Q2 2022 Dine Brands Global Inc Earnings Call
Yeah.
Good day, and thank you for standing by walking through the Dine brands Global Inc. Second quarter 2022 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 one on your telephone.
Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to your speaker for today, Brett Levy, Vice President of Investor Relations and Treasurer of Dine brands Global Brett. Please go ahead.
Good morning, and welcome to Dine brands second quarter Conference call I'm, Brett Levy, Vice President of Investor Relations and Treasury for Dine brands Global and I am joined this morning by John Peyton CEO Vance Chang CFO , Jay Johns President of IHOP and Johnson <unk>.
Ski President of Applebee's before we turn the call over to John Please remember our safe Harbor regarding forward looking information.
During the call management May discuss information that is forward looking and involves known and unknown risks uncertainties and other factors, which may cause the actual results to be different than those expressed or implied.
Please evaluate the forward looking information in the context of these factors, which are detailed in today's press release and 10-Q filings.
Forward looking statements are as of today and assume 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 also available on dine Brands' Investor Relations Web site.
Beginning with this release, we have returned to our prior quarterly same store or comparable store sales schedule rather than the more recent practice of sharing monthly results, which we believe became temporarily necessary during the peak of the pandemic given significant month to month volatility and uncertainty during the time.
With that I'll turn the call over to John .
Thanks, Brad welcome to the team and good morning, everyone. Brett brings to die more than 25 years of advisory and investment experience in the restaurant and retail sectors. Both on the sell side and on the buy side and prior to joining US Brett was the publishing analyst for Deutsche Bank, UBS and M. K M partners covering the restaurant industry. He.
Received his degree in economics from Rutgers and I know he's going to be a great asset as dawn continues to grow and we're looking forward to Brett driving our shareholder engagement and outreach.
Welcome Brett to the team.
So now shifting to the quarter. Thanks to the hard work of our team members and our franchisees, we sustained strong momentum and achieved another quarter of solid performance in Q2.
Our competitive position today remains strong because of what makes us uniquely dine and that's our delicious food are two world class brands, our asset light business model and our committed teams and franchisees around the globe.
The last few years have showed us how important restaurants are and how more than ever guests crave connection and community with one another so in Q2, both brands sustained and built on last year's momentum Here's the highlights Applebees and IHOP achieved positive comp sales of one 8% and three 6% respectively.
<unk>.
Off premise sales remained strong in particular relative to pre pandemic levels and dine in continues to recover in Q2 dine delivered strong EBITDA, despite higher costs and we remain comfortable that we will deliver results within our fiscal 'twenty two guidance range.
During the quarter, we returned $61 million in cash to our shareholders, which resulted in the repurchase of over 900000 shares or about 5% of our shares outstanding we raised our dividend, 11% to 51 cents and we're on plan to meet our development guidance for the year in spite of lending supply chain and permitting difficulties occur.
Cross the country that said economic conditions, absolutely remain challenging this.
This morning, I'll address the operating environment, including cost of goods consumer sentiment labor and pricing and I'll provide an update on our outlook.
First I'll begin with the acute cost inflation, we're experiencing across all inputs to our restaurants.
Our brands experienced a 22% rise in commodity costs during the second quarter, but dines P&L was not materially impacted because of our asset light model.
We're forecasting commodity cost inflation to ease the low teens for applebee's and mid teens for IHOP during the back half of the year.
Second we experienced some weakening consumer sentiment to varying degrees in each brand consistent with the economies overall slowing momentum.
We understand the economic pressures that our guests are facing including gas prices and in <unk>.
Fact of the declining gas cost or in the last 50 days are sustained it could serve as an indicator that suggest the potential for improvements for the back half of the year.
Third the labor market also continued to be tight last quarter, especially in the service sector as has been widely reported.
And while it varies by brand and by geography, we remained at about 90% of pre pandemic staffing levels.
And it's important to emphasize that team members are truly the heart and soul of every restaurant our franchisees are investing in their people theyre, providing flexibility better work life balance and community support to help them retain and attract talent.
And at the brand level Applebee's and IHOP are enhancing back of house in front of house training and technology to help our team members become more productive.
So while the conditions. We're operating in are difficult. We do believe that dine is positioned well for challenging times and that's because during past economic downturns Applebees and IHOP. Both demonstrated resilience for example, as leaders in the casual and family dining categories, Applebees and IHOP benefit from consumers tree.
<unk> down from higher priced formats and as value leaders, both brands have expertise and a proven track record of creating and executing enhanced value and marketing propositions that meet our guests where they are.
On past calls I've talked about playing both offense and defense during uncertain times and that absolutely remains our approach.
At the start of this year, we committed to our long term strategic plan that includes investments in tech development and new sources of revenue and we're making tangible progress against those goals. If for example, we've launched the international bank of pancakes and by year end, we'll have delivered on our plan to provide a simpler faster more agile tech stack across the die.
<unk> system.
We continue to introduce new restaurant formats, and our teams are working with our franchisees to evolve our restaurants to meet changes in consumer behavior, while also optimizing unit economics.
