Q4 2021 Dine Brands Global Inc Earnings Call
Good day and thank you for standing by welcome to the Q4 2021 Dine brands Global Inc. Earnings Conference call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today can dip team and exec.
Can a director Investor Relations. Please go ahead.
Good morning, and welcome to Dine brands fourth quarter fiscal 2021 conference call.
Bye bye.
Ajay CFO Jonathan.
And Jay Johns President of IHOP.
Before I turn the call John Please remember our safe Harbor regarding forward looking information during the call management may discuss information are forward looking and involve known and unknown.
Certainties and other factors, which may cause actual results.
Oh boy.
These forward looking information and the.
Factors, which are detailed.
And 10-K filings.
The forward looking statements are as of today.
The obligation to update or something else.
These statements.
We may also refer to certain non-GAAP financial measures, which are described in our press release and also available on <unk> Investor Relations.
I'll turn it over.
Hey, Thanks, Ken and good morning, everyone on behalf of John J and Beth Thanks for joining US we're at a moment in time. It reminds me of a tale of two cities.
Cities I read in college or in our case, a tale of two wins, it's headwind and tailwind spoke at the same time tailwind because guests are back in our restaurants and consumer intent to return to restaurants.
At a pandemic period high our new largely incremental off premise business is holding steady at more than two times 2019, and restrictions are largely being rolled back across the country. Yeah. At the same time, we're combating meaningful macroeconomic headwinds inflation, the labor shortage supply chain disruption.
And now the war in Ukraine.
That said dying is stronger than ever and that's because we play both defense and offense during the past two years, our investments in test menu simplification and off premise business all position us for additional growth in 2022.
Covid did surprise US again late in Q4, yes, despite omicron impact beginning in mid December we maintained our momentum in Q4, delivering another solid quarter today I'll share highlights of our Q4 and our full year results I'll talk about the impact of <unk> and other macroeconomic challenges I will frame up the ways.
In which the past two years made times stronger than ever before and I'll recap, our most important accomplishments in 2021.
So I'll begin by sharing the quarter's highlights, including comp sales and EBITDA cash flow and development.
First for the second consecutive quarter average weekly sales for IHOP and Applebee's, both surpassed the comparable quarter for 2019 for the sixth consecutive quarter Applebee's beat its comp set well outperformed its category two out of four quarters last year. According to black box.
We recognized revenue of $229 $6 million and EBITDA of $60 million, which reflects the momentum of our brands our franchise model and consumer commitment to returning to restaurants for.
For the full year, our brands opened 46, new restaurants globally and closed 96, Thats, our best net development performance since 2019, and an indication that franchisees are pivoting from defense.
The offence and for the 12 months ending December 2021, our assay like asset light model generated $191 million of adjusted free cash that's an improvement of 79% compared to last year.
So our Q4 and our full year results are impressive, particularly considering the virus and certain macroeconomic headwinds I'll address those those now.
Beginning in mid December Omicron briefly agitated staffing challenges and traffic before bouncing back in mid February at this point in time the impact from Amazon is largely dissipated.
We continue to see the impact of inflation on the cost of beef poultry and pork products soils and eggs and in light of the situation in Ukraine, we're closely following energy costs.
And while we expect supply chain availability and pricing to moderate throughout 2022, the increases in cost of labor are likely to remain over the long term.
Despite these headwinds we are increasingly encouraged that we're at the beginning of the end of Covid and as we transition to the endemic phase of the virus. We are optimistic that the days of mass requirements proof of vaccination and capacity restrictions are behind us.
So now I'd like to focus on dine in how we're emerging as stronger than ever from the past two years and I think it's important just to define what I mean by stronger strength is not only about the number of our brands brick and mortar restaurants today strength is all about in restaurant technology digital innovation loyalty program.
Communicating and serving our guests on their terms, when where and how they prefer and in that context I'll share examples of what we've done that have made us stronger.
First throughout the last two years, we've innovated in the in restaurant guest experience for example, our hygiene and safety protocols are enhanced and will become the new standard guest can now put their names on our waitlist and pay their bills with their phones servers are now serving server tablets, which helped them with efficiency and speed of service. They also earn.
More money this year.
We're rolling out IHOP and.
And Applebee's is projected to follow in 2023, the new POS includes a new kitchen management system and server tablet integration and provides a boost to front of house and back of house productivity and improved guest service and help servers earn more.
The second reason were stronger is because we have innovated the off premise experience applebees and IHOP through takeout and delivery more than two times versus 2019. This is largely incremental business that we intend to nurture and grow.
To go packaging is also nexgen it keeps food hot longer and it's designed to showcase our menu.
We supercharged technology investment in adoption and throughout the year and 'twenty throughout 2022, Applebee's Dot com IHOP dotcom flip dot com and their associated mobile apps will all be brand new.
We're changing back of house processes to better accommodate our higher off premise volumes. For example, we introduced car side Express at Applebee's and curbside at IHOP.
To use Geo fencing technology to track guess proximity to the restaurants and shorten handoff times.
And importantly, we implemented our new CRM and digital platform that is vastly improved our digital marketing and marketing analytics, which serves as the foundation for our loyalty programs.
Finally, we're stronger because we've streamlined operations and identify new sources of revenue that strengthened the financial performance of our franchisees.
Today for example, our menus are streamlined by more than a third compared to pre COVID-19 and as a result of our kitchens are more efficient there's less food waste faster prep times improve the quality and consistency of those items that remain.
And our franchisees embraced outdoor dining and expanded their seating capacity with minimal investment in capital.
Applebee's launch cosmic wings, and IHOP is testing virtual brands thrilled cheese and Super Mega deal and seven test markets with even more markets coming online providing incremental revenue to our franchisees and.
