Q3 2022 Dine Brands Global Inc Earnings Call

November 2, 2022

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Good day, Thank you for standing by and welcome to the Brown excuse me the Dine brands Global third quarter 2022 conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question answer session to ask a question to one.

Session, you will need to press star one on your telephone.

Please be advised that today's conference is being recorded.

I would like to call the hand, the call over now to Brett Levy and we apologize for technical difficulties. Thank you.

Good morning, and welcome to Dine brands third 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 , John Tsai Winski President.

Of Applebee's, and Jay Johns President of IHOP before.

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 involve known and unknown risks uncertainties and other factors, which may cause the actual results to be different than those expressed or implied please.

Please evaluate the forward looking information and the context of these factors, which are detailed in today's press release and 10-Q filings.

<unk> looking statements are as of today and assumes no obligation to update or supplement these statements.

We may also refer to certain non-GAAP financial measures, which are described in our press release and also available on dine Brands' Investor Relations website.

While we may provide color on intra quarter trends related to volatility and uncertainty we have returned to our traditional quarterly reporting schedule.

Please note our third quarter's results are inclusive of the company operated applebee's units as the transaction had not closed during the quarter.

With that I'll turn the call over to John .

Thanks, Brett and good morning, everyone. Thanks for joining US today, we delivered another solid quarter. Thanks to the strength of our brands are operational and marketing agility and most importantly, our seasoned team of franchisees are applebees, IHOP and dine leaders and our team members as.

As you know and as you've heard from others economic headwinds persist, particularly inflation and consumer sentiment.

Spite this macro environment our brands remained resilient.

He is an IHOP achieved positive comp sales of three eight and one 9% respectively Q.

Q3 was applebee's seventh consecutive quarter of comp sales growth and the sixth for IHOP and.

In addition, our dining results continued to improve as Applebees is ahead of 2019 and IHOP is continuing to gain ground.

And our off premise sales remained more than two times pre pandemic levels.

In Q3, <unk> delivered adjusted EBITDA of over $63 million by focusing on what's in our control, notably G&A was $46 million, reflecting our prudent approach to spending.

Through the first three quarters of 2022, we returned $145 million to our shareholders via dividends and buybacks.

And importantly during the quarter, we saw an easing in the inflation rate and the cost of food and supplies to the restaurants.

Applebee's cost of goods inflation fell from 23% during the first six months of 2022 to a run rate that looks like 13% for the back half of the year.

I hope, it's experiencing a more modest decline from 21% to 19% I have cost remain inflated due to the stubborn cost of eggs and the impact of the Ukraine War on grain prices and ultimately pancake mix.

I've talked before about the importance of strong brands during uncertain times during moments like these consumers stick with brands, They know and trust and love.

The value proposition of both our brands as well known so right now we're amplifying our value message to reflect our guest mindset and financial situation.

Now I'll walk you through the progress we made across our strategic priorities. This includes investments in technology development and new sources of revenue.

Our World Class Tech team is delivering product on time, and we've more than doubled our annual tech spend since 2019.

We're enhancing both the in restaurant and out of restaurant guest experience as well as new back of house in front of House technology.

Some examples of recently completed <unk> include our new learning management system.

New IHOP websites and App with Applebee's scheduled for next year.

Bye bye and pay and go technology that streamlines the guest interaction and we continue the rollout of IHOP new point of sale.

Next is development, our IHOP portfolio continues to expand the combination of traditional and new restaurant formats is driving our confidence in our long term unit growth at Applebee's continues its path toward net openings.

Our third priority is new sources of revenue I have now offers its virtual brands over 1100 locations and we have 55 ghost kitchens across Applebee's and international.

I have virtual brands are incremental to sales and target dinner and late night hours, both are opportunities for the brand.

We're building our virtual brand pipeline and believe there is an attractive long term opportunity for virtual brands within our portfolio.

While we expect challenges over the next few quarters Guy is positioned well for challenging times, we are confident in our ability to navigate the near term headwinds and deliver on our longer term goal where.

We're confident in the resilience of our iconic brands.

We're confident that our scale allows us to mitigate to some degree the client price disruptions and we're confident because diane as financially sound as our franchisees.

With that I'll turn the call over to Vance to review, our financial performance and outlook in more detail good morning Vance.

Thank you John as you mentioned the third quarter continued the momentum that we built over the last year and a half and our plan is moving us in the right direction.

Our third quarter total revenues were $233 $2 million franchise revenues grew 2% year over year due to positive comp sales growth at both brands.

Company restaurant sales increased over 8% to $38 2 million compared to the same period of last year, we completed the refranchising of our company restaurants last week.

Segment margins for the third quarter of 2022 improved by 6% to $7 $2 million over last year.

The favorable variance was mostly the result of franchisees hard retail sales, which drove higher percent rental income for the quarter.

G&A for the third quarter of 2022 was $46 $3 million compared to $43 7 million for the same quarter of last year as we continue our strategic growth investments in support of our brands.

We generated consolidated adjusted EBITDA of $63 $6 million in this quarter slightly ahead of last year's $63 $3 million quarterly results.

Finally, adjusted EPS for the third quarter was $1 66.

Outpacing last year's dollar 55 cents.

The variance was primarily due to lower weighted shares outstanding.

Turning to our cash flow statement and balance sheet.

Over the first nine months of 2022, we generated cash flow from operations of $63 5 million. This compares to cash flow from operations.

$145 $6 million over the comparable period last year.

The variance year to date cash flow from operations was due to the change in working capital we saw in Q1 and discussed in the prior two quarters.

This quarter also marked a continued improvement from our midyear results as we saw our working capital position and cash conversion rates gradually returning to normalized levels.

We also ended the third quarter with total unrestricted cash of $355 3 million.

This compares to unrestricted cash of $263 5 million.

And the second quarter.

In mid August we announced the upsizing of our borrowing capacity available under our DFM and we subsequently drew down $100 million, which provides us with greater financial flexibility.

Our leverage ratio move to three nine times, which was below the $4 two seven times last quarter.

As we discussed previously we have the option to refinance our class H, one bonds right now, but our anticipated repayment date for the bonds isn't until June of 2024.

Meantime, we will continue to evaluate our best course of action.

And take advantage of the refinancing window, if it makes sense for our shareholders in the long term.

<unk> remains committed to returning cash to shareholders. During the third quarter, we paid a cash dividend of <unk> 51 per share on September 30.

We repurchased over one 6 million shares as of Q3 year to date or approximately 9% of our share count has been retired since the start of the year.

The combination of paying dividends and repurchase of our shares remains a key component of our long term capital allocation plan and support our focus on driving total shareholder value.

Next I would like to update our financial guidance for the year.

First let me touch on development.

I Hopped development plans are now between 35 to 45 net openings for 2022 compared to our prior guidance of 50 to 65 net openings.

The change is primarily due to some of our planned openings moving to 2023, given current permitting and construction delays.

These development plans remain unchanged at five to 15 net closures for the year.

Second we are lowering our expected G&A range for the year based on our latest investment progress.

Our new 2022, G&A forecast guidance is $185 million to $190 million compared to our prior guidance of 188 $298 million.

Some of our planned G&A investments this year will be extended into 2023, given the disruptions caused by the pandemic, we will provide more guidance around 2023 on our next earnings call.

Third we're nearing our expected adjusted EBITDA guidance range to between 243 $2 million to $148 million.

<unk> to our prior guidance range of $235 $250 million.

This new guidance reflects our Q3 performance our continued strategic G&A investments in Q4, along with impact from Refranchising, Our company owned restaurants.

Lastly, we are maintaining our capex spending range of 33% to $38 million.

In summary, we're pleased with the consistent performance across our operations.

Our value focused approach again yielded solid results at both brands.

We remain confident in our ability to generate significant cash flows.

Best in growth and return capital to shareholders over the long term.

Next we'll hear from Josh <unk> with color on the Applebee's brand John .

Thanks, Vance and good morning, everyone.

21, and 2022 had been terrific years for the Applebee's brand in Q3 continued this momentum with a three 8% comp sales increase on top of last year's 12, 5% increase versus Q3 of 2019.

In a post COVID-19 basis, I believe visibility to a three year sales comp provides an important gauge as to the true health of the brand our three year comp sales calculation for Q3 2022 versus Q3 2019 reflects a remarkable 16, 9% growth.

Illustrating applebee's vibrant and sustained performance.

This also marks the best three year sales performance throughout the history of Dine brands.

The success to a combination of drivers first where the tactical marketing decisions. We made in response to this inflationary environment second.

Second is the restaurant excellence, we continue to see from our outstanding franchise partners.

And finally applebee's performance reflects the benefits associated with the completion of our multiyear portfolio rationalization.

Now as I break down the quarter Q3 average weekly sales remained quite strong at $53000 per restaurant seven.

76% of this volume was on premise, while 24% was off premise equally split between car side to go and delivery.

From an absolute dollar perspective weekly off premise sales were $12800 in Q3.

This off premise business is essential to our success and continues to flourish with more than $1 billion in annual system sales in.

In addition, we just opened our 10th drive thru pickup window as we began a comprehensive cost benefit analysis of this very promising new initiatives.

From a brand attribute perspective Applebee's continues to lead the casual dining category in key metrics, such as convenience affordability variety family friendly and brand awareness in fact, applebee's unaided brand awareness attained an all time high in Q3, as we introduced compelling value propositions under our eicher.

Eating good in the neighborhood umbrella.