And third we're investing in disruptive new growth channels like virtual brands and ghost kitchens.
Finally, <unk> long term health depends on the health of our franchisees and our franchisees remained healthy year to date. They are current in their financial obligations to dying and we have an experienced an increase in workouts or distressed situations. This signals to us that our franchisees emerged stronger from COVID-19, they're leaner there mark.
Productive and they're benefiting from off Prem and other new sources of revenue.
However, the cost pressure on four wall profitability is the priority focus and we will continue to closely monitor the health of our franchisees.
Across both brands franchisees raise prices about 7% to 10% in Q2 on average it's prudent balanced approach protects four wall margin, while creating opportunity to take share.
And in response to cost and traffic headwinds during the past two quarters, we leaned into advising our franchisees on menu pricing on cost mitigation and productivity strategies.
So to wrap up we remain cautiously optimistic on both our near term and our long term outlook based on our solid first half of 'twenty. Two we expect to achieve full year results within the guidance ranges provided on our Q4 call and reaffirmed after Q1 and our reiterated outlook incorporates the weakening consumer sentiment we've seen.
Over the past three months.
Of course, we don't know exactly what lies ahead, but what we do know is that we have the focus the energy and the commitment of our franchisees and our team members that gives me great confidence and optimism for the future I'll now turn the call over to advance to review our financial performance in <unk>.
Look in more detail and then John and Jay will join us to talk about each of the individual brands performance momentum and outlook as well.
Yes.
Thanks, John Despite the economic uncertainty, we're cautiously optimistic on the near term and remain confident in our plan over the long term.
We continue to execute well in a challenging environment and delivered solid results in Q2.
Holidayed revenues rose, 2% in Q2 versus the prior year, driven by rental revenues franchise revenues and our company restaurant operations.
<unk> revenues grew 1% to $168 million, primarily due to positive comp sales growth at both brands.
Company restaurant sales increased approximately 3% to $39 $5 million for the second quarter for the same period of last year.
Rental segment margins for the same quarter of 2022 improved by approximately 7% to $7.2 million compared to the same quarter of 2021.
Favorable variance was mostly the result of franchisees higher retail sales, which drove higher percent rental income for the quarter.
G&A for the second quarter of 2022 was $44.1 million compared to $39 $3 million for the same quarter of last year higher G&A reflects our strategic growth investments as well as higher personnel related costs and travel related to supporting franchisees as we returned to normal.
Operations.
For the second quarter of 2022 consolidated adjusted EBITDA was $66.1 million compared to $71.7 million for the same quarter of 2021.
Primarily due to greater G&A investments as well as the impact of inflation on our company restaurant operations.
Finally, adjusted EPS for the second quarter was $1 65.
Compared to adjusted EPS of $1.94 for the same period of 2021.
The variance was primarily due to an increase in G&A and a decrease in gross profit, partially offset by lower income tax expense.
Cash flow from operations for the first six months of 2022 was $29 $9 million.
And adjusted free cash flow for the first six months of 2022 was $23 $1 million.
This compares to cash flow from operations for the first six months of 2021 of $106 million and adjusted free cash flow for the first six months of 2020 one of $107.3 million.
The variance in year to date adjusted free cash flow was primarily due to the change in working capital that we saw in Q1 as discussed last quarter as well as an increase in capex related to our strategic investments.
We finished the second quarter with total unrestricted cash of $263 $5 million.
This compares to unrestricted cash of $294.7 million at the end of the first quarter.
Even after returning $61 million back to shareholders during the quarter, our leverage ratio continues to stay healthy as of Q2. It was 4.27 times, which is within our targeted net leverage range of four to four and a half times.
With our current levels of unrestricted cash on the balance sheet and the borrowing capacity available under our current credit facility will feel very comfortable with our current liquidity and the strength of the balance sheet. Both to continue to invest in long term growth as well as weathering any near term uncertainty in the macroeconomic environment.
Closing out on our balance sheet I would like to provide a quick update on our capital structure.
We're currently in the process of refinancing our $225 million credit facility, which will provide us with more flexibility.
Additionally, when our park haul window open on our series 2019 class a two one notes earlier this summer we evaluated whether to pursue near term refinancing of this maturity.
Given the volatile and uncertain market environment, we have decided to hold off for the time being.
Now I'll provide a summary of our capital allocation for the second quarter.
<unk> remains committed to returning cash to shareholders as evidenced by a 11% increase in our second quarter cash dividend to 51 cents per share which was paid on July 8th.
Additionally, we repurchased 912992 shares which is over 5% of our shares outstanding in the second quarter of 2022.
We will continue to be opportunistic with share buybacks, which are a key part of our overall long term strategy to deploy excess cash and increase total shareholder return over time.
Lastly, given the uncertain macroeconomic backdrop that we're facing we're maintaining our current guidance range and one highlight that we're still tracking to achieve our 2022 financial performance guidance and G&A Capex development and EBITDA.