And we work with our franchisees to expand our sales channel via Ghost kitchens in the U S and abroad.
Most importantly, our asset light model allows us to invest in what we do best menu innovation marketing and technology offer the benefit of our franchisees.
So our scale is also uniquely dye our IHOP and Applebee's purchasing co op. For example, procures approximately $2 billion in goods and services annually and this significant market footprint helps mitigate to some extent supply chain availability and cost dynamics.
Our scale enables us to invest more in technology than either applebee's or IHOP could do on its own and finally, our world class brands are also uniquely die Applebees and IHOP continued to gain share because guest trust us love Us and appreciate that we're focused on delivering delicious food at a great value while also providing.
Experiences that are enjoyable and safe.
I purposely focus my comments this morning on our results and our 2021 accomplishment and John J and Vance will do the same that's because we are looking forward to sharing our plans for growth during our investor and Analyst Day next Wednesday March nine at the Westin Grand Central in New York City or via our virtual broadcasts and with that.
I'll pass over to Vance, who will discuss our financial performance.
Thank you John .
As John mentioned, we are well positioned for growth and I'm pleased to share with all of your financial result.
Start with a recap of our operating highlights.
Provide a summary of capital allocation for Q.
One five.
Finally, I'll review, our financial performance guidance.
Starting with the income statement.
Franchise revenues for the fourth quarter were $162 $9 million compared to 134.
For the same period of 2020.
That improvement was primarily due to an increased royalty revenues, which reflected significant operating our business over the last 12 months.
And without advertising revenues franchise revenues increased 1%, mostly due to higher domestic franchise restaurant sales.
Our company restaurant operations and also for the <unk>.
Fourth quarter were $46 $6 million.
$32 $6 million with the same quarter last year.
This was mainly due to an increase in customer traffic and average check.
Medical segment revenues for the fourth quarter and $29 1 million.
$7 million for the same quarter.
One.
The favorable variance was the result of an increased percentage for closing comments.
Franchisees retail sales and a declining level John .
Adjusted EPS for the fourth quarter was $1 32 compared to adjusted EPS.
One of the same quarter last year.
Improvement was 43% decrease in gross profit, partially offset by higher G&A.
Yeah.
Now, let me provide a little more detail on the increase in G&A.
As shared on our Q2 'twenty one.
The G&A to be higher second half relative to the first half of the year, mainly due to two things one our incentive compensation.
There are two plan to the burden of expenses professional services and travel until the second half of 'twenty.
Why.
Our Q4, G&A was $48 9 million.
$39 4 million.
Last year.
Approximately 70% of the increase was due to our incentive compensation.
So now let's move to EBITDA for 2021 consolidated adjusted EBITDA was $253 3 million compared.
Compared to a $158 $7 million in 'twenty, one but.
The decrease was primarily due to improvements in our business, which led to increases in both total.
Revenues and gross profit.
Consolidated adjusted EBITDA for <unk> was also higher than outperformed guidance. This was mainly due to lower than expected G&A expense.
And we have built this into our 2022.
Guidance.
Now, let's get to cash flow, we generated adjusted free cash flow of $191 million.
While this compares favorably to 100 $166 million for 'twenty one.
Cash from operations for 2021 was $195 8 million compared to $96 $5 million for 'twenty one.
The improvement was primarily due to higher gross profit favorable change in working capital, partially offset by higher G&A expenses.
It is important to note that as of December 31st, especially all of the remaining balance.
$62 million.
Adam we obtained Tucson by our franchisees in 2021.
This includes royalties and.
Run rate.
It is also a strong indication of the financial health of our franchisees and importance of Washington DC.
<unk> had a favorable impact.
Right.
Capex for 2021 was $15 8 million compared to $10 $9 million for 2020.
Roughly half of our Capex.
Thanks.
Alrighty.
Now, let's go to the balance sheet, our financial discipline has helped us maintain our strong cash position gives us the flexibility that we're looking for rather we ended the fourth quarter with total unrestricted cash.
One.
This compares favorably to unreached unrestricted cash of $204 $2 million in the third quarter.
Our leverage ratio also improved by half a turn over Q.
Q4, It was 386 times compared to what we see in Q3. This represents.
Lowest leverage ratio since the fourth quarter of 2015.
Let me also share with you our inflation outlook at all.
We continue to be impacted by inflationary pressures just like the rest of the restaurant industry.
When we won our year over year commodity inflation was approximately 17% on average across both brands.
Looking ahead, we anticipate some moderation in commodity cost in the second half of this year based on current conditions and available information, we expect inflation for 2022 to be north of 10% for both brands compared to last year.
A reminder, it takes approximately 2% to two 5% of menu price increases for our franchisees.
It's about 10% of commodity inflation.
Regarding capital allocation, we continue to create value for our shareholders. We do that by returning capital along with investing capex in G&A to unlock long term growth.
Steady improvement in our business to 24 months position us to resume returning capital to shareholders.
Fourth quarter cash dividend of <unk> 40 per share or roughly $6 $9 million in aggregate on January seven.
We also repurchased 59000 shares for approximately $4 $5 million in the last 45 days of the year and weighted average price of $75 81 per share.
Mercury one there was approximately $66 million remaining on our current repurchase authorization.
And Philip that so far in Q1 of this year, we have made two significant decisions for our shareholders number one we have data on <unk> <unk> quarterly dividend represents a healthy starting point to growth.
As you can see from our financial results our businesses are getting closer to what they see this enable us to approve a 50% increase in our quarterly cash dividend to <unk> six per.
For sure what first quarter of 2022.
Number two the board also approved a new share repurchase program authorizing the company to purchase repurchase up to $250 million of its common stock.
Our new operating Aegean will replace the existing plan, which was approved in February of 2019.