On the development front, we'll open approximately nine new restaurants. This year, featuring a combination of traditional and ghost kitchen locations. We also expect to close 15 restaurants. This year, representing the fewest applebees closures in a decade.

We then plan to return to net new unit growth in either 2023 of 2024 again, a combination of traditional restaurants and ghost kitchens.

Looking forward, we anticipate eventually returning to an annual closure rate of approximately 1% for the Applebee's brand.

I'm also pleased to report that existing franchisee thrive restaurant group has acquired our 69 company owned restaurants in the Carolinas drivers led by John Rolfe of deeply respected second generation franchise partner and chairman of our franchise business Council.

John is now our second largest franchise partner with 148 restaurants and second the only Greg Flynn with 439 Applebee's.

With this transaction Applebee's returns to a 100% franchise business model with 31 partners owning all 571 restaurants in the U S.

Now as we do annually, we recently gathered the entire applebee's system to align around our 2023 business plan and to recognize our best performers I was honored to celebrate Mark show stack is applebee's franchisee of the year at this events Mark as a role model operator and partner with 62 restaurants in the state of Michigan.

In closing, perhaps nothing speaks more to the health and relevance of the Applebee's brand than the escalation of our average unit volume from $2 $2 million. When this team is first assembled in 2017 to where we are today in Q3 at $2 million $750000 for Black box.

25% increase is more than double the casual dining category is 10% increase excluding applebee's over the same five year time frame.

Even in this challenged environment, we remain aligned with our franchise partners as to how extraordinarily well positioned the applebee's brand is for sustained growth as we look forward to 2023.

I'd now like to turn the call over to Jay for an overview of the IHOP business.

Thanks, John and good morning.

Our brand continues to become more relevant for more occasions, with our menu and marketing as well as on the innovation and technology fronts. We've.

We posted a one 9% comparable store sales gain in Q3, marking our sixth consecutive positive quarterly results.

Our restaurants generated average weekly sales of $36800 compared with last year's 36200 <unk>.

Premise per restaurant weekly sales of approximately $7700 were modestly below the 8300 8900 over the prior two quarters.

<unk> business is still over 20% of sales with delivery accounting for nearly 13% and traditional takeout generating approximately 8% of sales.

The off premise business is also supported by our two virtual brands with over 1100 restaurants, offering thrilled cheese and Super Mega deal.

We opened nine new restaurants in the quarter and our franchisees continue to work towards getting all of their restaurants back the full standard operating hours as the portfolio increase restaurants operating either 24, 7% or 24, two in Q3, an additional 4% of our restaurants, having to offering overnight hours.

Our marketing and menu initiatives are resonating with guests.

Last quarter, we successfully partnered with dominion's on a well received promotion that drove results.

After value proposition through a widely accepted $5 two by two by two platform and most recently, we're excited about the launch of our new thick <unk> fluffy French toast offerings.

We're also enthusiastic about our strategic and technological efforts.

We've introduced our painesville options for our guests to closeout checks through their own devices.

Our point of sale platform rollout continues to expand now and approximately 240 restaurants and.

And the growth of our international Bank of Pancakes loyalty program has exceeded our full year target already we ended the quarter and its first six months with three 3 million sign ups.

Touching briefly on development, we remain bullish on the brand's long term prospects, despite having to deal with near term supply chain and permit approval timing challenges.

We expect to add 50, plus gross new restaurants in 2022 that represents one of the strongest years in our brand's history.

The change in our current year outlook is more of a timing issue, which weighs on our development prospects we.

We expect to see several of our franchisees planed Q4 openings move into 2023.

To wrap up IHOP brings joy to People's lives, which is fundamental to who we are and what we do we remain excited about the progress we've made and the foundation we've laid for our continued growth and future prospects I will now turn the call back over to John Payne.

Hey, Thanks, Jay and thanks to those of you on the line for your patience with our late start this morning, and thanks advanced John and Jay and their teams for all their hard work and great results in Q3, and a big Thank you to our franchisees the restaurant teams for their tremendous efforts and focus on our guests. We know that there is <unk>.

Andy right now and Thats why were working hard to be there for our guests, providing great food and experiences when they want and need us most and with that Lisa. Please open up the call for questions.

Thank you.

The first model.

Hey, Ross.

Our first question will be coming from RFP Dallas with Keybanc. Your line is open.

Yes.

Hey, Thanks for the question and good morning.

On the balance sheet, you have a big chunk of your securitization coming due in about 18 months or so so can you talk about your ability to refinance debt maturity and where do you think you might be able to get a deal done.

Today in terms of the current interest rate and then given the potential increase in interest expense can you still continue to buy back stock and more importantly, do you think it's the right move to shareholders to continue the current level of buybacks versus perhaps paying down the debt such that might limit the amount that you have to borrow.

Thanks, Eric I'll take that.

Good morning, Erik So we actually don't have any current maturities due and there is no need to refinance right now.

Hard call window that we have was open up earlier this summer.

Really only need to take advantage of it as it makes sense.

We're monitoring the market and then currently the market is pretty volatile right.

We're taking into account interest rate movements and capital markets environment, but the goal is always to maintain that financial flexibility.

That our current capital structure provides.

We may refinance on the market conditions improve right now.

Pretty choppy and buybacks.

Capital return is always being one of our top priority in terms of capital allocation.

Evidenced by the fact that we've done over $100 million.

Buybacks this year and will continue to be opportunistic.

Purchases.

But we need to balance that with not net leverage level, especially given today's environment.

Okay fair enough and maybe I can ask one about unit growth you have some targets out there with regards to growth.

In the next four to five years, which if I remember correctly it stacks up to about 15 or 150 to 200 units per year. So my question is are you still confident in this outlook given the higher rate environment and how are your franchisees, particularly IHOP system, we actually into the higher rates.

We're still dealing with the high teens inflation.

And then as it relates to that you lowered the unit growth outlook for IHOP. This year due to permitting delays does that mean in 'twenty three you'll see outsize growth as project timelines normalize or do you think this pushes up pipelines such that we see the typical 50 or so perhaps next year.

Yes. This is Jeremy.

I'll probably take.

Take that one since most of that was an IHOP related question yes.

Our growth. This year has been strong I mean, we are going to open over 50, new restaurants. This year, which is very good growth for us.

Did have.

Got a few issues, especially a lot of our pipeline was back loaded this year and we started getting into some permitting issues that seem to be persisting post COVID-19 and different municipalities equipment issues.

So that caused some of our pipeline that was going to open in Q4, just slide into next year, So that will help.

Will help that as we move forward.

The environment, obviously is a little bit difficult, but so far the franchisees.

We've got a lot of excitement as we just had our global conference.

Had a tremendous amount of franchisees talking to us about new restaurant openings.

I think theres still bullish on the opening of a lot of restaurants.

But the economics change so we're seeing a tremendous amount of our openings now being conversions, there's other restaurants that closed down and it's actually providing an opportunity for people to be able to go out.

And take advantage of that at this particular time, so I think the pipeline is still looking very good.

Like I said a lot of those will move into next year, which will help us out in future years.

And John why don't you address applebee's.

Hey, Eric.

We're confident in our strategic plan for Applebee's as you know we're rebuilding our pipeline.

Anticipate.

This is great news returning to net new unit growth combination of traditional and ghost and either 'twenty three 'twenty four.

We are optimistic and not concerned about any of the kind of near term Chan.

Challenges that may be delaying that timeline a little bit.

Fair enough. Thanks.

Thank you one moment, while we pull for our next question.

And our next question from Jake.

Bartlett of choice Youre line is open.

Great. Thanks for taking the question.

My first one was on the guidance for on the implied guidance in the fourth quarter for EBITDA.

It's lowering than a step down versus the other quarters of the year and I just wanted to kind of.

Understand better the reasons for that are the drivers for that I see that.

G&A is guided to be up in the quarter. So that's one aspect we mentioned in the release the impact from the Refranchising. So maybe it's part of that answer if you could talk about what the near term impact of Refranchising the stores.

Maybe what the impact would be in 'twenty three.

It's accretive.

Including some some reductions in G&A related to those stores. Thank you.

Okay.

And so you take that.

Hey, Jake so so we've got a full year two.

2022, but this is warner effectively we're guiding in Q4.

It does reflect our current performance, our G&A spending trends and along with the impact from Refranchising of our company owned restaurants as you as you said.

Most of the trends that Youre seeing in Q4 is driven by G&A and a reminder, that our Q4 G&A usually higher than other quarters, but Q4, particularly also includes a catch up.

Earlier in the year.

Credit is due.

With open positions projects et cetera.

So having said that though I think Q4 G&A does not represent a run rate.

And then we will continue to make certain investments people research technology product in 2023.

More details on 'twenty three guidance on the next in the next quarter.

But.

Our investment so as we said in the past.

It's time to drive and support long term growth.

Pleased with the progress that we're seeing so far.

And the impact of the Refranchising. It was mentioned in the release that that could be in.

<unk> EBITDA. So I look at your company margins I would think that that would be almost a one for one to a royalty rate.

But if you could if you could just help us understand the impact on.

On the financials in the fourth quarter and 23 from selling those stores and then also what kind of G&A is related I think in the past, maybe you've talked about five or $6 million related to the company owned stores is that rates should we expect G&A to go down by that amount any any help there would be helpful.

So our 2020 to G&A and EBITDA guidance reflects the re franchising transactions that was disclosed.

