that for some time. There. There are patios that are up in the northeast Easton.
It will have some impact but.
The brand team of the size of our organization and the amount of them that are in cold weather places. It's we just don't think it's going to be that material. The bigger issue is governmental capacity restrictions that.
Based on our closing down completely then you've really got to double down again on off premise.
I think one of the guys that gives us I think one of the things that gives us some confidence is.
You look at the geographic.
Spurt.
Dispersion of both brands.
Both brands are are heavily distributed in markets that have fairly heavy restrictions. So so we're already dealing with with those with those capacity will shrink so a lot of the markets. We're in.
And we'll have to wait and see obviously was our follow whatever government tell us to do that and make sure that we keep our customers and team members save.
We already are the numbers, we're achieving our in in the markets that aren't as strong as our.
It is open as a lot of the markets.
Got it and then my last question is just on the closures at IHOP and I'm wondering if this is similar to the effort in at Applebee's and a few years ago were you were waving.
Any penalty for closing stores is there a kind of concerted effort to kind of clean up the system here and provide some relief for for the franchisees that are that are operating those those underperforming stores and and related to that how confident are you that that 100 is that kind of the maximum.
Number of closures over the over the next six months.
Well I think the first this is Jay again, I think the first thing I would say is that we're looking at significantly underperforming restaurants that were probably.
Going into the pandemic in a much weaker states and been other locations. So this isn't a broad franchisee issue are up.
Our our applebee's and IHOP have very different kinds of systems I've got almost 300 franchisees hundred doesn't have only one or two locations the ability to whether this kind of pandemic may be very different for a single unit franchisee. This is their job in their livelihood as opposed to down 25.
Five restaurants, and they have one restaurant that is causing them.
Issues. So we're doing that assessment right now and we've really just wanted to make sure that we informed all of you in the street that we're working on this that we think that up to 100 is the right number at this point for what we know and there'll be more to come in the future on them.
Great. Thank you very much I appreciate it.
Your next question comes from the line of Nick Setyan from Wedbush Securities.
Your line is now open.
Thank you.
Two questions first.
Are there still things.
Assuming capacity constraints Duncan Cds are there still things that are.
Potentially implementable to increase sales.
Whether it's the continued expansion of UBS.
Of of dividers or.
And rollout of maybe tens in the parking lot. It said are there sort of store specific things that we can continue to do.
Nick This is John I think.
Our franchisees frankly for both brands have.
Have proven not only resilient, but extraordinarily entrepreneurial in maximizing square footage with sales social distancing parameters. So.
There is no stone unturned on that front and.
We continue to innovate so outside of the physical space.
Constraints that you're referencing we continue to innovate and provide relevant messages for our guests. So yes, even in those situations where.
The outdoor seating, which is a great example of that kind of entrepreneurial spirit may be hampered a bit by cold weather you couple that with the easing of restrictions in many geographies not all but many in that tends to offset that adverse impact of losing some outdoor.
Seeding yes.
I think on the IHOP side, Nick Hey, I think very very similar story I think the franchisees we got to remember what I just said about the makeup of my franchisees. These are truly entrepreneurs. These are people that this is the job. It's a career in many cases it their life savings they get really.
Adas on how to solve problems when when these things come up they that theyve already even in cold weather areas, they've been working with their local governments on how do you put in sales heaters, having to stay open as long as much as you can and I think the macro level to one of them is you got to remember I know, there's a lot of thought in question about losing out.
Our dining, but there's also a counter balance for our system think about Arizona. They can't use their outdoor patios. When it's a 118 outside very easily right people don't want to be out there. So as you get the winner those capacity is actually improving may increase and so you start to have puts and takes around the country for our system.
We have individual franchisees, though that we've got to help them and share best practices and then someone figures out a new way to do things be it on improvements on car side or improvements on Hyatt key to attend on your patio, we'll share those and we'll make sure that we're leaving no stone unturned to be able to help the franchisees and system. So.