If we enter into a prolonged recession, we have multiple levers within G&A and capex to protect our margins and cash flow and we have ample liquidity to weather a potential store, we feel very confident in our long term plan and we will not make short term decisions for short term gains.
<unk> is stronger than ever because we play both offense and defense during the past two years and we'll continue to do so going forward.
To close Q2 was a solid quarter continuing our momentum from a very strong Q1, while there are headwinds out there we believe our asset light business model strategic growth investments and balance sheet position us well to navigate this challenging environment and the near term and deliver compelling growth and shareholder value over the long term with that.
I'll turn it over to John will share more on the Applebee's business John .
Thanks, Vance and good morning, everyone Q2 was an outstanding quarter for the Applebee's brand as we posted a 1.8% comp increase.
Top of last year's record setting 10, 5% increase over Q2 of 2019.
This 12.3% combined growth reflects our powerful three year comp performance and reinforces the health and stability of the Applebee's brand.
On a year to date basis through June 30 of our 31 franchise partners are in positive territory with zero bad debt for the second consecutive year.
I always find it helpful to frame average weekly restaurant sales as a key performance indicator in Applebee's sales remained quite strong at $54500 in Q2, compared with 53000 and $400 in Q1.
And from a sales mix perspective, Q2 consisted of 74% on premise and 26% off premise with our off premise business equally split between car side to go and delivery.
From an absolute dollar perspective weekly off premise sales were $13900 in Q2.
And one subject I haven't discussed much over the past two years is applebee's beverage business in Q2, total beverage, including alcohol and non alcohol was 18.5% of sales a reflection of our dine in business continuing to grow providing an important profit contribution to restaurant p&l's and given current P&L.
Pressures are.
Our cross functional profit optimization work is once again underway, which is great news you'll recall. This is the work applebee's initiated with Pwc in 2017 that ultimately delivered 200 basis points of restaurant level cost reduction throughout 2018, and 2019, which we then suspended out of necessity during the pandemic.
In my view this process as a distinct competitive advantage, which I expect to provide meaningful financial benefit to our franchise partners beginning in 2023.
Now on the virtual brand front, we recently made a strategic decision to expand cosmic wings menu items from their delivery only virtual presence to applebee's core menu beginning here in August .
Rodney the availability of popular products like Cheetos wings, Cheetos cheese bites and waffle fries to 100% of our guests will allow us to fully leverage this opportunity in terms of product awareness and velocity.
I'd also like to reinforce that our cosmic wings virtual brand remains in place and available in the majority of the Applebee's markets.
Simultaneously, we are actively exploring other uniquely positioned virtual brands and will share learnings should these ultimately proved viable through our disciplined test process.
Looking forward, we continue to pay close attention to brand attributes, which is proven over time to be reliable leading indicators of applebee's performance not surprisingly at the top of this list is affordability, where applebee's continues to lead the casual dining category as it has for the past five years.
We also lead the category on convenience to go and delivery awareness and overall brand awareness. While other important attributes remained very strong such as menu variety friendly service and of course visit intent one.
One of the benefits of Applebee's tightly aligned franchise partnership is our ability to activate relevant value propositions as needed on short notice with national media muscle and this was certainly the case in Q2 with a combination of irresistible top gun and late night and I'm very pleased with the.
Eight of content available to us for the balance of this year.
Finally, I'd like to share a few thoughts on pricing on a national basis, Applebees franchisee prices were about 7% higher than Q2 than they were in Q2 of last year.
This reflects the aggregate of four different menu print cycles, where franchisees could choose to modify prices.
Of course pricing does not occur in a vacuum in the restaurant industry and our franchisees remain fully aware of the market share opportunity. This current environment represents remember there are approximately 210000 casual dining restaurants and America and about 85% of these are low volume independently owned.
Restaurants, with a challenged business model because of their very small scale.
It often surprises folks that the top 10 casual dining brands only account for about 4% of total C D. Our restaurants.
And applebee's is far and away the largest with 1500 and 70 units.
When it comes to pricing strategy are savvy and sophisticated franchisees understand this very delicate balance between restaurant profitability and guest affordability as I've stated previously brands and franchisees with scale and strong culture, who have earned the trust of their guests throughout Covid and have demonstrated.
Straight at the ability to be both innovative and nimble will win big over the long haul.
Genuinely believe this remains an increasingly leverage will point of difference for the Applebee's brand moving forward.
In summary, the state of the Applebee's business remains healthy our fundamentals remained strong and we continue to be extraordinarily well positioned in this environment.
With that I'll turn it to my partner J for an overview of the IHOP business.
Thanks, John Good morning, everyone last quarter, the IHOP team and franchisees made great progress against our plans reinforcing the strength and resiliency of the IHOP brand.
After all this time on zoom people are venturing out more in our meeting in person to eat together with family and friends.
Q2 comp sales were up 3.6% driven by positive comps across all day parts.
Average weekly sales for the second quarter were approximately 37900, an increase of 4% compared to the same period of 2021.
This was the fifth consecutive quarter of positive comp sales as I have steadily recovers from Covid and overcomes the current economic headwinds.