Closed last week.

2023 will provide more color on 23 next year, but I'm just reminding everyone that the 69 restaurants represents roughly 2% of our portfolio. We don't really anticipate a material change to our business fundamentals and historically, we haven't really discussed comp.

Any specific company owned restaurants specific EBITDA with G&A.

Okay.

But is there a G&A.

So can you say, whether it's accretive or dilutive to refranchising stores.

There is DNA that will be Scott and we will have more discussion on 2020.

Through guidance.

With our budgeting process for next year, we'll provide more color.

Next quarter.

Yes.

Let me take that.

Okay, and then there was no comment I believe about kind of your.

The current trends, we've seen same store sales in the fourth quarter and we've seen an improvement.

On a year basis throughout the year here.

Is there any reason to think that that wouldn't continue just in terms of the underlying momentum of the business.

Any any comments there would be helpful.

Yes, why don't we have Jay and John comment on that.

Yes, Jake this is John .

We love our plan with our franchisees, we're very confident in.

Not only the plan that we've aligned upon that our flexibility to change as needed. We have very strong momentum. This is Brian .

Our confidence quite candidly couldnt be any higher than it's been over the past five years.

I think on the IHOP side also we.

So we feel very good about our progress we've made.

Coming back after the pandemic, we had six straight quarters now being up in sales.

We seem to be hitting our stride right now.

Have a great pipeline.

<unk>.

We have pointed out all the way through next year. So we're feeling very good about where we're at what we're doing with the menu marketing and loyalty program. We've got a lot of things going for US right now that we don't see any reason why that would change.

Great I appreciate it.

Thank you.

Thank you one moment, while we prepare for our next question.

We have our next question is coming from Jeffrey Bernstein of Barclays. Your line is open.

Great. Thank you very much to.

Two questions. The first one just following up on that.

The consumer environment, it doesn't sound like you've seen any slowdown in trend either through the third quarter into the fourth quarter I just want to make sure that.

Accurate and just wondering what initiatives you might implement if trends were to slow.

On your end or whether perhaps you are already seeing.

Increased marketing or promotion or the competitors getting more aggressive just trying to size up the landscape in terms of potentially response as well as the competition and then I had one follow up.

Sure a question for John and Jay again.

Hey, Jeff This is John .

On the Applebee's front.

We're very thoughtful in this environment is a challenging environment. We are thankful for the momentum that we have one of the things thats happened here over the past.

Year, or so post COVID-19 as we return to having at least 12, perhaps even 18 months lead time in our and our marketing plans and our tactical.

<unk>.

With contingencies and flexibility built in so we have a portfolio of propositions that we can market and deploy as needed.

Should the environment become tougher.

We've got those programs sitting on the shelf, so and again, we only have 31 franchise partners, we meet frequently and our ability to.

Changed course on short notice in reaction or response to the marketplace is pretty easy for us so great momentum so very thoughtful on the challenged environment as well.

Hey, Geoff this is Jay at IHOP.

We feel really good about our ability to make adjustments as we need to the restaurant business. Historically is when things get tough your competitors start to do more discounting et cetera, we try really hard not to react to what everybody else does we have a plan we're trying to follow and we tried to.

You make value part of our strategy all the time, there's always a need for value for some of your gas and we need to have the ability for guests to access that we've got our happy hour program.

Use limited time offers we just did a $5 two by two by two promotion. We also just rolled out our new executive lumpy, French toast, which is a full price proposition.

Much better improved quality compared to what we had previously given.

We truly believe there is theres two sides to what people credit right. There's the indulgence.

Sweet side. There is also the more safety side, we rolled out new dinner entrees, we rolled out new better for you items, we're really executing our plan and we're confident that we're doing that plan, we're going to be in great shape and there's value incorporated in that plan as well.

Understood.

And then my follow up just because it's a maintenance have gone halfway through this call without much talk about menu pricing or inflation. So.

Was hoping to just touch on.

You mentioned, the commodity basket seemingly easing a little bit in the back half of the year I am wondering if you could maybe talk.

Directionally, where you think commodities and labor.

Headed I know, you're not giving formal guidance for next year, but how do you think about it from our franchisees perspective.

And maybe counter that with menu pricing kind of well.

How much pricing was in the menu for each of the brands in the third quarter and.

What are your suggestions to franchisees in coming quarters.

Sales really hold up in inflation were to ease just trying to get a sense of that potential margin outlook on the franchisee side. Thank you.

Jay and John you want to take that again.

Sure Jeff.

This is John on the Applebee's front.

I continue to be impressed with our our franchisees they are.

Our thoughtful strategic savvy.

Quite a sophisticated group they understand this delicate balance between.

Covering the margins to the extent possible and maintaining affordability.

Affordability leadership in Applebee's does lead the category and affordability. So it's important to us they've been conservative relatively speaking.

And strategic.

In their pricing.

And they have been from our discussions with them, taking a long term view as to market share opportunity in a tough environment and I applaud that with that said.

They will do what's necessary.

To protect their margins in a tough environment.

And conservative to date and I expect that to continue.

I think on the IHOP side.

No different really than youre dealing with the same kind of pressures.

Inflation has been a little stubborn this year.

Do think that as we get into next year potentially.

The inflation rates are going to start to decline. It doesn't mean prices are going to drop but I think the the deceleration of inflation is going to take place.

At some point here and you see that a little bit this year, but.

The fact that you are still pretty high now are our menus are already priced for the rest of the year. We don't have another menu for next year. So I don't see them changing anything right at the moment until we get into the spring I think they have done whatever they are going to do as far as their decisions on price, but food costs were Brian normalize slightly probably never comes.

Back down to the levels it was previously but.

Yes.

Have incorporated price to help overcome some of that.

And thats, a little bit more of a regional issue there are certain areas, where the softening of the economy is actually opened up.

Chaffing possibilities in the inflation rate on labor has slowed down as well, there's other markets, where it's still tough out there. If he has got an unemployment rate of 2% in your in your city it gets tougher.

That becomes a little more localized the franchisees very smart about how to take price as needed.

Do it in such a way where you don't run off your guest base because they can't afford to come anymore. So they're being very careful about it and trying to be a strategic as possible about how they take price where they take price.

And I think as inflation rates come down price increases will probably decelerated as well so.

Thanks.

When the inflation goes back to a more normalized rate I think your price taking the franchisees will do likewise.

Is there any clarification on that price for the third or fourth quarter three of the brands.

Yeah.

Jeff on the Applebee's front.

You are at a 7% quarter over quarter 'twenty to over 21.

And I think we've shared.

Color in previous quarters as well so I look at that as conservative in this environment and to Jay's point I do expect should the commodity cost inflationary environment improve.

We do expect it to do.

That our franchisees will revert back to at some point to more normalized 2% to 3% annual price increase that's what historically has proven to be the case.

Yes.

It's more likely.

11% is the pricing taken year over year Q3 to Q3 now given some of those roll off.

And then use.

Your quarters change, but when we just look at Q3 versus Q3.

Over 100%.

Hey, Geoff it's John Peyton, just some context there.

The 7% and 11% in price increases for the two brands.

Is less than half of that increase in cost of goods into the restaurants. So it does reflect the franchisees really balancing their margins with what they think their guests Ken.

Can tolerate.

And what's also interesting is that get pushback on price increasing increases has been surprisingly limited while they're managing the total cost of their check you can see from our same store sales growth that consumers.

Consumers are tolerating the price increases have come really to expect that given the economy overall.

Yes.

Thank you.

Thank you one moment, while we prepare for the next question.

Our next question is coming from Nick Saban.

Bush of Wedbush go ahead. Please.

Thank you.

Wanted to ask about value in this environment do you really feel like.

And aggressive value stance as necessary, particularly ours.

Gas prices have come down from early Q3 peaks and then.

In General I guess how has the.

Perception of value evolved.

Just given the inflationary headwinds out there.

Jay and John you wanted to add.

Yes. This is John C. Nick good to chat with you.

Okay.

Your question is do I think value is necessary.

Please is fundamentally a value brand we lead on affordability will obviously see our franchisees protecting their margins.

But I do think value remains important we are at the lower end of the average check spectrum in casual dining that's important.

You are challenged.

Quite obviously in this environment in terms of discretionary income.

Lots of ways to convey value, we're big believers in restaurant excellence and our franchisees have truly been exceptional at earning the trust of not only their guests, but their team members throughout Covid I think thats evidenced in our results.

And there are lots of ways to deliver value added value there is co branding.

The use of borrowed equity wed.

Wed like conveyed through our advertising emotional connection with our guests I believe a good neighborhood is perhaps more relevant than it's ever been.

In this environment. So yes, I believe value is important but there are multitude of ways tactically to.

To deliver upon that that value proposition.

Hey, Nick this is Jay.

I think that to an extent values always necessary.

It's still a little bit part of our overall strategy.

There are certain guess you'd have to get more occasions from them.

As always important and you want to have value on your midyear two.

Some people call it environmental strategy in a more expensive items you have items that are more approachable and affordable for gas, but not all the same we have guests that are.

Higher income scaled it there.

They are less price sensitive.

The favorite item they don't care, what it costs. There are other people, though that they can't do that they have to manage their pocket book when gas prices go up and things get more expensive. They watch their dollars alone very closely and so I think there is a need for value all the time.

John said very well theres different tactic there.

There is abundant value that doesn't necessarily mean, it's a cheap price.