Nick if you think about it in terms of the levers obviously one of the biggest levers that would help us would be deep decrease restrictions. So thats. So we'll have to play that out but we've got lots of other levers to pull we have got expanded hours because we're still operating it at a lesser hour rate for most.
Restaurants.
We've got as people return.
To some level school that will drive some business.
As people as there are some return to offices that will drive some business.
And the the what we're finding is municipalities are doing a lot to work with us to let US 10 parking lot said.
Take over sidewalks and do all sorts of things because they're interested in their business. The surviving in them getting their good tax revenue. So even if we don't get a lot of the restrictions. There is other levers we can pull and in addition to that we're pushing heavily into digital which will help us and we are doing different things with some of the delivery companies all of which we think will help.
Push off premise and delivery more.
Nick I guess the final for this is John the final point here, it's a very interesting note outside of everything that we do.
And we control we have found guest behavior to modify here.
They're very savvy and so while business historically has been concentrated in a tight 532.
730 dinner window and a tight 11 30 to one o'clock launch window, we have found guest behavior.
Modified here and they are choosing kind of the fringe.
Dayparts, if you will earlier dinners later dinners mid afternoons and what that does for us It allows us to fully leverage capacity in those other dayparts and we're not trying to.
Sales rent as many guests quite honestly is the peak dinner hours that helps.
Yes.
Hi, Thanks for all the detail, it's very helpful and then on the margin side.
The bad debt expense, obviously, we saw a sequential decline there is that going to continue to decline do you think is there any visibility around.
Where those levels.
Head from here and also some of the bad debt expense over the last couple of quarters is recoverable.
Yes, those are all good questions, Nick and I'll start from kind of the leading indicators of how you think about that one is obviously sales levels performance over franchisees franchisee health, but.
But also we indicated in.
Our scripted portion some of the other leading indicators, which is on that deferral balance because that doesn't represent a we're sensitive to the fact that does represent increase payments.
During that very very tough period, when a lot of the country was on Lockdown. We did provide the deferrals. We thought it was a industry leading deferral program.
But but the repayments on it on that program has been very very strong and we had a number of franchisee repay the balances in fall. So we feel that that's a very good leading indicator.
As is our collections rate both.
Both brands remains very very strong so.
We think that trajectory will continue Nick we in.
It's good that you do Didnt note the sequential improvements in.
Well you never know given all the uncertainties that continue in the market.
We hope that that's going to continue to improve.
Great. Thank you very much.
Your next question coming comes from Brian Vaccaro from Raymond James Your line is now open.
Yes, Thank you and good morning, I wanted to.
Follow up on that I have capacity.
Topic, and sorry, if I missed it but did you say how many units currently have the partitions installed and you have line of sight into how many might have it by the end of the year within the next six months or some timeline you have in mind.
I think that and this is a rough estimate of where we are right. Now these numbers change all the time as people keep making changes, but we think there is about 20% of our restaurants that have added on some type of.
Outdoor dining or partitions or whatever based on what the local restrictions and or requirements are for them too.
Invest the money to do that to help expand that capacity.
Okay. So that would be I think you mentioned, 20% outdoor or partitions, just broader initiatives to expand capacity yen in lot of cases, those tend to be similar desert crossover there right a lot of those of the same locations just it just the way the government restrictions are those those restrictions on indoor dining.
Some of those in the same state and municipalities kind of allow both of those.
Okay, great, great and I guess shifting gears to the franchisee profitability, we maybe touch on that for each brand and maybe start with I.
Where's the four wall profitability in the down 25% to 30% range or average weekly sales 25, 26 27 range can you provide an update on that front.
This is Jay ill start with IOP.
Overall, our franchisee financial help given what they've been going through is actually pretty good.
It's hard to always say averages lie.
If you look at an average you think okay, well, we're getting closer and closer to making money, but so many of the different franchisees are in different places and just give you. An example, looking at state results.
