Ladies and gentlemen, thank you for standing by. Welcome to the Q2 2021 Dine Brands Global Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please evaluate the forward-looking information in the context of these factors, which are detailed in today's press release and 10-Q filings. With that, I'll turn the call over to your host, Mr. Ken Diptee. You may begin.

Good morning, and welcome to Dine Brands' second quarter 2021 conference call. I'm joined by John Peyton, CEO; Vance Chang, CFO; Jay Johns, President of IHOP; and John Cywinski, President of Applebee's. Before I turn the call over to John, please remember our Safe Harbor regarding forward-looking information.

Good morning, Ken. Good morning, everyone. Thanks for joining us today. We're pleased with our strong Q2 results, and I'm excited for you to hear from Vance Chang, our talented new CFO. I'll start by defining this moment in time. The restaurant at this time is clearly driving our rebounded Dine Brands and Americans are returning to indoor dining. And now that Americans are back, we're pivoting from triage to acceleration. What I mean by that is we're accelerating the innovation and the reinvention of the guest experience. Today, I'm thrilled to report that our investments in innovation and the resiliency of our franchisees and team members are clearly paying off. During Q2, both Applebee's and IHOP posted significant improvements in comp sales. Both brands are fundamentally improved businesses due to off-premise sales. I've been on the road, and each conversation with a franchisee or a team member reinforces for me our unique advantages that ensure our business is built to win. First, we've got two iconic brands that thrive based on guest connection. Collectively, Applebee's and IHOP have been serving communities for more than 100 years. Our guest satisfaction is strong, which is impressive because many of our restaurants are operating with less labor than they're used to. Finally, we worked side-by-side with experienced talented franchisees who are emerging from the pandemic with stable financial fundamentals. Our brand posted meaningful improvements during Q2 and on this call, we'll be comparing comp sales to the same period in 2019. I'll recap second quarter highlights, including comp sales, EBITDA, free cash flow, off-premise growth, and development. According to Black Box, Applebee's and IHOP each outperformed their segments in Q2. Applebee's second quarter comps increased by 10.5%, and IHOP comps declined by 3.4%, an improvement of 17.8 percentage points compared to the first quarter. We achieved revenue of $233.6 million and EBITDA of $71.7 million, which reflects the continued strength of our franchise model. We generated free cash flow of $107.3 million during the first six months of the year. Despite what is still a fluid and unpredictable environment due to the Delta variant and COVID-19, we remain cautiously optimistic. There are two main reasons why: first, improving consumer confidence is approaching pre-pandemic levels; and second, meaningful tailwinds are coming from federal spending. However, our optimism is somewhat tempered by continued volatility. For example, the labor shortage is affecting wages, hours of operation, and the availability of certain SKUs in our supply chain. Inflation is a concern for our guests as well as for our network. I want to give you a more complete picture of how we're accelerating innovation through digital technology. At Dine, we're leaning into our scale. Our strategy is to build one common digital architecture for both Applebee's and IHOP. We're implementing a new CRM and digital platform that strengthens our digital marketing and analytics while serving as the backbone for our loyalty programs. We've rolled out upgrades to our apps and our websites. Guests now have more ability to customize their orders, and we've added cool functionality like geofencing to track guest arrival for pick-up and delivery. In 2021, we've introduced tech to improve the on-premise dining experience, including handheld devices for servers. These devices drive faster table turns, additional drink orders, and most importantly, increase server earnings due to turning tables faster. I will wrap up by emphasizing that our performance, our brands, and our finances are strong. We understand that the environment remains fluid, and we are drawing on our deep experience to continue to grow share today and in the future. Our new CFO, Vance Chang, will share more information about our financial results.

Thank you, John, for the warm introduction, and good morning, everyone. I'm excited to be here today and look forward to working with you. During my first month at Dine, I've been meeting with team members and franchisees and reviewing plans. The onboarding process was instrumental and reinforced my confidence in the business. Let me spend a few minutes talking about the financials. I'll begin with our cash position. We finished the second quarter with a total unrestricted cash of $259.5 million, a 44% increase over the first quarter's unrestricted cash balance. Franchise revenues for the second quarter were $167 million compared to $67.9 million for the same quarter of 2020. Adjusted EPS for the second quarter of 2021 was $1.94 compared to an adjusted net loss per diluted share of $0.87 for the same quarter of 2020. The improvement was due to an increase in gross profit as our business continued to recover from the effects of the pandemic. Additionally, our Q2 financial performance reflects strong pent-up demand that we may not experience at the same level in Q3 and Q4. I would like to share some thoughts about the back half of the year. We expect G&A to be higher in Q3 and Q4 relative to the first half of the year. The increase in G&A is primarily driven by two factors: higher incentive compensation is expected in the second half based on our business performance, and we have pushed professional services and travel expenses to the second half of the year. Regarding capital allocation, we are considering all options to maximize shareholder return and deliver sustained long-term profitable growth for the system. We'll have more details on our third quarter.