Today more of our restaurants are open for guests to enjoy as we now have 91% of our restaurants at standard operating hours or greater that's an increase of 140 more restaurants that are back to pre pandemic hours of operations.
On the off premise front sales remained strong off premise sales volumes were approximately $8300 compared to last quarter, which was $8900.
For Q2, our to go business accounted for 21, 3% of sales broken down into 12, 9% delivery and 8.4% takeout.
The team is continuing to work on ways to evolve and innovate what we offer on the to go menu, how we marketed and improving profit dollars in that segment as well all of which will pay long term dividends for the brand and our franchisees.
Speaking of franchisees I wanted to touch on something John also referenced the <unk> brand and our franchisees also work with Pwc, which delivered nearly 100 basis points of restaurant level cost reductions throughout 2018, and 19 until we also paused the work due to the pandemic.
We restarted this process earlier this year working with our franchisees N T. S. C S. Our purchasing co op.
The goal is to optimize franchisee profitability, while still providing a great guest experience.
In regard to virtual brands, they're delivering incremental sales and profits in the more than 1000 restaurants offering one of our brands thrilled cheese or Super Mega deal our.
Our strategy is to continue the growth of these virtual brand partnerships as we see incremental revenue and profits at participating restaurants.
Let me shift gears to some other key levers of our strategic plan designed to drive incremental traffic and sales growth starting with marketing.
We launched the international Bank of Pancakes on April 4th we expect one of the biggest drivers of our long term growth will be our loyalty program.
Enrolment and participation are exceeding our expectations. After just four months, we have more than 2 million loyalty members, earning pan coins.
30% of whom are new to our brand.
We also introduced our new core menu last quarter, we know food is at the heart of our guest relationship with a brand in fact, our core menu accounts for the large majority of our business and our growth there.
This offers a great foundation for innovation on our classics.
The core menu featured on what's new protein pancakes, and eye ops flashers, each of which outperformed our expectations.
In addition, we launched a new brand AD campaign that is guaranteed to put a smile on your plate.
For over 60 years <unk> has been serving of smiles and this new distinctive advertising is reconnecting gas with remarkable cultural moments and our core menu.
This summer we also executed a fantastic promotion with Universal Studios and illumination minions. The rise of grew which premiered on June 20th.
Given minions as a movie franchise of Gen Z grew up with where spending more media dollars on platforms like Tictoc.
Which is driving viral content supporting the new menu.
To enable our long term growth and enhance the experience for both our guests and team members. We're also doubling down on technology, we've taken pay and go nationally providing our guests with the ability to use our mobile app to scan the receipt and pay the bill from their phone.
This offers guests convenience and automatically give them pan coins for the new loyalty program.
We also relaunched our brand new version of our website and mobile App and we're currently in the National launch of our new point of sale platform.
We selected trait P O S. A cloud based Pos system.
We're currently in over 100 locations and we'll be transitioning restaurants for the remainder of this year into next.
Development is another key focus on our long term growth strategy. We've opened 16, new restaurants domestically this year and have a pipeline that's moving through the various development stages to help support our 2022 plan for new restaurant openings. Despite the continued supply chain challenges and increasing commodity costs were still within our guidance of $50.
<unk> 65, net new restaurants and on track to grow our non traditional footprint by 80% this year as part of that plan.
Our international team is also having great success growing our brand we've opened seven new restaurants through Q2 and last month, we announced a very exciting new partnership in Saudi Arabia to open five new IHOP is there over the next five years.
To wrap up I'll say this at IHOP, we know that we have a great opportunity to provide people across America with a sense of togetherness and belonging something folks who've been missing. These past few years and we'll always need.
We're excited by the progress we've made and understand the work. We have ahead of us for driving growth regardless of the macro backdrop I'll now turn the call back over to John Payne.
Thanks, Vance and John and Jay for the work that you your franchisees and your teams did this quarter to deliver solid results and for continuing to focus on our long term strategic plan and initiatives to make sure that we achieve our goals.
Operator, we're now ready to open the call for questions.
Thank you as.
As a reminder to ask a question you would need to press star one on your telephone.
Ladies and gentlemen, we ask that you limit yourself to one question and one follow up again that star one want to ask the question. Please.
Please stand by while we compile the Q&A roster.
Our first question comes from the line of Jeff Bernstein with Barclays. Your line is open.
Okay.
Great. Thank you very much.
Two questions one just on the broader macro commentary.
I know you stopped giving monthly same store sales, but I think you noted that you havent seen signs of an economic slowdown over the past quarter.
So I'm wondering maybe what in particular.
Whether you can share just directional trends per months and into July or maybe changes you've seen in terms of traffic or mix like how do you Ah.
Assess the fact that you think you are seeing it in your business over the past number of months and then I have one follow up.
Hey, Geoff it's John It's John Hey, Good morning, and thanks for the question.
What I can say at the macro level as both brands performed similarly, which was.
Very strong performance in April and May and we you know we thought what we would describe as you know a slight to modest decline in traffic.
Just in June and.