Lastly, I'll review the highlights of our financial performance guidance for 2022, which assumes there are no further disruptions to our business due to COVID-19 this year other than the impact on.
Q1.
Please see the press release, we issued today with the details on our guidance, we believe that the current disruption in the restaurant landscape has created an opportunity for time to gain market share position.
Positioning ourselves to execute our peers.
'twenty two is an investment year, we are making upfront investments in technology development and new revenue channels for both brands.
Well further positioned <unk> for long term sustainable growth.
The benefits of those investments may not be fully seen in this calendar year.
For 2022, G&A is expected to range between approximately $188 million.
E L F.
Moving on cash.
Based compensation expense and depreciation of approximately $30 million.
At this point.
Quite a mccann we cannot hear you. Please check your mute button.
We projected net unit development to range between 50 and 65 domestic restaurants.
We expect unit development between five and 15 net fewer applebee's restaurants, signifying an applebee's planned portfolio rationalization.
Lastly, consolidated adjusted EBITDA for 2022.
<unk> to be between approximately $235 million and $250 million inclusive of company restaurant segment EBITDA.
Our business has demonstrated strong improvement.
Continued execution of our growth strategy and ability to consistently generate meaningful adjusted free cash flow Macy's enthusiastic about a year ahead now I will turn the call over to John Lucey will provide an update.
Jonathan.
Excuse me, one second Vance I'm going to jump in there was a technical glitch.
30 seconds, where we understand that no. One can hear you and we lost you just about the time you were saying that the company has.
Put the new buyback authorization in place a $250 million could you just cover that section because we missed you for about 30 seconds.
Sure.
That was another two point I said the board also approved the new purchase repurchase program authorizing the company to repurchase up to $250 million to the common stock the new authorization will replace the existing plan, which was approved in February of 2019, and then lastly, I'll review the highlights of our financial performance guidance for 2020.
Two which assumes there are no further disruption to our business due to COVID-19 . This year other than the impact on Q1.
That's good that's good that's why we picked it back up.
Further advance you are grateful times, so good morning, everyone.
Thanks for joining <unk> 2021 wasn't it.
An exceptional year for the Applebee's brand after the pandemic briefly interrupted our momentum in Q1 of last year. After these delivered comp sales increases of 10, 5% in Q2 12, 5% in Q3 and nine 1% in Q4 versus our 2019 baseline as well.
Prior quarters Q4 weekly results were very consistent with comp sales in the first nine plus 13% range, except for the final two weeks of the year when in fact, it was quite a bit.
A full year basis 21 versus 19.
<unk> posted a comp sales increase of six 2%, representing our best performance under <unk> ownership.
This performance reflects weekly restaurant sales of $50500 also representing our highest sales volume under diner.
While the brand attained record results on multiple fronts I am pleased to report that our company restaurant portfolio also delivered its best year in 'twenty, one posting an 11% comp sales increase over the 19 and ranking number four among our 30 franchise partners.
And according to Black box intelligence with the exception of only the first week of 2021, Applebee's outperformed the casual dining category, where a remarkable 51 consecutive weeks last year by an average of 740 basis points.
I should note that Applebee's also outperformed the category on 'twenty, one versus 'twenty basis by 960 basis points with a comp sales increase of 38, 2%.
In addition to comp sales applebee's fundamentals remain rock solid.
The brand continues to maintaining category leadership on important attributes such as affordability menu variety and convenience to go awareness delivery awareness and overall brand awareness.
Now.
On the off premise front Q4 weekly sales remained very stable at $13800 per restaurant more than double our pre pandemic volume accounting for 27% of total sales Applebee's Q4 sales mix consisted of 73% in item, 14% car side to go and 13 <unk>.
<unk> delivery.
We had a significant investments over the past few years and continued operational excellence.
Now more convinced than ever that our off premise business as a genuine core competency and a very leveraged to a point of difference for the Applebee's brand.
In addition, we will soon be adding our third drive thru pickup window. This one in Columbia, South Carolina with plans for several more throughout the year, although a small sample size preliminary results are very encouraging.
Delivery front, we started growing as John referenced our constant ways virtual brands with door dash over the past several weeks on a market by market basis at present about 1000 restaurants are now active on GOR dash with the balanced with all of this model and we anticipate completing wings delivery expansion in Q2.
With the addition of Grubhub.
Now on the development front, we closed 25 restaurants in 2021, that's our lowest closure totaling five years signifying entered applebee's planning portfolio rationalization. In addition, we opened five new traditional restaurants last year we.
We hope to double this number of new restaurant openings in 2022 with a combination of traditional and ghost kitchen units Martin in the beginning of our development escalation moving forward.
As we methodically reestablish our development pipeline and expect to achieve net new unit growth beginning in 2023.
As of the end of 2021, Applebees had 578 restaurants in the U S.
To help address.
Very obvious ongoing labor challenges, we executed our second national hiring day on February 8th with Great success in total applebee's secured more than 58000 applications on a single day, surpassing our 40000 total from last year, this along with media muscle and supply chain expertise.
These represent just a few examples where scale provides applebee's tremendous competitive advantage.
Looking forward, we will continue to leverage culinary beverage marketing and media innovation as primary differentiators for the Applebee's brand.
Closed out 2021 by driving awareness of our co branded partnership with Pepsico and Cheetos, when we kicked off 2022 by thanking our oil and gas for sticking with us throughout the pandemic as.
As we move through the year, you can expect a mix of.
Targeted location based messaging from Applebees, featuring Buzzworthy innovation and value propositions designed to reinforce our isn't good in the neighborhood of position.
In total I expect national media allocation to be very healthy this year and slightly favorable last year from an absolute dollar perspective.