If you get a lot of food for your money. There is five point Theres limited time offer values.

Our loyalty program opens up the possibility for one to one personal value.

What they care about and how to motivate extra visits from those individuals so.

Yes, the economy it makes it front and center.

But I think value is always there. It's just how you pull the levers when and where and how to to keep the floor again.

Hey, Nick This is John see my final point on this one and I firmly believe this.

As we think about the past couple of years brands with meaningful scale, which we have.

And brands that have strong culture within their franchise communities.

And entities and brands that have earned the trust of their desk are going to thrive and perhaps navigate this inflationary environment better.

Then others, who don't have scale and don't have strong culture, we love our position.

Okay.

Is there a way to maybe quantify like value mix as a percentage of the overall.

Menu or sales.

Now versus say pre COVID-19 for both brands.

Well Nick this is John Steve if you or I would not equate value tactical discounting.

I think my view on that is.

Sometimes lazier desperate brands resort to tactical discounting out of necessity. So.

Always had kind of a core value proposition embedded in what we do and how we market and that will continue moving forward.

Okay. Thank you very much.

Thank you.

While we prepare for the next question.

Okay.

Our next question is coming from Brian <unk> of <unk>.

Deutsche Bank. Please go ahead your line is open.

Okay.

Just a question on IHOP specific to the loyalty program I know from the prepared remarks sign ups are going well, but can you speak to one or two elements that maybe have you. Most encouraged thus far from a consumer response perspective any early learnings there and then just kind of related to that it seems like the dining room traffic at IHOP is still down.

Quite a bit relative to pre COVID-19 is <unk>.

Seek to recapture that from here can you maybe put the loyalty program into context in terms of how important of a tool as compared to maybe other items like operating our restoration or older guests getting more comfortable around dining out or just anything you'd want to right around those dining room traffic trends.

Yes. This is Jay.

Look I think dining room traffic keeps coming back we see it improving decreasing and.

Obviously, that's something we're trying to do as part of that is hours of operation So that keeps improving for us as well as you heard in my prepared remarks, we had about 4% more of our restaurants go to overnight hours.

As franchisees see their way to that being a profitable business venture for more and more are going to do that and so in.

Some locations that staffing and have an access to people to be able to staff it overnight.

It may be the cost of doing business overnight, depending on cost of that staff and inflation of food et cetera are virtual brands are really healthy that because a lot of those sales happen in the late night hours. So that gives a little extra incentives to get your IHOP back open again as well. So some of this is hours of operation.

Some of this is.

Ladies people still maybe not quite as comfortable coming out it's a little bit of everything I cant quantify and say exactly what is what but we see the dining business coming back until a critically important piece of our business. It is.

The core of the number one sales driver we have so obviously, we're working on that and I think that this.

Relevancy in the food that I've talked about before it also becomes important and that is.

How do you have better items for people that want to eat healthier have you have items that are more relevant to people for dinner instead of just eating breakfast. So we're addressing all of those things to help our brand become more relevant for more occasions throughout the entire day.

We look at that.

And then.

Refresh me what was the very first part of your question before you got there you asked about one other thing.

Sorry that was kind of a two parter just well.

I know program, Brian , Yes, the sign ups are going well, but how about <unk>.

Early learnings on consumer response.

Yes, the sign ups are going fantastic and I think that is the first indicator of people their engagements. They love the brand they want to join the sign ups are going way faster than what we even thought they would do we thought for the entire year. Our goal was two 5 million people were $3 3 million by the end of.

Q3 was a whole another quarter to go so that's going really well.

We're not going to get into loyalty discussion on all the different metrics every quarter. It will probably do something maybe on an annual basis. When we get to the end of the year. We will give you some more details about.

Some other statistics and data on that.

We'll keep you informed on that as we move forward, but we're very happy with where we're at right now and how it's progressing it's just too early to start sharing those details yet we'd like to have a little more history behind us.

Thank you.

Thank you I will prepare for our next question.

Our next question is coming from Brian .

The taro.

Of Raymond James Your line is open.

Good morning, and thanks for taking my question.

<unk> I wanted to start on the applebee sales strength.

I heard you say, 7% pricing year on year, I think thats pretty similar to Q2, suggesting that sequential improvement youre seeing is traffic related I guess the first can you just confirm that that's correct.

Assume would also be could you elaborate on what's driving the sequential acceleration any data points, you could see share, suggesting that youre benefiting from trade down or a way to ballpark the benefit of this shift to value and that's the thing worth noting per day part or weekday versus weekend perspective.

Sure Brian .

That's a lot embedded in that that question good to hear from you.

Let's tackle kind of the health of the business and what I attribute that to first and foremost.

Restaurant excellence.

General manager retention and restaurant level excellent one guest at a time has been a hallmark of this brand throughout the pandemic.

Throughout this recessionary environment.

In addition to that and I mentioned it in my remarks.

We concluded a while ago, our portfolio rationalization and ended up closing over five years.

Just about 300 restaurants, that's complete our portfolio, both restaurants and franchisees is rock solid right now and that's evident in the results quite frankly.

I have seen that earlier had it not been for the pandemic and then it takes a combination of.

Off premise execution, great marketing I referenced it in good in the neighborhood, we'd like to connect emotionally we'd love music.

And we'd like to make our guests smile and make them Hungary.

And we're a brand thats.

That's not only affordable we went up four attributes and this is what I would attribute our not only our success, but why we're so confident moving forward. We went out affordability. We went on convenience, we went out and variety. Therefore, no veto vote and we're absolutely dominating on brand awareness you add those four up.

And you have sustained growth.

For a very relevant brand the brand is better positioned than it has been I would argue this is my second stint with applebee's.

In its entire history, so I won't quantify or attempt to quantify anything for you other than to say those are the reasons driving.

The results that you see and that you've seen over the past few years for the brand.

Alright, thank you and on the commodity front.

At Applebee's, what was year on year inflation in the third quarter could you level set sort of where you see the fourth quarter of shaken out I'm just trying to get a sense of I know you gave some statistics on first half versus second half, but trying to get a better understanding of the degree to which you're seeing improvement and then I know.

Things can turn on a dime. These days the hour by hour, but everything you know today is there a reach a reasonable range.

That you would expect on food inflation that you could operate into 'twenty three.

Mid single digits et cetera, something in the ballpark.

Hey, Brian I can take I can let you know in Q3, where applebee's inflation that we experienced was about 17% for IHOP was about 21% and so if you think about first half versus second half.

Relation.

First half was I think for both brands, we're in the low twenties.

And then the second half that inflation for applebee's, despite the low teens and for IHOP, it's close to 20% just because they have different commodity basket.

But as John mentioned as both John mentioned earlier I think the index that to July for the next 18 months, we're seeing we're seeing that that cost Scott starting to go down so even though it is still year over year growth inflation is not as steep as we saw in the <unk>.

First half and that trend will likely continue into 2023.

Alright, Thank you for that and I also had a question on IHOP for Jay could you just give some perspective on the cadence you saw through the quarter I'm trying to get a sense as to what degree the LTE of the two by two by two and September might've, driven outperformance in the month and just curious if there's anything worth noting.

From a day part weekend versus weekday et cetera, anything worth noting there.

Hey, Brian This is Jay.

No as far as the quarter.

Right about that.

Yes.

Dual time, we get a little bit of softness.

And then for the whole quarter, though it kind of evens itself out that's pretty typical for us.

We were real pleased with the promotion overall I think it's just what we wanted to do we keep talking about value does value work in value does work.

It does drive traffic need to be profitable traffic for our franchisees, though that's always think we're looking to do is you don't just want to.

Good traffic coming in and it doesn't help our franchisees.

The nice thing is when you do a value promotion like that though.

Frankly, most people don't buy just that promotion that get people in the door and what they do is they decide when they get there one person has that promote promotion item, but the other three people they bring one of them do not either regular behavior.

<unk> ended up being good towards overall doing that so.

Overall, we're very pleased with that.

Quarter end.

As long as gas prices stay more moderated and things get much worse in the economy I think we're in very good shape.

Okay and then.

Last one for me in the third quarter I noticed there was this other EBITDA add back of around $2 $5 million could you provide just more color on what that was I know, there's usually add backs that you identified that there was this other bucket any color there would be great. Thank you.

Yes, it was around professional services or for work that we're doing that's not related to the run rate of the business.

Okay. So that was embedded in G&A, then I would assume.

Thanks Ryan.

Great I'll pass it on thank you.

Thanks, Brian .

Thank you.

And for our final question.

That will be coming from.

And you will see.

King.

Q2 your line.

Great. Thank you I wanted to ask a follow up on the.

Lower commodity costs that you are expecting somewhat experiencing now at applebee's.

Just.

The company sort of financial and economic model.

As I understand it the direct exposure for the company as it is only through or mainly through the the mixes that are sold out of IHOP.

But is there anything else is there any exposure through the co op or any other way that.

Commodity inflation directly impacts the company's P&L.

Hey, Andrew it's John and thanks for joining the call, we're glad you're with us and Vance can take that.

Hey, Andrew.

Good to talk to you.

No it's primarily through.

Through the dry mix cost as you mentioned when we had the company owned restaurants, they would flow through our P&L as well, but now that the Refranchising has closed it won't really impact us directly and now having said that John and Jay both talked about how it impacts our franchisees. So so it does we do care about it and it's something that we monitor.

They're very closely because we care about the health financial health of our franchisees.