And as we mentioned you know, we're not giving specifics on July at this point, but I can tell you a couple of things one is that we are.
Reconfirming our guidance for the year based upon the trends that we're seeing.
Second thing is we're encouraged by.
By things like the recent 50 day trend in the decline of gas prices right and that the emerging opinion that inflation seems to have peaked in June and so we think that those are our tailwind for our guests that will be.
Favorable for traffic in the back half of the year.
Understood and then from a unit growth perspective, I know you reiterated 22 guidance for both brands, which is encouraging I'm just wondering any early thoughts.
The plan was to accelerate in 'twenty three I think applebee's is going to be doing net 20, new and I hope maybe up to 80, a year I'm just wondering whether that early line of sight is still there, but maybe there are some challenges with permitting and construction equipment things like that that we've heard across the broader industry any color in terms of that acceleration in unit growth into 'twenty three would be great. Thank you.
Yes.
Yes, it's Jon again, the premise of your question is exactly right.
Supply chain issues, increasing cost to build restaurants.
Our our REO that said, we're on track for our development plans this year and our pipeline for next year remains encouraging I think Jay if you can give some detail and then John on each of your brands that'd be great.
Yes, Jeff this is Jay.
Everything you said is true there are challenges.
To bring a new restaurant marketing has expanded a little bit you've got a plan for that.
We're very encouraged that our pipeline is still robust.
Taking greater advantage during this time.
Doing more retrofits journey restaurants.
There are some other brands.
We've got a lot of experience given that we have plenty of time to visa.
Our system already we've done over 65 years. So we're very good at it.
We've done a lot of interest a lot of our pipeline.
Pipeline.
And Jeff This is John C on Applebee's.
John framed it well.
We're particularly overseas.
To reduce the number of restaurant closures within the Applebee's brand again guidance for this year is.
As reiterated with respect to expectations.
Thank you.
Thank you.
Thank you please standby for our next question.
Our next question comes from the line of Eric Gonzalez with Keybanc. Your line is open.
Hey, Thanks, and good morning, a question for John C. At Applebee's, you coming up against some really tough comparison in the third quarter as you lap fancy like which I believe took off around this time is around this time last year. So I was wondering if you could tell us about your confidence level of the same positive. This quarter. If you have any tricks up your sleeve to maintain a positive trend and then I have a quick follow up.
So Eric I think.
Broadly speaking reiterating guidance balances year should be a pretty strong indicators to our level of confidence I'm confident on the SBC.
You bring up a good point, we're rolling over double digit comps virtually every month with the exception of.
December we have clear visibility to our plans we had psychological franchisees.
<unk>.
And we also have the ability to flex.
Of course, correct as necessary.
Im looking right now.
Balance of year Tactical plan.
Lineup very well in this environment so confidence is high.
Just on that.
Flexibility comment we're hearing from a number of changes both in full service and quick service that are beginning to lean more heavily into value. So perhaps you could talk a little bit more about what that means and how youre thinking about doing value on a broader scale and then maybe we could tie into two brands here and how that strategy might differ might differ at IHOP.
In terms of what we saw in the past versus what you are thinking about today.
Yes.
Hey, Eric It's Jon I'll make a quick general comment and Jay and John can give you examples which is which is.
Both of our brands right as you guys all know our brands that that position themselves as value oriented brands theyre known for it and they both anchor their segments.
Normal times, theyre known as value oriented brands, which we define as as.
Delicious food generous portion and a wonderful environment at an affordable unapproachable price.
And at times like these when economic and the economics are tough for our guests our brands have particular expertise in knowing what additional value add.
Did they do that move traffic and they both had success with that.
Last quarter.
And it would be great again, if Jay and then John can give you examples of that.
So Eric Thank you Josh John C.
We're very much a value oriented brand at applebee's and as we think about tactical execution around value again, the affordability leader within the category.
There are number of ways to do that.
And I personally don't believe.
Straight out of discounting.
We prefer to execute our innovation plans there can be value added there can be value added in terms of the card proposition and marketers.
Shrimp effort for dollar with a stake purchase which is <unk>.
Terrific margins at a great value for the guests could be a settlement.
Could be a new product introduction could be a service oriented initiatives, perhaps around off premise. So there are number of ways tactically to execute against value and we've got a portfolio of propositions that are proven and we'll deploy them as moving forward.
Hey, Darren this is Jay Johns at IHOP.
I think the thing that we always do is we may.
Sure we have the ability to pivot any time, we need to.
Theres always circumstances change competitive forces that are at play so.
The way we look at it.
There is different ways to do that again.
Do you have a bonded value, where you're giving people a lot further money.
And sometimes those remarks.
Price point as things to a point, where it's cheap when you think about our price pointed value then you have other.
Thanks.
This point, they're starting at price for entry level products are based price.
As a way to do value and we do a little bit of all of that depending on circumstances do we think about it right now we have like happy hour, which is kind of our everyday value that is over 85% of our restaurants across the system.
That's there all the time for people that need to say.
Save a little money or may be depressed because of gas prices et cetera, and they know that we always have that.