In a recent week I had one state that was down over 50% Interstate there was plus 10. So you get the disparity between how this is working generically speaking once the franchisees get to that 70 80, 85% range of sales.
They are pretty good shape as far as flown some cash and.
Obviously, they're not making that kind of money they were but as far as breaking even paying their bills et cetera.
They can get their individual restaurant owner business up to that level. They can sustain a lot longer in this kind of environment that we're dealing with right now, but if you're down 50%.
That's a different issue and then how they are the franchisee is very different based on what their footprint do they have a restaurants have restaurants, only in California, where maybe all the restaurants are still close except for off premise. That's one issue.
If they've got five restaurants in California in five warrant, Arizona, maybe that's a different issue they can balance out the portfolio a little bit with their profitability. So it's kind of all over the board, but when they get up to about that 80%.
Other previous sales level, they start being a little better place than they were before hey, Brian. This is Tom I'll answer and on behalf of Applebee's only because we have our own company operated portfolio, which really is a lot of respects represents that kind of an average port.
Portfolio in the system in terms of size, we have 69 units in north and South Carolina.
Really.
Lease with how that team is brought back.
Those restaurants into an open status of and have been flourishing. Despite these very very tough conditions. So when we look at the four wall profits there, Brian we anticipate we're going to be in a fairly solid four wall profitability perspective, EBITDA positive for the year and cash flowing positive at this point.
In time, so again applebees is in a more favorable position sales wise clearly.
Then then that I have we are.
Again aware that but hopefully that gives you some insights on that on the Applebee's side, Yes, I think it's also worth worth noting Brian that a lot of our franchisees took advantage of the PPP program. So that has significantly helped cash positions and I think is in part why we're experiencing the kind of.
The kind of receivables and cash flow that we are so obviously that program and we are working very closely with through our associations and were involved with most of them.
To push for another program, which will hopefully help franchisees again, and then also working with them on main street lending programs and SP SP loan programs. So we're trying to work both ends of it both obviously the most important is bringing the business background, but the other is pushing.
Mean for financial support.
For our franchisees.
As as as we approach them through the various associations and various advocate advocate program.
Programs that we've got going.
Does it look like obviously is going to happen pre election, but it'll be it'll be it'll be fast and furious following the election, because everybody's going to be scrambling for federal dollars and we want to make sure that we're at the front of the line yes.
And Brian This is John the the mission is returning to positive sales so.
Applebee's front when you look in particular at the trajectory in Q3 and in particular first month of Q4 as a franchisee recognizing there's some variability across geographies you get back to positive sales and we're in great shape. Our mission right now is to get all franchisees in the portfolio back to that position.
Yes, Thats, great and then just last one I just had two quick clarifications on the guidance if I could Tom for the guidance on Gionee that $45 million is there any lumpiness or timing or nonrecurring items kind of pushing that number to 45 and is there a way to maybe tease out a more normalized.
Quarterly run rate or is that a new quarterly run rate and then can you clarify the tax rate I think you gave us an annual number would you be willing to give kind of a quarterly number just to make sure. We're on the same page. Thank you.
Yes. So that's a good question. So Q Threeg DNA was roughly $37 million. It is we're guiding and it's bumping up to 45 million, let me provide a bit of a bridge I think it will help.
We do have.
Bit of an extra pay period in that fourth quarter.
So that's a couple of million dollars you have it.
Frankly, some deferral so during our Q2 austerity and beginning of Q3 austerity mode. As we were in the cash preservation is or.
As far as their primary motivator for DNA.
We do have some deferred items in there that we we made a decision to hold back on but then come online. So that's that's another 3 million or so and then we have some co related expenses that elevate our DNA above our typical norm and so that's another.
2 million, so that kind of bridges between the 37 in the 45.
And just remember we brought back all outstanding Furloughed employees at this point, we have 97% of our restaurants open we really do need to support our franchisees and so we are fully resourced at this point.
Okay that answers your question, yes thats helpful. Thank you.
Your next question comes from the line of Jeffrey Bernstein from Barclays. Your line is now open.