Great just wanted to double check that and just on the G&A spend maybe I can ask sort of a basic question.

Sure.

Could you kind of quantify how much of.

The planned spend kind of slid out of either of the first three quarters or out of the third quarter into the fourth quarter.

Help us understand the step down in EBITDA and also I guess to some extent the step up in the third quarter.

Yes, it's hard to quantify how much Scott slipped because it's kind of a theoretical question.

Yes.

But.

I think I'll reiterate what I said before which is if you look go back to our quarterly G&A numbers for the past four five years Q4 is traditionally a little higher than than other quarters.

There were some true up of accruals that we do just as normal operating procedures, but this quarter. It does include high new hires that we wanted to hire earlier in the year that we couldnt do in product research projects and development projects that we wanted to do earlier in the year, but Scott.

Pushed back because of Amazon and.

Some some of those macro impact, but it's hard to quantify how much that was pushed back into Q4, but our guidance reflects that though.

Does that does that help Andrew.

Have we lost Andrew.

Operator.

Andrew.

Yes, he has dropped off the call.

Yes.

Okay. So I think that concludes the Q is that right Lisa yes.

Yes, there is no more.

All participants in the queue I would like to turn the call back over to Jonathan for closing remarks.

Great well since we're 12 minutes over we appreciate you all sticking with us and I will just say thank you we're proud of our results.

Okay.

Thank you all for participating this concludes today's conference you may all disconnect.

Yes.

Gotcha.

The conference will begin shortly to raise Johan during Q&A you can dial one one.

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Good day, Thank you for standing by welcome to the Brown excuse me the Dine brands Global third quarter 2022 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. So 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 like to call.

And the call over now to Brett Levy and we apologize for all technical difficulties. Thank you good morning, and welcome to Dine brands third 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 , John Tsai Winski.

President of Applebee's, and Jay Johns President of IHOP.

Before we turn the call over to John Please remember our safe Harbor regarding forward looking information.

Please evaluate the forward looking information in the context of these factors, which are detailed in today's press release and 10-Q filings.

The forward looking statements are as of today and assumes no obligation to update or supplement these statements.

We may also refer to certain non-GAAP financial measures, which are described in our press release and also available on dine Brands' Investor Relations website.

While we may provide color on intra quarter trends related to volatility and uncertainty we have returned to our traditional quarterly reporting schedule.

Please note our third quarter's results are inclusive of the company operated applebee's units as the transaction had not closed during the quarter.

With that I'll turn the call over to John .

Thanks, Brett and good morning, everyone. Thanks for joining US today, we delivered another solid quarter. Thanks to the strength of our brand our operational and marketing agility and most importantly, our seasoned team of franchisees are applebees, IHOP and dine leaders and our team members.

As you know and as you've heard from others economic headwinds persist, particularly inflation and consumer sentiment.

Spite this macro environment our brands remained resilient.

<unk> is an IHOP achieved positive comp sales of three eight and one 9% respectively.

Q3 was applebee's seventh consecutive quarter of comp sales growth and the fifth for IHOP and.

In addition, our dining results continued to improve as Applebees is ahead of 2019 and IHOP is continuing to gain ground.

And our off premise sales remained more than two times pre pandemic levels.

In Q3, <unk> delivered adjusted EBITDA of over $63 million by focusing on what's in our control, notably G&A was $46 million, reflecting our prudent approach to spending.

Through the first three quarters of 2022, we returned $145 million to our shareholders via dividends and buybacks.

And importantly during the quarter, we saw an easing in the in placement rate in the cost of food and supplies to the restaurants.

Applebee's cost of goods inflation fell from 23% during the first six months of 2022 to a run rate that looks like 13% for the back half of the year.

IHOP is experiencing a more modest decline from 21% to 19% <unk> cost to remain inflated due to the severance cost of eggs and the impact of the Ukraine War on grain prices and ultimately pancake mix.

I've talked before about the importance of strong brand during uncertain times during moments like these consumers stick with brands, They know and trust and love.

The value proposition at both our brands is well known so right now we're amplifying our value message to reflect our guest mindset and financial situation.

Now I'll walk you through the progress we made across our strategic priorities. This includes investments in technology development and new sources of revenue.

Our World Class Tech team is delivering product on time, and we've more than doubled our annual tech spend in 2019.

We're enhancing both the in restaurant and out of restaurant guest experience as well as new back of house in front of House technology.

Some examples of recently completed <unk> include our new learning management system.

New IHOP websites and App with Applebee's scheduled for next year.

Bye bye and pay and go technology that streamlines the guest interaction and we continue the rollout of IHOP new point of sale.

Our third priority is new sources of revenue IHOP now offers it's virtual brands over 1100 locations and we have 55 ghost kitchens across Applebee's and international.

I have virtual brands are incremental to sales and targeting dinner and late night hours both are opportunities for the brand.

We're building our virtual brand pipeline and believe there is an attractive long term opportunity for virtual brands within our portfolio.

While we expect challenges over the next few quarters Diocese isn't well for challenging time, we're confident in our ability to navigate the near term headwinds and deliver on our longer term goal. We're confident in the resilience of our iconic brands.

We're confident that our scale allows us to mitigate to some degree the client price disruptions and we're confident because dine as financially sound as our franchisees.

With that I'll turn the call over to Vance to review, our financial performance and outlook in more detail good morning Vance.

Thank you John as you mentioned the third quarter continued the momentum that we built over the last year and a half and our plan is moving us in the right direction.

Third quarter total revenues were $233 $2 million franchise revenues grew 2% year over year due to positive comp sales growth at both brands.

Restaurant sales increased over 8% to $38 2 million.

To the same period of last year, we completed the Refranchising of our company restaurants last week.

Our rental segment margins for the third quarter of 2022 improved by 6% to $7 2 million over last year.

The favorable variance was mostly the result of franchisees hard retail sales, which drove higher percent rental income for the quarter.

G&A for the third quarter of 2022 was $46 3 million compared.

Compared to $43 7 million for the same quarter of last year as we continue our strategic growth investments in support of our brands.

We generated consolidated adjusted EBITDA of $63 $6 million. This quarter slightly ahead of last year's $63 $3 million quarterly results.

Finally, adjusted EPS for the third quarter was $1.66 outpacing last year's $1 55.

The variance was primarily due to lower weighted shares outstanding.

Turning to our cash flow statement and balance sheet.

Over the first nine months of 2022, we generated cash flow from operations of $63 5 million. This compares to cash flow from operations of $145 $6 million over the comparable period last year.

The variance in year to date cash flow from operations was due to the change in working capital we saw in Q1 and discussed in the prior two quarters.

This quarter also marked a continued improvement from our midyear results as we saw our working capital position and cash conversion rates gradually returning to normalized levels.

We also ended the third quarter with total unrestricted cash of $355 $3 million.

This compares to unrestricted cash of $263 5 million at the end of the second quarter.

In mid August we announced the upsizing of our borrowing capacity available under our BSN and we subsequently drew down $100 million, which provides us with greater financial flexibility.

Our leverage ratio move to three nine times, which was below the $4 two seven times last quarter.

As we discussed previously we have the option to refinance our class a tier one bonds right now, but our anticipated repayment date for the bonds isn't until June of 2024.

Meantime, we will continue to evaluate our best course of action.

Take advantage of the refinancing window, if it makes sense for our shareholders in the long term.

<unk> remains committed to returning cash to shareholders. During the third quarter, we paid a cash dividend of <unk> 51 per share on September 30.

We've repurchased over one 6 million shares as of Q3 year to date or approximately 9% of our share count has been retired since the start of the year.

The combination of paying dividends and repurchase of our shares remain a key component of our long term capital allocation plan and support our focus on driving total shareholder value.

Next I would like to update our financial guidance for the year.

First let me touch on development well IHOP development plans are now between 35 to 45 net openings for 2022 compared to our prior guidance of 50 to 65 net openings.

The change is primarily due to some of our planned openings moving to 2023, given current permitting and construction delays.

These development plans remain unchanged at five to 15 net closures for the year.

Second we are lowering our expected G&A range for the year based on our latest investment progress.

Our new 2022, G&A forecast guidance is $185 million to $190 million.

Compared to our prior guidance of 188 $298 million.

Some of our planned G&A investments this year will be extended into 2023, given the disruptions caused by the pandemic, we will provide more guidance around 2023 on our next earnings call.

Third we're narrowing our expected adjusted EBITDA guidance range to between $243 million to $248 million.

Compared to our prior guidance range of 235 million to $250 million.

New guidance reflects our Q3 performance our continued strategic G&A investments in Q4, along with impact from Refranchising, Our company owned restaurants.

Lastly, we are maintaining our capex spending range of 33% to $38 million.

In summary, we're pleased with the consistent performance across our operations our value focused approach again yielded solid results at both brands.

We remain confident in our ability to generate significant cash flows.

Invest in growth and return capital to shareholders over the long term.

Next we'll hear from Joseph <unk> with color on the Applebee's brand John .

Thanks, Vance and good morning, everyone 2021, and 2022 have been terrific years for the Applebee's brand in Q3 continued this momentum with a three 8% comp sales increase on top of last year's 12, 5% increase versus Q3 of 2019.

On a post COVID-19 basis, I believe visibility to a three year sales comp provides an important gauge as to the true health of the brand.

Three year comp sales calculation for Q3 2022 versus Q3 2019 reflects a remarkable 16, 9% growth illustrating applebee's vibrant and sustained performance.