And then right now for example, we're doing kids eat free promotion as part of our menu.
Rollout that we did and Thats more of an Lts limited time offer during the maintenance campaign.
Paul Sankey.
Over the course of time all of the hardware.
Part of our strategy at some level.
Just to help kind of on track.
Great. Thanks.
Thank you please standby for our next question.
Our next question comes from the line of Nick Sutton with Wedbush. Your line is open.
Thank you.
One of the things.
Post COVID-19 that we've seen is a.
A decline in.
Marketing spend from some of your.
Bigger competitors.
As the environment evolves are you seeing them become a little bit more aggressive now in terms of that marketing.
Spend versus what you are spending.
Yes.
Just to follow up on the value question.
Yes.
We have heard a lot of commentary from the competitive set that.
There was some incremental value coming have you already seen that incremental value and I guess your.
There was a comment about.
Pivoting when you need to do you feel like you don't need to as of yet.
Yes.
Yes, okay.
Great questions for John and Jay to take directly.
John C here, Nick I do expect the level of aggression from a marketing perspective.
Disciplined marketing spend.
National and local to accelerate this year and next.
<unk>.
Excuse me.
Environment, we've seen some of that from our competitors I expect to see significantly more of that as we approach 23.
Hey, this is Jay at IHOP.
I haven't seen a tremendous amount more marketing or different levels of marketing.
<unk> seen in the past I think there may be a few more messages and focus more on value.
The gas prices have gone up economy may have sounded a little bit.
But I don't see a change so much.
And what slipped marketing is at least not at this point.
And I think a lot of companies do the same thing.
Do they kind of.
Look at their business, they make personal decisions about what they think they need.
In June .
To maintain market share or steal market share.
This kind of economy.
We can say today.
And on the.
Just from that from an operating cash flow.
There was a lot of use of cash in the first half is that just a timing thing do we expect that to.
Come back in the second half.
Yes, yes.
Again timing thing.
Our cash flow last year.
Got it.
Business.
Two one.
Last year, we had a one time working capital benefit selection.
Sure.
LTE.
Larger BOP in the crude appetite.
Okay.
<unk>.
Right.
For 2022.
We don't have a same positive.
The impact of a solid.
Additionally, as you can.
We did add one.
Well hear from just our larger compensation performance compensation expense that was paid in 2022.
2021.
So thats flat.
Lastly, the changing working capital overall, we do expect this year.
Global cash flow conversion trends.
Yes.
Thank you very much.
Thank you please standby for our next question.
Our next question comes from the line of Todd Brooks with Benchmark Company. Your line is open.
Hey, Thanks. Good morning, everybody question, and then a follow up if I may.
On the.
The IHOP side of the house, you talked about staffing improving nicely over the course of the quarter can you update us I think.
IHOP used to have about 50% of the units that ran in a 24 seven operating model and I think we've been sitting in the mid twenties last we had talked about it with the improvement in staffing and your commentary that we're returning to full.
Operating hours and a lot of locations, where does that imply that we've improved the 24 seven operations back to over the course of the quarter.
Yes.
Alright, thanks for the questions Jay.
As far as I mentioned, we've got 140 additional restaurants that are now returning to pre pandemic.
Many of those are either 24 seven.
When we call 22 restaurants, so usually their way into doing 24, 7% somewhere else doing it on the weekends.
An easier way to work you might have some staffing level that you need to do 24, seven so most of those 140 years I was at <unk>.
And is there overnight hours.
2007.
We're still stands at about 90%, but if you think about it we're adding a lot of extra day parts and ours is pretty interesting. So they are getting better staff. They are hiring more people.
Yes, we are.
People also at the same time. So if you think about your percentage. Thank you still need more people to keep expanding these expanding those hours.
Things are getting a little better out there as far as how the SaaS we're still.
So we still got two or 300 more restaurants, we need to get huge feedback to pre pandemic as I said, we're at 91% of our restaurants are pre pandemic hours, there's still quite a few more to go to get back all the way to that level.
But we're working on it.
Hi.
Better.
Okay, Great and then thanks, and then my follow up for John .
Can we just explore cosmic a little bit more I know you potentially you talked about a little more detail with the platforms broadening out on what you thought that business could be but now you're also rolling as onto the applebee's menu. So a little bit more time on maybe what the performance was through the aggregator channels as you broadened it out.
But then also the thinking behind bringing the cosmic brand onto the Applebee's brand there. Thank you.
Sure.
See here Thats a good question.
The products are popular in particular.
Those waves.
And cheese bites and waffle fries.
One of the challenges from my perspective with.
That particular virtual brand is the fact that it's always available to about 13% of our guests via delivery.
And we do have some geographic variability across the country.
March performed really really well with some less well.
Wanted to expose those products to a higher percent of our guests not just delivery, but also to go in.
Certainly the value of our guests.
The reason for the move.
Franchisees have embraced it and thats going to happen here shortly.
And then I should mention that we continue to we have some irons in the fire on the virtual brand for us and we continue to explore and validate other.
Virtual brand opportunities that we think have cros.