Summarizing 2021 represented the culmination of our strategic brand optimization work over the past several years as expected 2021 and provides us the opportunity to really unlock applebee's full potential providing a glimpse as to what's possible moving forward.
Proud of our team.
Very proud of our franchise partners I believe applebee's is exceedingly well positioned to flourish on a sustained basis with that I'll turn it over to my partner today for an overview of the IHOP brand.
John Congratulations on another great quarter. Good morning, everyone average weekly unit sales improved each month each month of the fourth quarter sales remained strong averaging approximately 37500 per week in line with the same quarter of 2019.
Although I have comp declined 3% in the fourth quarter. We view this is isolated and not a change in our solid fundamentals.
Several factors that adversely affected performance. The most impactful include the surgeon the omnicom variant in mid December .
Along with the standard operating hours in some restaurants due to labor shortages rolling over the hugely successful tie ins with Mgm's animated Tony Adams family, which was our strongest promotional windows during 2018 and 2019.
Additionally, a four week core menu print mismatch in a day or week holiday mismatch for both Christmas and new years day, which both on Saturdays in fiscal 2021, we take place on the holidays are very advantageous for our brand.
As mentioned earlier <unk> continues to affect the labor supply, but that said <unk> remains approximately 85% to 90% SaaS nationally.
The percentage of our domestic restaurants that are open for standard operating hours or greater are improved by three percentage points to 86% compared to Q3.
Approximately 26% are open and operating 24, seven which is consistent with our previous quarter.
We believe that having additional restaurants opened for standard operating hours.
Positive effect on our dine in business, which is 76% of our sales mix for the fourth quarter. Our offerings business remained steady accounted for 24% of sales in Q4.
Average weekly off premise sales volume for the fourth quarter of 2021 or approximately $9300. This compares to sales volume of approximately $9200 for Q4 of 2020.
To enhance our one one guest engagement, we will be launching our new loyalty program by the end of Q1. This year is a true earn and burn program that allows our guests to collect and redeem rewards when they die.
We believe this program will be a fun and appealing way for us to create even stronger connections with our nearest build brand loyalty and drive incremental visits.
We've evolved our strategy to adapt to the changes in consumer behavior brought on by the pandemic.
As a result, our plans to grow sales extend beyond traditional brick and mortar locations expanding our presence through virtual brands out of our existing domestic restaurants provides opportunity to drive incremental sales with lower capital requirements.
And our fourth quarter, we started to I think two vertical brands in nine restaurants across Dallas, Fort worth and Phoenix and Lexington, Kentucky.
Early results are encouraging and we recently launched a beta test on approximately 50 restaurants.
These virtual brands, which intentionally do not compete with our breakfast day part business required minimum only with us and don't require new equipment to execute.
We're enthusiastic about this flexible lower cost options to meet the convenience needs of our guests.
To provide an update on progress.
Turning to development, our franchisees opened 40, new restaurants globally in 2021 of which 37 were domestic openings.
We remain confident in our ability to significantly expand our unit growth. There are four development formats, which include traditional non traditional small prototype and slipped by all of which can be done conversions.
We opened our second flip location in December in New York City. The units approximately 800 square feet and seeing capacity is about 2000 seats.
I'll provide more details on flip later in the year.
In addition to growing our domestic presence. We're also focusing on key opportunities outside the U S. We recently announced our first franchisee deal in the Caribbean.
First <unk> location in Nassau Bahamas is scheduled to open in late 2022.
Payment with Bahamas limited, which calls for opening 16, IHOP restaurants over the next several years.
Additionally, we announced the deal and as IHOP franchisee in the U S to develop both IHOP and Applebee's restaurant in the UAE.
We also have our first dose kitchen in North America in partnership with dosage of brands, our guests on trial and now sort of a wide selection of affordable menu items for off premise consumption.
To wrap up I'm very proud of what we've accomplished in 2021, we outperformed the category in Q2 Q3 by an average of 183 basis points relative to the comparable quarters in 2019. According to Black box intelligence, we adapted to changes in consumer behavior by launching an array of highest portable items such as our new handcrafted.
We maintain a strong off premise business, even as guests return to in restaurant dining.
We elevated our omnichannel approach to utilize our marketing resources better.
Our franchisees opened 40, new restaurants, including the first two slipped by applications.
I'd like to thank our team members and our franchisees for their volume contributions to make all of that.
Looking ahead, I'm optimistic that our strong unit growth potential and expanding our presence through virtual vehicles. Lastly, we're optimistic that new cases of COVID-19 will start to decline and stacking will return to pre pandemic levels and I will turn the call back over to Jon for his closing comments John .
Thanks, Thanks, Dave appreciate it great quarter for both.
And Applebee's and before we have closing comments I think we're going to take some questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw.
Your question, Chris the Palanquin, we ask that you. Please.
Please limit yourself to one question and one follow up question.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Brian Milan.
Deutsche Bank. Your line is now open.
Hey, Thank you just in reference to the 2022 guidance I can appreciate youre not guiding same store sales by brand today, but I think it would be helpful to understand.
The underlying assumptions on the top line that might lead one to either the high end or the low end of that EBITDA guidance. However, you'd like to talk about that that would be helpful. Either average weekly sales in relation to 2019 or any other ways that would help people know.
Underlying revenue assumptions that youre, making.
Yes.
Thanks, Brian .
As you pointed out we're not guiding on comp, but what goes into our guidance.
It reflects the.
It reflects the.
Initiatives that were working on that that are from comp.
Both development growth and new revenue channels.
There is still.
I think the <unk>.
Margin expansion will happen over time.
2023 after some of these.
<unk> gives our realized but it didn't.
As an investment year for us. So so that's why we're not specifically guiding on comp performance, but.
Having said that we are seeing coming from mostly behind us so anything beyond Q1.
Sure.