Great job, Vance, and welcome to the team. I'm very pleased to report that Q2 was an exceptional quarter for the Applebee's brand. April, May, and June comp sales were positive, marking the best quarterly sales performance throughout Dine Brands' history. Restaurant sales delivered approximately $53,000 per week throughout the quarter. According to Black Box Intelligence, Applebee's has outperformed the casual dining category on comp sales for 25 consecutive weeks. With guests returning to our dining rooms, we experienced a shift from off-premise sales to dine-in sales in Q2. The Applebee's off-premise weekly sales in June were $14,700 per restaurant. Given the importance of this business, we are expanding our initial drive-thru tests to include an additional six units in Q4. Applebee's continues to resonate with our guests on key operational metrics such as guest satisfaction, brand affinity, and visiting trends. To address the labor challenge, we executed our First National Hiring Day which resulted in more than 40,000 applications secured, with a terrific result. I'm proud of the authenticity and resonance of our marketing work. We have developed a business partnership with Dwayne Johnson to introduce his new premium Tequila brand into all Applebee’s restaurants this July. While Applebee's momentum remained strong, it would be unrealistic to expect these unprecedented double-digit sales to sustain in the back half of this year. With that said, I'm confident in Applebee's ability to continue to thrive in this environment.

I'm pleased to report that IHOP's solid trajectory continued this quarter. Our second quarter comp sales improved sequentially by 17.8 percentage points compared to the first quarter and outperformed the family dining category as well. Our off-premise sales mix moderated as anticipated, which accounted for 26.1% of sales mix for the second quarter. However, we continue to believe that we will retain the majority of the on-premise sales growth attained over the last 15 months. We have a multi-pronged strategy to drive traffic and sustainable long-term growth, including a new marketing approach and launching a loyalty program in the fourth quarter. We believe that having more restaurants operating on standard hours could be a potential tailwind in the second half of the year. Looking ahead, we believe the brand can develop 40 to 50 new restaurants.

Thank you, Jay. Great results. So these are terrific results. And with that, we're looking forward to taking your questions and we'll turn the call back over to the operator.

Our first question comes from Brian Mullan with Deutsche Bank.

Hey, thanks, everyone. Congrats on a good quarter. John Peyton, last call you shared some really helpful goals or numbers that you've challenged each Brand President to get to from a gross openings perspective over the next several years. Do you expect Dine to experience domestic net unit growth in 2022?

What I mentioned last time and can reinforce this time is that for IHOP, I believe they can improve on their pace. Net unit growth for IHOP will be positive in 2022. For Applebee's, we expect to return to net positive growth more like 2023 and beyond. We are recognizing that Q2 was particularly strong, but we still have strong expectations for the remainder of the year.

Our next question comes from Jake Bartlett with Truist Securities.

Can you remind us what your normalized late-night sales mix is, and how it’s impacted by current operating hours?

We still have some restaurants that are not fully back to their standard operating hours in the later time of the day. The opportunities for us are the hours that some of the restaurants took to get back to full operation. We're confident we'll fully get back, but I cannot specify when that will fully happen.

We’re expecting our inflation costs to go between 4% to 5% for the year. On the saving side, technology innovations will help with the operating costs of the franchisees.

Our franchisees have successfully mitigated some of the impact of inflation by offering full margin items and shifting back to a dine-in experience. We have fundamentally changed operational efficiencies, and we've simplified our menu to navigate through the current environment effectively.

You mentioned that double-digit comps in Q2 were unexpected. Can you elaborate on your outlook for Q3 and Q4 while considering current trends?

It's hard to gauge; we've experienced unprecedented sales volumes. Q2 was challenging due to various factors including government stimulus, so while we are optimistic, we maintain caution in forecasting.

For 2021, our closures will be more of a typical run rate given we finished large scale closures in the first half of the year.

Can you provide insight on the sales performance in late-night stores and the potential upside from returning to normal operating hours?

For IHOP, the restaurants operating 24X7 tend to show better performance due to more operating hours. We expect that as more restaurants resume these hours, overall sales will increase.

We are considering options to maximize shareholder returns, including balancing between investments in the business and returning capital to shareholders going forward.

Thank you, everyone. We appreciate your questions. Great conversations today. Thank you also to Ken, Jay, John, and Vance for a great quarter.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.