Certainly should those be validated through a process.
I will share information.
In future calls with respect to.
So some of those initiatives.
That's great. Thanks Darren.
Thank you.
Thank you please standby for our next question.
Our next question comes from the line of Brian Mullan with Deutsche Bank. Your line is open.
Hey, Thank you just a question on applebee's.
Really the drive thru pickup Windows you first brought up at the Investor Day, I think you were planning to have <unk> done by year end I'm wondering if you're still on track for that and then John are these are these working in all cases or is there a lot of variability in the early results here any earning any early learnings you could provide any thoughts on how big this could be and your optimism.
How do you think this migrates out across the system.
Hey, Brian .
No we haven't.
<unk> five.
<unk>.
Anticipate having at least 10 by year end as to whether we obtained 15 I don't know quite honestly because those are driven by local municipality approvals.
Complex carve out at the right way.
Ill pick up window under the existing law.
Too early to draw significant.
<unk> other than our guests.
Once you experienced that once or twice.
Your expectation from a guest perspective sort of the early feedback there was very favorable team members general managers slowed as well, probably obviously allows us perhaps to say a little later.
At night, and instead of team members running food out to a car in a parking lot.
Transaction takes place through a window, so not only helps with our to go business, but thinking about delivery drivers were queuing up to pick up the orders that are coming in and all that can be facilitated through the window.
Net investment cost can range from 75 to 100.
50, plus asset depending upon the market circumstance once we have good healthy 10 to 20.
In market will assess the business case, and certainly share our view from not only the guest and team member perspective, both financial perspective.
In the future just a little too early right now to draw meaningful conclusions.
Okay. Thank you for all that color appreciate that and then just question on the IHOP side. It seems like the dine in sales per week and they made a lot of sequential progress in the quarter, but theyre still.
Decently below 2019 levels I think Jay I'm, just wondering if you could speak to the factors here can this be explained away is this entirely just the missing operating hours or are there certain day parts during the day, where maybe broadly across the system. The dining rooms, just not fully recovered yet just any any color or any thoughts on the likelihood of it.
Fully recapturing that one day it would be great.
Hey, Thanks, Brian Thanks, Jay.
The total business overall.
Back to about 97% of our total business sales Eric to pre pandemic. So we've made great progress in recovering that business and it keeps growing every quarter.
Obviously.
I think it's a little bit everything obviously, the staffing was an issue with the weekends for a long period of time, it's absolutely are absolutely your peak.
On the weekend breakfast it was difficult to.
Turning tables at the speed that you need to turn tables.
Generally those sales and then obviously dinner and our overnight business was challenged because the hours of operation.
We're coming back across all day parts, this past quarter, and making progress some little faster than others, obviously overnight probably leads the way as a percentage just because of the hours coming back.
Overall, we're very comfortable with the recovery, we are doing across the entire business and maintaining our off premise sales are pretty steady clip as well as guidance.
Thank you.
Thank you please standby for our next question.
Our next question comes from the line of Brian Vaccaro with Raymond James Your line is open.
Hi, Thanks, and good morning.
I wanted to circle back on the health of the U S consumer.
Yes, we have a pretty unique perspective operating two of the largest full service brands in the industry. So I guess I'm curious if you're seeing changes in frequency and any particular cohorts or income bands or any changes in behavior. Once the customer is in the restaurant at any changes in order patterns.
Rates et cetera that might be worth highlighting.
Hey, Brian It's John I'll take that because what we're seeing is very similar in terms of consumer behavior at both of our brands and I'll frame. It by saying that we look at household incomes below $50000 between 50, and 100 and then a 100.
$50, 75% and 75 plus.
So what we're seeing in the $50000 and below household income cohort is.
A slight decline of a couple of percentage points of those guests in our mix in the last quarter right. So we assume that Dave they've left us to look for lower cost options.
The middle cohort is flat to up a couple of points and the 75000 plus is up.
Significantly six to eight points, which suggests to us that.
That guests that often dying at more expensive restaurants are finding applebee's and IHOP because they are well known value position right, which is why we performed well during tough times like this and we actually performed well during the <unk> <unk> recession, as well relative to to our peers when it comes to <unk>.
Check management average check has remained steady throughout the two quarters and so we're not seeing evidence yet of major check management once they are at the restaurant.
Alright, great Thats very helpful color.
I guess switching gears I noticed in the 10-Q that you recently entered an agreement to sell the 69 company stores in the Carolinas any incremental color. You can provide there are you selling to a new or existing franchisee and expected proceeds from the sale.
Sure Vance can address some of your questions, but not all of them.
Right right.
Thats right.
Yes, so we don't have a lot of information to share, but effectively if you think about the model.
From your perspective should be simpler going forward, assuming the transaction closes we're going to be back to the 100% franchise.
Type model.
Take away the complexity.
<unk>.
Projections.
Restaurants property represents 2% of our portfolio.
We anticipate a material change.
Got it.
For Q3, assuming that closes.
We will have a little bit more information to share.