A focus for us going forward.
Okay. Thank you and then just a question on IHOP.
It sounds like the percentage of locations that were opened 24 seven.
Didn't change much from the third quarter to the fourth quarter. If I heard you right Jay in the prepared remarks. So just wondering if you could update us on your current thinking on that topic today I imagine as a franchise or you want to get that fully restored what does the franchisee perspective, right now and how are those conversations going.
Well.
We'll get back to pre pandemic levels can give you an answer exactly when that will be clearly.
The pandemic is waning.
Staffing is improving slowly.
And they're getting back with full standard operating hours as you've heard me say that improved 3%.
Three 1%.
In the quarter to right now.
So it is slowly getting pattern I think that once we get to kind of a full operating hours of the standard business, you'll have frame diseases will start opening more and more the way our franchisees historically users even for say a new restaurant.
<unk> typically got started plenty more satisfying for example, restart standard hours then we will move to what we call 2004, two so we will go to 24 hours just on the weekend to begin with and that way. They can slowly build that aggregates faster than I would expect that potency of this changing that.
Thank you.
Brian It's John .
I'll add that on a national basis.
Two quarters Q3, Q4 of last year, you. All may recall, we were saying that based upon cabinets and franchisees, we were about 85% staffed versus what was needed.
We're hearing now from our franchisees.
We ended the first quarter in the first quarter of this year is that we are now approaching 90%, even a little bit better. So we are seeing an improvement in staffing nationally after stalling last year.
Understood. Thank you very much.
Thank you. Our next question comes from the line of Jack Corrigan from true as Securities. Your line is now open.
Good morning, guys. Thanks for taking the questions.
My first question is on on G&A and the guidance for 'twenty two can.
Can you talk a little more detail on the drivers of that and maybe if anything is unique in 'twenty two that that might ease in 'twenty three and going forward.
And then also within that could you quantify any level of permanent savings that you found during the pandemic.
Hey, Jack it's John I'll take it at a high level and then I'll turn it over to advance for a little bit more specific on the numbers, but when it comes to G&A in 'twenty two.
We enter.
My second year as well is there are a couple of things that we want to invest in these investments we believe will pay off over the long term and they're not a permanent increase to our G&A, but there are certainly investments. We think are necessary next year, but right now this year in 2022, one of them is technology, whether it's restaurant based.
<unk> back of house or front of house.
Ambitious plans and whether and for the consumer facing technology and all we want our guests to be able to do on their phones. We also have ambitious plans. There. So there is certainly a tech investment we're making in 2022 that we began last year that we think will pay off over the long term. We're also investing in accelerating unit.
Growth in our loyalty program.
Some other things like that.
Vance can you sort of specifically.
The data behind that.
Yeah.
<unk>.
That's one thing the guidance really reflects the appropriate level of infrastructure that we need to unlock the growth potential of our brand. We do not anticipate another big increase in G&A beyond what we currently planned for this year will cover more of this on our Investor Day next week, but ultimately as I mentioned earlier, we do see margin expansion over.
Time as a result of the expected growth.
New revenue channels.
That we're investing in.
John talked about.
Earlier, just now but the investments are primarily related to technology initiatives designed to support growth franchisees support to improve operations and guest experience and unit development.
So for us.
Sure.
One last thing I'll mention is that we do have.
We do have open positions in different departments.
Different projects in consumer research and product knowledge travel expenses that.
Our plan for 2021, but we're still pursuing in 2022 and that would also be built into our 2019 G&A items.
Great. Thanks, that's really helpful color.
And my second question is really on the health of your franchisees and maybe within that could you could you talk about with furniture. The franchisee store level profitability was in 2021 versus pre COVID-19 .
And then given your comments that you expect 10% plus inflation.
Do you expect that to be pressured materially in 2022.
Well now compound.
Relation 0.1st.
As I mentioned in my prepared remarks I think.
The average inflation for the year were expecting north of 10%.
More specifically about 13% of our applebee's and nine.
Nine 5% for IHOP or for this year with some moderation in the second half of the year versus the first half.
Our franchisees are I think the best way, we can explain our.
The financial health of our franchisees.
Just on the fact that.
All of us for all is being repaid and.
<unk>.
We see that their.
Are there any certain development again growth again, so that also reflection of the.
The vote of confidence from our franchisees and.
But we haven't historically disclosed.
Our JV financial information specific.
No.
Jack This is John <unk>.
I would say very clearly applebees franchisee financial health is better than at any point in my five year tenure here coming back a second time.
They've got a terrific year, and then with respect to cover inflation, there are smart strategic and they'll be very responsible on pricing.
And I view this as market share opportunity going forward.
Great. Thank you.
Thank you. Our next question comes from the line of Nick <unk> from Wedbush. Your line is now open.
Thank you.
Congrats on a solid Q4.
Yes.
The EBITDA guidance obviously.
It's a big concern because youre youre going down year over year.
Understanding it's a year of investment.
A big step up in G&A, maybe you can give us there.
Sneak peek.
Of your longer term expectation around EBITDA growth.
Beyond 2022.
If that's possible.
Hey, Isaac.
This is Vance, we will cover a lot more of this in our Investor day, but.
You said 2022, as an investment year for us.
And the reason why.
The margin is going down year over year is because we're making upfront investments in the business. While the benefits of these initiatives are happening over time. So it's more of a timing mismatch and we think 2023 and beyond is more reflective of our run rate business.
We think of this year.
The year to two to be aggressive in how we think about the future of the business for the next few years setting ourselves up for a longer term.
Sample growth.
But at the same time, we have a very healthy capital return program planned for our shareholders as well. So we're trying to take that more balanced approach with how do we how do we think of our capital.
Understood have you purchased any shares year to date.