This also marks the best three year sales performance throughout the history of Dine brands.

The success to a combination of drivers first where the tactical marketing decisions. We made in response to this inflationary environment.

As the restaurant excellence, we continue to see from our outstanding franchise partners and finally Applebee's performance reflects the benefits associated with the completion of our multiyear portfolio rationalization.

Now as I break down the quarter Q3 average weekly sales remained quite strong at $53000 per restaurant.

76% of this volume was on premise, while 24% was off premise equally split between car side to go and delivery.

From an absolute dollar perspective weekly off premise sales were $12800 in Q3.

This off premise business is essential to our success and continues to flourish with more than $1 billion in annual system sales in.

In addition, we just opened our 10th drive thru pickup window as we began a comprehensive cost benefit analysis of this very promising new initiatives.

Keep in good in the neighborhood umbrella.

On the development front, we will open approximately nine new restaurants. This year, featuring a combination of traditional and ghost kitchen locations. We also expect to close 15 restaurants. This year, representing the fewest applebees closures in a decade.

We then plan to return to net new unit growth in either 2023, or 2024 again, a combination of traditional restaurants and ghost kitchens.

Looking forward, we anticipate eventually returning to an annual closure rate of approximately 1% for the Applebee's brand.

John is now our second largest franchise partner with 148 restaurants and second the only Greg Flynn with 439 Applebee's.

With this transaction Applebee's returns to a 100% franchise business model with 31 partners owning all 571 restaurants in the U S.

Now as we do annually, we recently gathered the entire applebee's system to align around our 2023 business plan and to recognize our best performers I was honored to celebrate Mark show stack is applebee's franchisee of the year at this event Mark as a role model operator and partner with 62 restaurants in the state of Michigan.

In closing, perhaps nothing speaks more to the health and relevance of the Applebee's brand than the escalation of our average unit volume from $2 $2 million. When this team was first assembled in 2017 to where we are today in Q3 at $2 million $750000 per black box does too.

25% increase is more than double the casual dining category is 10% increase excluding applebee's over the same five year time frame.

Even in this challenged environment, we remain aligned with our franchise partners as to how extraordinarily well positioned the applebee's brand is for sustained growth as we look forward to 2023.

Now I'd like to turn the call over to Jay for an overview of the IHOP business.

Thanks, John and good morning.

Our brand continues to become more relevant for more occasions, with our menu and marketing as well as on the innovation and technology fronts. We've.

We posted a one 9% comparable store sales gain in Q3, marking our sixth consecutive positive quarterly results.

Our restaurants generated average weekly sales of $36800 compared with last year's 36200 <unk>.

Premise per restaurant weekly sales of approximately $7700 were modestly below the 8300 8900 over the prior two quarters.

<unk> business is still over 20% of sales with delivery accounting for nearly 13% and traditional takeout generating approximately 8% of sales.

The off premise business is also supported by our two virtual brands with over 1100 restaurants, offering thrilled cheese and Super Mega deal.

We opened nine new restaurants in the quarter and our franchisees.

Franchisees continue to work towards getting all of the restaurants back the full standard operating hours as the portfolio increased restaurants operating either 24, seven or 2042.

In Q3, an additional 4% of our restaurants.

The offering overnight hours.

Our marketing and menu initiatives are resonating with guests last quarter, we successfully partnered with dominion's on a well received promotion that drove results we offer the value proposition through a widely accepted $5 two by two by two platform and most recently, we're excited about the launch of our new thick <unk> fluffy French toast.

Offerings.

We're also enthusiastic about our strategic and technological efforts.

We've introduced our painesville options for our guests to closeout checks through their own devices.

Our point of sale platform rollout continues to expand now and approximately 240 restaurants and.

And the growth of our international Bank of Pancakes loyalty program has exceeded our full year target already we ended the quarter and its first six months with $3 3 million sign ups.

Touching briefly on development, we remain bullish on the brand's long term prospects, despite having to deal with near term supply chain and permit approval timing challenges.

We expect to add 50, plus gross new restaurants in 2022 that represents one of the strongest years, our brand's history.

The change in our current year outlook is more of a timing issue with ways under development prospects we.

We expect to see several of our franchisees planed Q4 openings move into 2023.

Hey, Thanks, Jay and thanks to those of you on the line for your patience with our late start this morning, and thanks to advanced John and Jay and their teams for all their hard work and great results in Q3, and a big Thank you to our franchisees the restaurant teams for their tremendous efforts and focus on our guests we know that there is uncertain.

Right now and Thats why were working hard to be there for our guests, providing great food and experiences when they want and need us most and with that Lisa. Please open up the call for questions.

Thank you.

Wow.

Hey, Ross.

Okay.

Our first question will be coming from Eric in Dallas with Keybanc. Your line is open.

Hey, Thanks for the question and good morning.

Is it on the balance sheet, you have a big chunk of your securitization coming due in about 18 months or so so can you talk about your ability to refinance that maturity and where do you think you might be able to get a deal done.

Thanks, Eric I'll take that.

Good morning, Eric So we actually don't have any current maturities due and there is no need to refinance right now.

Park call Windows that we have was open up earlier this summer, but we will.

We only need to take advantage of any kidney SaaS. So we're monitoring the market and currently the market is pretty volatile right.

We're taking into account interest rate movements and capital markets environment, but the goal is always to maintain that financial flexibility.

But our current capital structure provides so we will we.

We may refinance on the market conditions improve right now.

It's pretty choppy.

And buybacks.

Capital return has always been one of our top priority in terms of capital allocation I mean, as evidenced by the fact that we've done over $100 million.

Buybacks. This year and then we will continue to be opportunistic.

Purchases.

But we need to balance it with net leverage level, especially given in today's environment.

Okay fair enough and maybe I can ask one about unit growth you have some targets out there with regard to growth.

Over the next four to five years, which if I remember correctly it stacks up to about 15 or 150 to 200 units per year. So my question is are you still confident in its outlook given the higher rate environment and how are your franchisees, particularly IHOP system reacting to the higher rates.

They are still dealing with the high teens inflation.

And then as it relates to that you lowered the unit growth outlook for IHOP. This year due to permitting delays does that mean in 'twenty three you'll see outsize growth as project timelines normalize do you think this pushes up pipeline such that we see the typical 50 or so perhaps next year.

Yes, Jeremy.

I think that one since most of that was an IHOP related question yes.

Our growth. This year has been strong I mean, we are going to open over 50, new restaurants. This year, which is very good growth for us.

We did have.

Quite a few issues, especially a lot of our pipeline.

Back loaded this year and we started getting into some permitting issues that seem to be persisting post COVID-19 and different municipalities equipment issues.

So that caused some of our pipelines it was going to open in Q4, just slide into next year, so that will.

That will help that as we move forward.

The environment, obviously, it's a little bit difficult, but so far the franchisees.

Got a lot of excitement as we just had our global conference and had a tremendous amount of franchisees talking to us about new restaurant openings.

Theres still bullish on the opening of a lot of restaurants at the IHOP brand, but the economics change. So we're seeing a tremendous amount of our openings now being conversions. There's other restaurants that closed down and it's actually providing an opportunity for people to be able to go out and take advantage of that at this particular time.

I think the pipeline is still looking very good.

Like I said a lot of those will move into next year, which will help us out in future years.

And John why don't you address applebee's.

Hey, Eric.

We're confident in our strategic plan for Applebee's as you know we're rebuilding our pipeline.

Anticipate and.

This is great news returning to net new unit growth combination of traditional and ghost and either 'twenty three 'twenty four.

We are optimistic and.

Not concerned about any of the kind of near term Chan.

Challenges that may be delaying that timeline a little bit.

Fair enough. Thanks.

Thank you one moment, while we pay for our next question next.

Our next question from Jay.

Jake Barlett.

Highlight of choice your line is open.

Great. Thanks for taking the question.

My first one was on the guidance for on the implied guidance in the fourth quarter for EBITDA.

It's lowering a step down versus the other quarters of the year and I just wanted to kind of.

We're seeing better the reasons for that are the drivers for that I see that.

G&A is guided to be up in the quarter. So that's one aspect we mentioned in the release when Impac.

Impact from the Refranchising. So maybe it's part of that answer if you could talk about what the near term impact of Refranchising. The stores is and maybe what the impact would be in 'twenty three whether it's accretive.

Including some some reductions in G&A related to those stores. Thank you.

Okay.

And so we take that.

Hey, Jay so so.

On a full year.

2022, but well this quarter effectively we are guiding in Q4 and then it does reflect our current performance our G&A spending trend and along with the impact from the Refranchising of our company owned restaurants as you as you say.

Most of the trend that Youre seeing in Q4 is driven by G&A and a reminder, that our Q4 G&A is usually higher than other quarters, but this Q4, particularly also includes a catch up.

Earlier in the year.

This credit is due.

With open positions projects et cetera.

So having said that though I think Q4 G&A does not represent runway.

And then we will continue to make certain investment people research technology product outlets in 2023.

More details on 'twenty three guidance on the next in the next quarter.

But our investments as we said in the past.

Designed to drive and support long term growth.

Pleased with the progress that we're seeing so far.

And the impact of the Refranchising. It was mentioned in the release that that could be.

Packaging EBITDA so I.

I look at your company margins I would think that that.

Would be almost a one for one to a royalty rate.

But if you could if you could just help us understand the impact of.