Great. Thank you very much.
Couple of questions. My first one just specific to the Applebee's brand John I think you mentioned.
Talk of a virtual brand.
Seems like that's the theme this morning with the.
Your largest peer perhaps pursuing something similar although it seems like you guys are using grubhub I'm. Just wondering if you can give any color I think you said 700 units, thus far and the entire system in the first quarter of next year, but what if you could share in terms of early feedback on sales or margins or incrementality whatever early learnings you have would be very helpful.
Sure, Jeff I think the.
Probably see some differences between brands I know you're referencing.
Another competitive brand, specifically, we've kind of dipped our toe in the water here in this initial.
700 restaurant pilot, we have some very good learning won't share.
Results I will tell you that the learning is leading us to.
Fundamentally repositioned in terms of relevance in menu and branding that will take place in Q1.
Probably towards the back half of Q1 and at that point in time I'll share more information in terms of everything from.
Delivery partners.
Two naming two menu.
In marketing, we believe it's a significant incremental lever, we just haven't pulled that yet with.
Any meaningful activity, but the learning is robust.
Okay.
Okay, and then just in terms of.
The broader industry.
I'd love to talk about independent closures and I know this came up last quarter on your call.
Obviously that significant of an enclosures would presumably be a silver lining for the larger chains, allowing for some market share gains I think last quarter. You mentioned, a very large forecast I'm. Just wondering three months haven't gone by now what you're seeing thus far in terms of industry wide independent closures.
Obviously, you've got touch points and pretty much 50 states. So any color you can provide in terms of the closure outlook, thus far would be great.
So clear.
Clearly, we're not hoping that other people are suffering through this crisis. So however.
If you look at the industry forecasts from the various associations.
A significant number of closures that have occurred.
And that will continue to occur as this extends out.
And those numbers range.
Broadly based on the study but.
There. It is mostly believed to be in the independent restaurant issue, but Theres you also seen a bunch of change are struggling.
So.
So we're not sure what the total fallout is clearly when there is empty empty restaurants.
Could be opportunity for us, we're not hoping to gain on other people's losses. However.
It will be an opportunity for us as those numbers are substantial and.
So on that in terms of restaurants, the numbers range in the 30 percentage points and in terms of independents they range higher than that so those are the general numbers. We're seeing we don't have any insight other than what we're seeing from the industry studies and that's that's what we're that's what we're here yeah I think the national Jeff.
The National Restaurant Association has published.
That they are currently seeing about a 100000 closures in the industry.
I would categorize that by category they.
They haven't defined whether.
The break out there around independents and chains I think Steve brings up a very good point.
Don't make the assumption is that this thing is just impacting independence its impacting vulnerable changes to be clear winners certainly our brands will be at the top of that list and there will be others that struggle because they don't have the scale or the infrastructure or.
The talent that some of these more formidable brands like Applebee's and IHOP have.
Understood and then just lastly.
It's been great working with Steve over the past number of years I know you guys talked about at some point a transition to a new CEO in early 21, just wondering well, perhaps a delicate topic just if there's any update in terms of how that.
Search go lease or whether Steve decides he's going to stick with us for the next few years, just because its actually its not that delicate at all.
So the process is the same the board is working diligently along the process.
They will make an announcement.
At some point when they decided that the final positioning of it obviously I'm here.
Working surprisingly full time.
On as we continue on this process and we'll do that until we've got somebody new to report to you that will come in and hopefully belt build build the brands from here.
Great. Thank you.
Now I would now like to turn the call back over to our presenters for their closing remarks.
So thank you.
I appreciate your time appreciate the questions. Obviously, we feel pretty good about where we are but it is a cautious optimism based on what we might face going forward.
However, we think we're in a great position with a great business model great brands, Great franchisees will.
We'll look forward to speaking with you again in hopefully a healthier and more profit more profitable new year.
Ladies and gentlemen. This concludes today's conference call. You may now disconnect. Thank you for your participation.
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