Well, we havent, we havent, we have an active purchase program.
As previously approved that we initiated in late.
Late in Q4 of last year, and we continue to do so this year.
Obviously, you announced a new $250 million share repurchase program.
It will be in fact come up and we will continue to do so it is a big part of our capital return program and part of our overall strategy to increase our earnings per share over time.
Okay, and then you guys talked about two to two 5% menu price.
Across the system, if I understood correctly.
Do you think that'll be higher as the year progresses, just given the inflation.
You're talking about.
Hey, Nick John sitting here with respect to Applebee's.
Don't know.
This is a fluid environment as I said, our franchise partners tend to be very strategic and disciplined and conservative in our pricing in viewing us as a market share opportunity.
I don't see an overreach on that part.
Some point moderation in price it will be harder to forecast that at this point.
Yes.
Thank you.
Thank you. Our next question comes from the line of Eric Gonzalez from Keybanc Capital. Your line is now open.
Hey, if I could maybe follow up on some of the G&A and even the Capex investments.
Wondering about the technology side of it is there a way that youre planning to recoup that investment in terms of fees charged to franchisees or any type of.
Transaction fee in the future.
Hey, Eric I'll take that as John It's John P. So the answer is no.
What the value that we add as the franchisor is is the tech platform that we that we build so generally speaking the cost of building the platform.
Our hours and the costs annual service fees and maintenance once we rolled out our that the franchisees and we view this as part of our value proposition, which is the investments, we're making on their behalf and because applebee's and IHOP are part of <unk>. We can do more for both brands in either brand can do on their own when it comes to investments in tech.
Okay Fair enough and then on the inflation commentary I think you said you know maybe slightly higher than 10% can you maybe comment on what you might have locked in for the year and how much visibility you have in that that 10% how that compares to prior years.
So on the prior.
Prior year, I think in 2020 , one will be solid.
Close to 7% for Applebee's and 6% for IHOP.
We don't control menu pricing for our franchisees our franchisees.
Do so on their own.
And so it's a <unk>.
Louis Blues situation I think the Best example, I can give us.
It wasn't my prepared remarks, which is.
222 to two 5% of menu pricing increase covers about 10% of inflation costs are.
Our franchisees are aware of the math and then we will look at that is to take a very.
Disciplined approach to menu pricing increase.
Going forward.
Hi, This is John I would just argue both brands are extraordinarily well positioned to navigate an inflationary environment given our scale.
Alright. Thanks.
Thank you. Our next question comes from the line of Jeffrey Bernstein from Barclays. Your line is now open.
Great. Thank you very much first just wanted to follow up on that last comment about the two to two and a half price.
That's the math of what it takes to to mitigate I guess, 10% basket inflation I'm. Just wondering if you could share what the actual pricing is I know the franchisees get to make their own decisions and like you said encouraged to hear that they are disciplined in terms of.
Being cautious on strategic but whats the pricing, perhaps in the first quarter of 'twenty two looking like for.
For each brand.
Yeah, Hey, Jeff It's John Let me, let me just sort of jumping on behalf of both brands.
We can tell you is we haven't seen Q1, yet for this year, but what we can tell you is typically.
Franchisees in both brands raised prices, 1% to 3% a year last year, particularly in the back half it was 3% to 4%. So they did increase.
Basis points or so what they had historically done and so when Vance gives you that math of two 5% increase covers a 10% increase in inflation. It just it gives you the sense that they are.
At least mathematically covering their cost of goods and probably also.
A bit of the inflation, that's built into labor costs as well as a result of the last year and then the important thing to keep in mind is that both of our brands our value brands and that's particularly important right now and while our franchisees make their pricing decisions independently of us.
They are aligned on balancing this bit of a tightrope between maintaining value for our customers as well as protecting their margins as best they can in this environment.
Understood.
And then a couple of questions just on the cash usage, one just related to the Capex spend.
It looks like guidance is for it to roughly double versus 21, I'm just wondering what the biggest components of the incremental spend R 22, whether that's some components of the technology or.
The company operated side of the business just trying to get a gauge for the increase in the Capex guidance.
Yeah. That's a good that's a good question for Beth to walk through the components.
Yes. This is a key investment areas for Capex is unprecedented and off premise technology to improve guest experience and operating efficiency that probably the bigger piece.
We're spending money on loyalty program on CRM infrastructure and then there is a piece that's on our company.
Yeah.
Got it and then just lastly, as it relates to cash usage beyond Capex I know you mentioned your leverage I think I said it is the lowest since 2015 so.
With that as a backdrop I'm just wondering what your outlook is for that.
Specifically I know you raised the dividend you've got a little share repurchase I'm. Just wondering whether this is now kind of the more normal steady state dividend, we should expect.
Or whether you think thats further upside to go on that dividend I know the initial dividend you established a quarter or two ago was more starting point. This was the bump up.
Trying to get a gauge again for your leverage view and the return of cash which was your priority. Thank you.
Sure.
We've said this before we have a very disciplined approach to cash utilization.
It is our objective over the next few quarters to evaluate and balance our capital allocation strategy based on one investment in the business and technology as we said two is returning capital to shareholders.
Mentioned, making sure our leverage level is appropriate and for maintaining the financial flexibility to address any remaining uncertainty from the pandemic or inflation vapor supply chain issues that we're seeing right now right and then lastly, just any strategic M&A opportunities.
On the dividend specifically.
Increase our cash dividend by 15% last quarter, where it currently has about 2% to 3% dividend yield depending on stock price you use for that calculation. We do believe there's an attractive yield relative to our peers, but we have plans to further increase our dividends over time and.
Purchases, we talked about this huge $150 million.
Program that we just started.
Our level.