On the financials in the fourth quarter and 23 from selling those stores and then also what kind of G&A is related I think in the past, maybe you've talked about five or $6 million related to company owned stores is that right should we expect.

G&A to go down by that amount any any help there would be helpful.

So our 2020 to G&A and EBITDA guidance reflects the Refranchising transaction that was disclosed that was closed last week.

2020, we will provide more color on 23 next year, but I'm just reminding everyone that the 69 restaurants represents roughly 2% of our portfolio. We don't really anticipate a material change for our business fundamentals and historically, we haven't really discussed.

Any specific company owned restaurant specific EBITDA with G&A.

Okay, So but is there a G&A.

So again, you can say, whether it's accretive or dilutive to refranchising stores.

There is DNA that will be cut and we will have more discussion on 2023 guidance.

With our budgeting process for next year I will provide more color in the next quarter.

G&A that will be taken out.

Okay, and then there was no comment I believe about kind of your.

The current trends we've seen.

Same store sales in the fourth quarter and we've seen an improvement.

On a three year basis throughout the year here.

Is there any reason to think that that wouldn't continue just in terms of the underlying momentum of the business.

Any any comments there would be helpful.

Yes, Brian we have Jay and John comment on that.

Yes, Jack this is John .

We love our plan with our franchisees, we're very confident in.

Not only the plan that we've aligned upon but our flexibility to change as needed we have very strong momentum as a brand.

Our confidence quite candidly couldnt be any higher than it's been over the past five years.

I think on the IHOP side also we.

So we feel very good about our progress we've made.

Adding back after the pandemic, we had six straight quarters now being up in sales.

We seem to be hitting our stride right now.

Have a great pipeline.

The initiatives, we have planned out all the way through next year. So we're feeling very good about where we're at what we're doing with our menu our marketing our loyalty program. We've got a lot of things going for US right. Now we don't see any reason why that would change.

Great I appreciate it.

Thank you.

Thank you one moment, while we prepare for our next question.

We have our next question is coming from Jeffrey Bernstein of Barclays. Your line is open.

Great. Thank you very much.

Two questions. The first one just following up on the.

The consumer environment, it doesn't sound like you've seen any.

Low down in trend either through the third quarter into the fourth quarter, just want to make sure that.

Accurate and I was wondering what initiatives you might implement if trends were to slow.

On your end or whether perhaps you are already seeing.

<unk> marketing or promotion or the competitors getting more aggressive just trying to size up the landscape in terms of potentially response as well as the competition and then I had one follow up.

Sure, but a question for John and Jay again.

Hey, Jeff This is John .

These front.

We're very thoughtful in this environment is a challenging environment.

Well for the momentum that we have one.

One of the things that's happened here over the past.

Year, or so post COVID-19 as we return to having at least 12, perhaps even 18 months lead time in our and our marketing plans and our tactical.

<unk>.

With contingencies and flexibility built in so we have a portfolio of propositions that we can market and deploy as needed.

Should the environment become tougher.

We've got those programs sitting on the shelf, so and again, we only have 31 franchise partners, we meet frequently in our ability to.

Changed course on short notice in reaction or response to the marketplace is pretty easy for us so great momentum so very thoughtful on the challenged environment as well.

Hey, Geoff this is Jay at IHOP.

You make value part of our strategy all time, Theres always a need for value for some of your gas and we need to have the ability for guests to access that we've got our happy hour program.

Use limited time offers we just did a $5 two by two by two promotion. We also just rolled out our new executive fluffy, French toast, which is a full price proposition.

Much better improved quality compared to what we had previously.

We truly believe there is theres two sides to what people credit right. There's the indulgence.

Sweet side. There is also the more safety side, we rolled that Dave dinner entrees, we've rolled out the better for you items, we're really executing our plan and we're confident that we're doing that plan, we're going to be in great shape and theres value incorporated in that plan as well.

Understood.

And then my follow up just because it's amazing we have gone through this call without much talk about menu pricing or inflation. So.

Was hoping to just touch on.

You mentioned, the commodity basket seemingly easing a little bit in the back half of the year I'm wondering if you could maybe talk.

Directionally, where you think commodities and labor.

Headed I know, you're not giving formal guidance for next year, but how do you think about it from our franchisees perspective.

And maybe counter that with menu pricing kind of well.

How much pricing was in the menu for each of the brands in the third quarter and.

What are your suggestions to franchisees in coming quarters.

Sales really hold up in inflation were to ease just trying to get a sense for that potential margin outlook on the franchisee side. Thank you.

Jay and John you want to take that again.

Sure Jeff.

This is John on the Applebee's front.

I continue to be impressed with our our franchisees they are.

Our thoughtful strategic savvy.

Quite a sophisticated group they understand this delicate balance between.

Covering their margins to the extent possible and maintaining.

Affordability leadership in Applebee's does lead the category and affordability. So it is important to us they've been conservative relatively speaking.

And strategic.

In their pricing in and they have been from our discussions with them, taking a long term view as to market share opportunity in a tough environment and I applaud them for that with that said.

They will do what's necessary.

To protect their margins in a tough environment and they have been.

Conservative to date and I expect that to continue.

Yes, I think on the IHOP side.

No difference really they're dealing with the same kind of pressures.

Inflation has been a little stubborn this year we.

We do think that as we get into next year potentially.

Inflation rates are going to start to decline. It doesn't mean prices are going to drop but I think the the deceleration of inflation is going to take place.

Some points here and you see that a little bit this year, but backup.

You are still pretty high now are our menus are already priced for the rest of the year. We don't have another menu credit until next year. So I don't see them changing anything right at the moment until we get into the spring I think they've done whatever they are going to do as far as their decisions on price, but food costs will probably normalize slightly probably never comes.

Back down to the levels it was previously but.

Yes.

Have incorporated price to help overcome some of that.

And that's a little bit more of a regional issue.

Certain areas, where the softening of the economy has actually opened up.

Staffing possibilities in the inflation rate on labor has slowed down as well, there's other markets, where it's still tough out there and if he has got an unemployment rate of 2% in your in your city. It gets tougher but that becomes a little more localized the franchisees very smart about how to take price as needed.

It is such a way where you don't run off your guest days because they can't afford to come anymore. So they are being very careful about it and trying to be a strategic as possible about how they take products, where they take price.

And I think as inflation rates come down price increases will probably decelerate as well so.

<unk>.

When the inflation goes back to a more normalized rate I think your price taking the franchisees will do likewise.

Is there any clarification on that price for the third or fourth quarter three of the brands.

Jeff on the Applebee's front thinking about a 7% quarter over quarter 'twenty to over 21.

And I think we've shared.

Color in previous quarters as well so I look at that as conservative in this environment and to Jay's point I do expect should the commodity cost inflationary environment through which.

Which we do expect it to do over time.

At our franchisees will revert back to at some point to more normalized 2% to 3% annual price increase that's what historically has proven to be the case.

Thanks.

More likely closer to 11% is the right taken year over year Q3 to Q3 now given some of those roll off.

Print menus.

Our quarters change, but when we just look at Q3 versus Q3 a.

A little over 100%.

Hey, Geoff it's John Peyton, just some context there.

7% and 11% in price increases for the two brands.

Is less than half of the increase in cost of goods into the restaurants. So it does reflect the franchisees really balancing their margins with what they think their guests Ken <unk>.

Tolerate.

And what's also interesting is that guest pushback on price increasing increases has been surprisingly limited while they're managing the total cost of their check you can see from our same store sales growth that.

Consumers are tolerating the price increases have come really be expected given the economy overall.

Yes.

Thank you.

Thank you one moment, while we prepare for the next question. Our next question is coming from Nick favorites.

Bush of Wedbush go ahead. Please.

Thank you.

I just wanted to ask about value in <unk>.

Environment do you really feel like.

Aggressive value stance as necessary, particularly eyes.

Gas prices have come down from early Q3 peaks and then.

In general I guess.

How has the.

Perception of value evolved.

Just given the inflationary headwinds out there.

Jay and John you wanted to add.

Yes, John This is John C. Nick good to chat with you.

Your question is do I think value is necessary.

Police is fundamentally a value brand we lead on affordability will obviously see our franchisees protecting their margins.

But I do think value remains important were at the lower end of the average check spectrum in casual dining that's important.

Through challenged.

Quite obviously in this environment in terms of discretionary income and there are lots of ways to convey value, we're big believers in restaurant excellence and our franchisees.

They have truly been exceptional at earning the trust of not only their guests, but their team members throughout Covid I think thats evidenced in our results.

And there are lots of ways to deliver value added value there is co branding.

The use of borrowed equity.

Like conveyed through our advertising emotional connection with our guests I believe good neighborhood is perhaps more relevant than it's ever been.

In this environment. So yes, I believe value is important but there are multitude of ways tactically.

To deliver upon that that value proposition.

Hey, Nick this is Jay.

I think that to an extent values always necessary.

It's a little bit part of our overall strategy.

There are certain guess you'd have to get more occasions from them.

As always important and you want to have value on your mid year.

Some people call it the barbell strategy in a more expensive items you have items that are more approachable and affordable for guests, but not all the same we have guests that are.

Higher income scaled it that they are less price sensitive.

In order to pay for an item.

Care, what it costs there are other people, though that they can't do that they have to manage their pocketbook when gas prices go up and things get more expensive they watch their dollars closely.

And so I think there is there is a.

Z for value all the time and as John said very well there is different kinds of value.

There is abundant value that doesn't necessarily mean, it's a cheap products.