Alright fair enough and then last one for me I just want to ask about G&A.
It held the guidance for the year and that guidance implies a meaningful step up in spend versus the first half can you just remind us what some of the specifics are within that second half outlook thats driving that anticipated increase.
Of course, so first of all I think.
We plan for more projects slated for more projects in the second half of the year than the first.
There are certain things that got pushed out because of that on and then there are also certain physicians.
Longer too.
Those reasons are contributing to the second half being a little higher than the first half, but primarily we are investing in restaurant technology and marketing.
Isn't that lytic systems, we're investing in franchisees or in terms of head count.
And then development.
Headcount support.
We're spending more in traveling.
So those are the.
Yes.
Hi, there.
We are focused on.
Sure.
Okay and can you also just confirm advanced the company units.
On an annual basis, there was about $6 million of cost included in your G&A spend related to those units.
Is that right.
I don't know, if we disclose that but I think assuming the transaction closes the G&A cost will go down.
Alright, I'll pass it along thank you.
Thank you.
Please standby for our next question.
Our next question comes from the line of Jake Bartlett with tourists. Your line is open.
Great. Thanks for taking the question you might have on menu pricing.
And John I think you mentioned that Applebee's was running about 7% Jay I'm wondering if you could just confirm that the <unk>.
The 7% to 10% that was mentioned earlier pertains to IHOP, meaning that IHOP pricing is about 10% and then for both brands. If you could just comment on your appetite for further price increases in the back half of the year.
I assume you'd be reticent, given the value position, but any comments there would be helpful.
Hi, Jay this is Jay and IHOP.
Yes, that's right there's a range obviously the franchisees take based on their own decisions on what they're going to have again, a 10% range, where we were at.
And then as far as future increases again, the franchisees to want to make the ultimate decision.
Yeah.
At IHOP, we actually utilize our mask, which is to solve the top franchisees with how they think about what prices paid by markets et cetera. So that helps them a little bit and I think the franchisees are pretty smart.
They know that they need to cover some of those cost pressures that they have but they also know they are finding a fair warning traffic during this time as well so.
I would assume that we'll be cautious in their meters.
It's going to differ based on the areas of the country.
Jay This is John C on the Applebee's front.
Our franchise franchisees tend to be very strategic in their pricing assessment, they've taken kind of a year over year, 7%.
Restaurants, they understand this is a market share opportunity.
It's a fine line spin of the type of market margin protection and guests affordability.
<unk> and my.
Level of confidence, they're going to continue to be smart and conservative is very high.
We're playing the long game.
And.
And thereafter to do anything to compromise guest affordability perceptions of the brand, but that said we are going to be smart protective margins to the extent they can.
Great and then my second last question is just on franchisee profitability and franchise and the franchisee health I mean, I think the question maybe pertains mostly to the IHOP side.
So Jay if you can just give us.
It feels like we're seeing 10% menu price increases but.
As a whole, 22% commodity cost inflation and I would imagine you're still very high labor inflation. So what's is what's your franchisee margins or profit margins kind of look like here.
If you can share anything that would help us feel confident of the health of the franchise system on the IHOP side maybe.
Percentage that are also kind of multi concept franchisees any any other details that would just give us some confidence that the franchisees are going to get through the <unk>.
Near term.
In one piece here.
Yes, Jay this is Jay again.
We're very confident of its franchisees' health is in pretty good shape right now.
If you think about all the things I think advance mentioned earlier.
We're not taking bad debt, we're not seeing collections that are an issue, we're not seeing workout issues.
We actually again one of the biggest indicators if you think about it.
We reconfirmed our guidance on 50% to 65 net new restaurants.
We opened 19 restaurants last year.
These are people that are signing up for a 20 year commitment pretty much in most cases.
The people have great confidence in the brand and.
Remember our cost structure is a little different breakfast has.
Food cost at several points less than a lot of other <unk>.
Dining restaurants et cetera.
The business model is a little bit differently. The breakfast you can make pretty good margins.
So while food costs goes up you're off a smaller base.
And a lot of the increases this year for us.
And in particular, it was really a problem.
That was driven a lot by the avian flu.
Pretty much behind US now in the summer time.
Yes, so theres some circumstances.
<unk> continued to improve and we're very confident franchisees are pretty good shape.
Great I appreciate it thank you.
Thank you.
I'm showing no further questions in the queue I would now like to turn the conference back to John <unk> for closing remarks John .
Okay, Thanks, Hey, Jeff, Eric Nick Tod, Brian , Brian and Jake we appreciate your questions. This morning.
Great conversation and I'll, just I'll, just conclude by re emphasizing that.
Both applebee's and IHOP are resilient brands that are really positioned well to perform not only in good times, but also in tough times, because they really are safe havens for consumers at times like this.
Jay and John and their teams know how to lean into value added propositions that make a difference to our guests at times like this so thanks to advanced Jay and John for a great quarter and welcome one more time to Brett who I know many of you know well and we're looking forward to him working with you over.
Over the next couple of quarters, so have a great day everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Okay.
Sure.
[music].
Sure.