Repurchases will be opportunistic and based on our view of the company's intrinsic value and where things are trading, but it's also just going to be a part of our overall strategy to increase our earnings per share over time.
Hope that answers your question.
Yes.
Jeff It's Jonathan I'll, just put a little bit of a bow around that if I can I think what's implied in the question is.
400 plus million dollars.
<unk>.
Cash balance that we intend to sit on over the long term and the answer to that is no. This is certainly a moment in time.
As you know we were accumulating cash during the two years of the crisis to make sure that we had but we needed not knowing what the future would bring.
And then last year the recovery happened much more quickly than than the industry anticipated. So we had a good year last year as well so as Vance said, we're now looking over the next couple of quarters.
<unk>.
A very holistic, but balanced approach to how we work with that cash balance.
Great look forward to see you next week.
Okay.
Thank you. Our next question comes from the line of Brett Levy from <unk> Partners. Your line is now open.
Great. Thank you for taking my question.
Just building on Jeff's question, there as you think about the initiatives and the investments.
How should we think about what kind of savings and contributions we can see from some of these tech investments.
As it relates to labor and also what kind of drivers we could see from some of your initiatives that you discussed whether it's on or off premise.
The labor initiatives will impact the franchisees financials, and where we are.
The interest too to make sure that the health of our franchisees are.
Are taken care of.
We won't see that.
In <unk> financials.
But.
The <unk>.
Result.
Investments will happen over time.
The ghost kitchens, and the virtual plans that we're working on what happened throughout the year.
We will continue and will continue so that's where that's where the growth of our investment will come in.
Of course, the next day.
Next 12 to 18 months.
I think.
As I mentioned earlier.
2022 calendar year guidance.
It looks off just because of the fact that we are making upfront investments from the start and then again. The result of this expected growth is happening over time so.
Please come to our Investor day, we will get into more details on 'twenty three and beyond.
Target that we're shooting for for the company and you also get a sense of.
A more detailed plan from each one of our plant up overview over the next few years.
And Brad it's John I'd like to add that.
Technology is meant to do two things around advanced Vance was with a clear that at the franchisee level at the restaurant level, It's certainly going help with cost by making back of house in front of house more efficiency. The benefits of dine is on the top line.
Helping franchisees grow their business, which obviously helps us grow our franchise revenue. So the checked out the investment we're making for example in the technology to support IHOP soon to be announced the loyalty program is going to we believe drive traffic, which benefits us the investment, we're making in apps and off premise to grow and nurture that business.
Increases revenue the franchisees that benefits us.
And even handhelds for servers, which makes the restaurants more efficient also helps IHOP for example on weekends when they've got 90 minute wait to turn tables faster that benefits us as well so the technology benefits dying as well as the as the franchisees.
Thank you.
Thank you. Our next question comes from the line of Todd Brooks when the benchmark. Your line is now open.
Hey, good morning, everybody I just wanted to first of all I'll go back I think the call cut out in a different spot than maybe John where you reset it to for for us on the sand that cut out as soon as advanced started talking about.
G&A $188 million to $198 million in the next 30 seconds were gone after that I didn't know if you wanted to take a second here to get that in.
And of the transcript.
On the call here.
Yes, so I would say in G&A is on $898 million, including noncash stock based comp and depreciation of approximately $30 million.
I mentioned that the range is inclusive of G&A related to the company restaurant segment.
Our projection also includes some G&A spend from 2021 that was pushed through 2022 that was the comment I made on G&A and Capex I said, we're expecting we're expecting to range between $33 million and $38 million.
And that reflects the additional investments in the business that we discussed earlier.
We expect upside to development at IHOP compared to prior years with projected net unit development to range between 50, and 65% domestic restaurants, and we expect unit development between five and 15 net your applebee's restaurants, signifying the end of Applebee's plant portfolio rationalization.
Okay, great. Thanks, guys I appreciate it.
Can you quantify for us that amount that slid out of kind of Q4, 'twenty, one and into 'twenty two as we're evaluating maybe what what the component that the jump is that you had intended to spend this year, but weren't able to.
It's an open positions in different departments that form fill in projects in consumer research and product development and travel expenses that are still pursuing in 2022 is not a material amount, but it is.
It does make up some of the 2022 guidance.
Okay great.
And then.
John on Cosmic wings, I know you spoke to.
The rollout I think on the second platform in Q2, so I guess well a presence across the two platforms. When that's completed then just thoughts and I'm sure you'll you'll share more details next week on what type of sales layer cosmic could be perhaps ms.
Sure good morning.
It's tough to gauge at this point in time, because we had a hiccup.
I think I referenced on the prior call we had a supply interruption on the wins for us and so we really put the pedal to metal.
Think about it this way we started with <unk>.
Sure.
Cosmic <unk> deployments with Uber in February March of last year.
We are now currently expanding to the largest provider.
Delivery provider door Dash and then.
We will follow over the next month or so with Grubhub and so by the time, we get into Q2, we will have full deployment across all three of the largest delivery providers at that point, we will have.
Very clear view as to the full potential of Hudson.
Wins in terms of <unk>.
Average weekly sales and incremental.
The incremental impact on the business side that will quantify that.
It's just too early quite honestly at our Investor call for our Investor Conference next week.
Okay Fair enough and then Jay just a quick question.
Can you walk through loyalty timing again, maybe a little bit on the structure of the program how.
How the customer gains points and when we should start to see whatever revenue benefit we would see from loyalty hitting it. Thank you.
Yes, Thanks, Tom.
The program like you said should we should get that launch by the end of Q1. So that's the end of this month.
So we're very close to that being launched.
To be able to share some more details with you next week as well on all the specifics, but yes as I said, it's kind of as a comp program rising earn you earn rewards by extending mining right.