You get a lot of food for your money. There is five point is valid.

At this time author values.

Our loyalty program opens up the possibility for one to one personal value on what they care about and how to motivate extra visits from those individuals.

Yes, the economy it makes it profit center.

But I think value is always there just how you pull the levers when and where and how to to keep the flow of gas companies.

Hey, Nick This is John see my final point on this one and I firmly believe this.

As we think about the past couple of years brands with meaningful scale, which we have.

And brands that have strong culture within their franchise communities and entities and brands that have earned the trust of their desk or going to thrive and perhaps navigate this inflationary environment better.

Then others, who don't have scale and don't have strong culture, we love our position.

Okay.

Is there a way to maybe quantify like value mix as a percentage of the overall.

Menu or sales.

Now versus pre.

Pre COVID-19 for both brands.

Well, Nick this is John C.

I would not equate value tactical discounting.

I think my view on that is.

Sometimes.

Z are desperate <unk> resort to tactical discounting out of necessity. So.

We've always had kind of a core value proposition embedded in what we do and how we market and that will continue moving forward. Okay. Thank you very much.

Thank you.

While we prepare for the next question.

Okay.

Our next question is coming from Brian <unk>.

Deutsche Bank. Please go ahead your line is open.

Okay.

Just a question on I have specific to the loyalty program I know from the prepared remarks sign ups are going well, but can you speak to one or two elements that maybe have you. Most encouraged thus far from a consumer response perspective any early learnings there and then just kind of related to that it seems like the dining room traffic at IHOP is still <unk>.

<unk>.

Quite a bit relative to pre COVID-19 is <unk>.

Yes. This is Jay.

Look I think dining room traffic keeps coming back we see it improving increasing and.

As franchisees see their way to that being a profitable business venture for more and more going to do that for in some locations that staffing and have an access to people to be able to staff it overnight.

Some of this is.

Ladies people still maybe not quite as comfortable coming out it's a little bit of everything I cant quantify and say exactly what is what but but we see the dining business coming back until a critically important piece of our business. It is.

The core of the number one sales driver we have so obviously, we're working on that and I think that.

This relevancy in the food that I've talked about before it also becomes important and that is how do you have better items for people that want to eat healthier. How do you have items that are more relevant to people for dinner instead of just getting practice. So we're addressing all of those things to help our brand become more relevant for me.

More occasions throughout the entire day.

As we look at that.

And then.

Refresh me what was the very first part of your question before you got there you asked about one other thing.

Sorry that was kind of a two parter just.

Well listen I know program right.

The sign ups are going well, but how about early learnings on consumer response.

Yeah. The sign ups are going fantastic and I think that is the first indicator of people their engagements David Love the brand they want to join the sign ups are going way faster than what we even thought they would do we got for the entire year. Our goal was to an asset light people were $3 3 million by the end of.

Q3 was a whole another quarter to go so that's going really well.

Some other statistics and data on that but.

Thank you.

Thank you I was hoping if our next question. Our next question is coming from Brian .

Taro.

Raymond James Your line is open.

Good morning, and thanks for taking my question John .

<unk> I wanted to start on the applebee sales strength.

I heard you say, 7% pricing year on year, I think thats pretty similar to Q2, suggesting a sequential improvement youre seeing is traffic related I guess the first can you just confirm that that's correct but.

We would also be could you elaborate on what's driving the sequential acceleration any data points, you could see share, suggesting that youre benefiting from trade down or a way to ballpark the benefit of this shift to value and anything worth noting per day part or weekday versus weekend perspective.

Sure Brian .

That's a lot embedded in that that question good to hear from you.

Let's tackle kind of the health of the business and what I attribute that to first and foremost.

Restaurant excellence.

General manager retention and restaurant level excellent one guest at a time has been a hallmark of this brand throughout the pandemic.

Throughout this recessionary environment.

In addition to that and I mentioned it in my remarks.

We concluded a while ago, our portfolio rationalization and ended up closing over five years.

Just about 300 restaurants, that's complete our portfolio, both restaurants and franchisees is rock solid right now and Thats evidenced in the results quite frankly, you would have seen that earlier had it not been for the pandemic and then it takes a combination of.

Off premise execution, great marketing I referenced it in good in the neighborhood, we'd like to connect emotionally we'd love music.

And we'd like to make our guests smile and make them, Hungary, and where brand thats.

Yes.

That's not only affordable we whaler four attributes and this is what I would attribute our not only our success, but why we're so confident moving forward. We went out affordability. We went on convenience. We went on variety. Therefore, no veto vote and we're absolutely dominating on brand awareness you add those four up and you have some.

Stained growth for.

For a very relevant brand the brand is better positioned than it has been I would argue this is my second stint with applebee's.

In its entire history, so I won't quantify or attempt to quantify anything for you other than to say those are the reasons driving.

The results that you see and that you've seen over the past few years for the brand.

Alright, thank you and on the commodity front.

At Applebee's, what was year on year inflation in the third quarter could you level set sort of where you see the fourth quarter shaken out I'm just trying to get a sense of I know you gave some statistics on first half versus second half, but trying to get a better understanding of the degree to which you're seeing improvement and then I know things can turn on a dime. These days the hour by hour.

But everything you know today is there a reach a reasonable range.

We would expect on food inflation that you could operate into 2003.

Mid single digits et cetera, something in the ballpark.

Hey, Brian I can take I can let you know in Q3, where applebee's inflation that we experienced was about 17% for IHOP was about 21% and so if you think about first half versus second half <unk>.

Equation.

First half was I think for both brands, we're in the low twenties.

And then the second half that inflation for applebee's, despite the low teens and for IHOP, it's close to 20% just because they have different commodity basket.

But but as John mentioned as both John mentioned earlier I think the index that to July for the next 18 months, we're seeing we're seeing that that cost Scott starting to go down so even though it is still year over year growth inflation is not as steep as we saw in the <unk>.

First half and that trend will likely continue into 2023.

From a day part weekend versus weekday et cetera, anything worth noting there.

Hey, Brian This is Jay.

No as far as the quarter.

Right about that dual time, we'd get a little bit of softness.

And then for the whole quarter, though it kind of evens itself out it's pretty typical for us.

We were real pleased with the promotion overall I think it's just what we wanted to do we keep talking about value does value work.

It does work.

It does drive traffic need to be profitable traffic for our franchisees, though that's always I think we're looking to do is you don't just want to get traffic coming is it doesn't help our franchisees.

The nice thing is when you do a value promotion like that though.

Frankly, most people don't buy just that promotion that get people in the door and what they do is they decide when they get there one person has that promote promotion item, but the other great people they bring with them do not either regular behavior.

It ends up being good towards the overall doing that so.

Overall, we're very pleased with.

The quarter end.

As long as gas prices stay more moderated and things don't get much worse in the economy I think we're in very good shape.

Okay and then.

Yes, it was around professional services or for work that we're doing that's not related to the run rate of the business.

Okay. So that was embedded in G&A, then I would assume.

Thanks Ryan.

Great I'll pass it on thank you.

Thanks, Brian .

Thank you.

And for our final question.

That will be coming from.

And you will see.

King.

Q2 your line.

Great. Thank you I wanted to ask a follow up on the <unk>.

Our commodity costs that you are expecting somewhat experiencing now at applebee's.

Just.

The company sort of financial and economic model.

As I understand it the direct exposure for the company as it is only through our mainly through the.

The mixes that are sold out of IHOP.

But is there anything else is there any.

Exposure through the co op or any other way that.

Commodity inflation directly impacts the company's P&L.

Hey, Andrew it's John and thanks for joining the call, we're glad you're with us and Vance can take that.

Hey, Andrew.

Good to talk to you.

It's primarily through.

Through the dry mix cost as you mentioned when we had the company owned restaurants and flowed through our P&L as well, but now that the Refranchising is closed it won't really impact us directly and now having said that John and Jay both talked about how it impacts our franchisees. So so it does we do care about it and it's something that we monitor.

Very closely because we care about the health financial health of our franchisees.

Great just wanted to double check that and just on the G&A spend maybe I can ask sort of a basic question.

Could you kind of quantify how much of the.

The planned spend kind of slid out of either of the first three quarters or out of the third quarter into the fourth quarter, just help us understand the step down in EBITDA and also I guess to some extent the step up in the third quarter.

Yes.

It's hard to quantify how much Scott slipped because it's kind of a theoretical question.

But.

I think I'll reiterate what I said before which is if you look go back to our quarterly G&A numbers for the past four five years Q4 is traditionally a little higher than than other quarters.

There was some true up of accruals that we do just as normal operating procedures, but this quarter. It does include high new hires that we wanted to hire earlier in the year that we couldnt do in product research projects and development projects that we wanted to do earlier in the year Scott.

Pushback because of Amazon in and.

So some of those macro impact, but it's hard to quantify how much that was pushed back into Q4, but our guidance reflects that.

Does that does that help Andrew.

Have we lost standard.

Operator, it seems like.

Andrew.

Yes, he has dropped off the call.

Yes.

Okay. So I think that concludes the Q is that right Lisa yes.

Yes, there is no more.

All participants in the queue I would like to turn the call back over to Jonathan for closing remarks.

Great well since we're 12 minutes over we appreciate you all sticking with us and I'll just say thank you.

Proud of our results.

Okay.

Thank you all for participating this concludes today's conference you may all disconnect.

Q3 2022 Dine Brands Global Inc Earnings Call

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