Just a pure discounting program right, you're actually driving sales traffic et cetera for people to spend money to actually earn the ability to redeem that for other food items et cetera, and we will probably be some chances for them.
Do you think other than just assume that we have.
The opportunity sometimes to do special programs with vendors et cetera, where they might be able to get rewards or more.
<unk> space and things that we might be able to do for that so a lot more details to come on that but we.
We think the gas are really going to be excited about the program is going to be very unique I think in our segments and I believe it's really going to help us drive.
Guess guest behavior and the way it also for us to engage with our fans will say at breakfast.
That would be kind of at another time today. So we can expand our base.
Hey, Mark.
Okay perfect look forward to seeing you all next week take care.
Thank you. Thank you. Our next question comes from the line of Brian Vaccaro from Raymond James Your line is now open.
Thanks, and good morning, I was hoping you could just clarify that back to the G&A and the Capex guidance and thinking about the increase in each is there a way to ballpark sort of how much of the increase is related to corporate infrastructure investments versus call. It direct co investments at the store level.
Whether it would be helping to pay for new Pos or other equipment and also does it include any new unit growth incentives to franchisees.
Thanks, Brian So the Capex guidance does not include.
Incentive program.
But.
Yes.
And then to your question on the co investment the way the way we work it out with our franchisees typically that we invest in the infrastructure part of the technology. They will pay for the ongoing maintenance of licensing.
Fee part of it. So so it's a co investment from that perspective, but we're not necessarily paying for the hardware cost of the tablets or in the Pos.
Hardware themselves.
Okay. That's helpful and this new range, we're talking about in 'twenty. Two 188 to 198, just so I'm clear did you say that that's a new normal level of spend expected going forward or are there one timer investments in 'twenty, two where G&A dollars could be expected to decline from this level in 'twenty three and <unk>.
And can you just clarify that yes.
Yes, well I think what I said was we don't expect another increase.
In G&A going forward the increase.
Thanks.
People that we hired services projects that we're looking to do.
And so so.
It's investments that.
In the infrastructure to unlock the growth that we think we can achieve overall I think margin expansion will happen and then.
The revenue growth will outpace our G&A growth then.
For 2023 and beyond.
<unk> will make make more sense and you will see.
You see our our goal we set for ourselves going forward.
Okay, and sorry, two more on G&A.
The incentive comp piece of it.
How much was how much incentive comp was included in 2021 can you just level set how much higher versus a normal year is that just to help us frame. The comparison into 2022 I heard your comment on the fourth quarter. I think you said it was up 7% or $8 million of the increase in <unk>.
They might have been related just if my quick math is right. Maybe it was up seven or eight is that representative of an outsized incentive comps and we should expect incentive comp to go down in 'twenty two.
Help level set that.
Yes, you should definitely expect incentive comp to not repeat at the same level of 'twenty one what.
What happens is we.
We do have we.
We do have catch up.
Catch up on the G&A that we cut in in 2020 that we have to make up.
'twenty one 'twenty two so so the catch up roughly offset the.
The old.
Would have been the higher incentive comp that we experienced in 'twenty one.
Okay, Great and just.
Just to clarify I think I said, we shouldnt expect incentive.
I think at that point wasn't wasn't made on the performance of the company in 2021 was an exceptional year, so that would be correct.
Right understood sorry.
One on G&A that you could help me clarify hopefully the guidance you said includes stock based comp and DNA of $30 million I think historically when the company has guided G&A that stock comp and DNA component has been $40 million to $45 million.
Can you help understand whats driving that difference is there is some difference in how youre defining that are accounting for that or any help there.
I think part of it was was the type of investments we're doing in terms of company restaurants versus <unk> versus <unk>.
Corporate restaurants, and then Matt or stock based comp that goes into it as well there is no.
There is no strategic or big changes in estimates other than other than sort of how how the plant and it worked out for us.
What a year.
Okay, and then last one sorry.
I wanted to ask about the balance sheet leverage and what are your targets in terms of leverage do they differ at all from the company's historical leverage sort of in that five <unk> debt to EBITDA. I know you were a little lower than that now and then could you just remind us too when when when does the make whole expire on your existing notes and is there an opportunity to refi.
At some point moving through 'twenty two.
Yes, let me, let me hit the <unk> pipeline and I'll talk about the leverage point.
So so quick reminder, our 2024 bond callable at par in our 2026 bond becomes callable at 101 in June of 2022.
We had a one year window for us to exercise a call option. So the.
Market is volatile right now, but we'll monitor it very closely.
Only reason, yes, if a whole business securitization market is in our favor in terms of rating structure, but the call option prices, we don't happen to them.
Short short run does not close.
Sure.
We think we're at the right leverage level right now.
Our business isn't covered nicely, we do benefit from the relatively affordable securitization market without overextending, our leverage level.
We mentioned this before our CVR peers or are in the low threes leverage and then our island franchise peers are in the mid to high fours and work in between those two concepts.
<unk> is one seven times this year so so so.
So we're really in a good position.
And we will naturally delever over time as EBITDA grows obviously, but.
Really happy where we are.
Thank you at this time I am showing no further questions I would like to turn the call back over to Jonathan for closing remarks.
Hey, thanks, so much thanks, everybody for joining our call today Big Thank you to our management team on the call today and across the country to our franchisees.
Our team members for their hard work.
To deliver another strong quarter.
So all of you.
Looking forward our entire leadership team will be in New York next week, we will have members of our board there will have some leaders from our franchisee community I look forward to spending time with you telling you our story about the future.
At our Investor Conference in New York City, and also sharing with you.
That was the best.
The best of IHOP, and Applebee's cuisine, so comfort breakfast and lunch as well so thanks very much.
Look forward to seeing you next week.
This concludes today's conference call. Thank you for participating you may now disconnect.
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