Dine Brands Global, Inc. Q3 FY2021 Earnings Call

Good day and thank you for standing by. Welcome to the Third Quarter Dine Brands Global Inc. Earnings Conference 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 be advised today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Executive Director of Investor Relations, Ken Diptee. Please go ahead.

Thank you. Good morning and welcome to Dine Brands' third 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. During the call, management may discuss information that is forward-looking and involves known and unknown risks, uncertainties and other factors, which may cause the actual results to be different than those expressed or implied. Please evaluate the forward-looking information in the context of these factors, which are detailed in today's press release and 10-Q filings. The forward-looking statements are as of today and assume no obligation to update or supplement these statements. We may also refer to certain non-GAAP financial measures, which are described in our press release and also available on our website. With that, I'll turn the call over to John.

Thanks, Ken, and good morning, everyone. Jay, Vance, Ken, and I appreciate you taking the time to join us this morning. Q3 was another terrific quarter for Dine Brands. For the second consecutive quarter, both brands beat their competitive sets. Average weekly sales for IHOP and Applebee's exceeded pre-pandemic levels for the first time, and we recorded a 48% increase in quarter-over-quarter EBITDA. Dine's posting results like this for two reasons: the resilience of our two world-class brands and the value of our asset-light model. Q3 reinforced again the benefits of our highly franchised business in driving our strong performance versus our peers. Let me explain why that is. First, our model reduces complexity and is a significant generator of cash. It allows us to keep our operations lean and our movements agile. And during moments like this, when labor and commodity costs are rising and guest behavior is uncertain due to the pandemic, we delivered less volatile results from period to period. Said another way, asset-light allows us to invest in what we do best, which is menu innovation, marketing, and building technology. And at the same time, Applebee's and IHOP continue to gain share because guests trust us, they love us, and they appreciate that we're focused on delivering delicious food at great value while also providing experiences that are enjoyable and safe. And just like I said to all of you when I first joined, Dine Brands that win are different, better, and special, and they're able to create emotional connections with guests, particularly during tough times, and that's exactly what our brands have been doing all year. So, today I’ll share highlights of our fantastic Q3 results. I'll talk about our view of this moment in time in the industry, and I'll address our thoughts on capital allocation and long-term growth. On this call, as all year, we'll be comparing comp sales to the same period in 2019 due to the pandemic distortion of 2020 sales. So here we go. I'll recap Q3 highlights including comp sales, EBITDA, cash flow, and development. First, according to Black Box, Applebee's and IHOP again outperformed their segments in Q3. And for the first time in 2021, both brands' average weekly unit sales exceeded pre-pandemic levels. We recognized revenue of $229 million and EBITDA of $63.3 million, which reflects the compelling resilience of our brands, our franchise model, and continued progress towards a return to steady state. For the nine months ended September 2021, we generated approximately $141.6 million of adjusted free cash. We opened 11 restaurants, which signals our franchisees' continued confidence in putting their capital investments back into the business. And we're particularly thrilled that Sun Holdings, the third largest owner of restaurants in the US, joined the Applebee's family via the acquisition of 131 restaurants through a transaction with Aecon Investments, another signal of Applebee's strong performance. So, now let's put our results in the context of this very unique moment in time. We're certainly enjoying meaningful tailwinds. First, Americans continue to dine out, and our numbers indicate that the delta variant did not have a material adverse effect on that trend. Also, our guests continued their recent habits of takeout and delivery. And while it's certainly unfortunate that 110,000 US restaurants permanently closed, this did lead to five points of market share shift from independents to national chains according to the Boston Consulting Group. And as you all know so well, we're also navigating unprecedented headwinds such as the shortage of workers and the rising cost of labor, the scarcity and rising cost of certain commodities. And, of course, the lingering uncertainty related to vaccines, testing, and mask mandates. Yet, I've got to tell you despite this extraordinary moment in time, we are unequivocally bullish on our long-term strategy. I'll tell you why. First, the restaurant industry remains a $485 billion market, and the casual and family segments are expected to fully recover by 2023. Second, US consumers are increasingly optimistic as we emerge from COVID. Research tells us that 44% of consumers report that they will increase their visits to restaurants as COVID recedes, and an additional 35% tell us they'll go just as often as they did before the pandemic. And third, franchising remains an entrepreneurial engine for launching a business, creating wealth, and growing jobs in our country. At Dine alone we have 345 franchisees operating more than 3,400 restaurants across the country and around the globe, and these entrepreneurs employ approximately 125,000 team members supporting their state and local economies. Now that we're beginning to see the light at the end of the tunnel, our teams are focused on our plans for long-term growth. Our approach is simple and straightforward. It's to set audacious goals, and I'll touch on four of those goals right now. First is the development of new restaurants. We see a path to Applebee's returning to net unit growth in 2023 and beyond, and we see IHOP doubling its historical unit growth also by 2023. We'll achieve those goals through a combination of bricks-and-mortar stores and those kitchens. To drive this growth we recently hired two new VPs of development, Jake Barden and Don Rayburn, who come with terrific experience from RBI, Intercontinental, Starwood Hotels, Brinker, and Yum!. These new VPs will be shepherding our new prototypes that reflect the learnings and new consumer behaviors that emerged during COVID. Our second focus is meaningful investments in loyalty programs, our digital ecosystem, and CRM. These tech investments in addition to our industry-leading menu and marketing innovation will drive consistent same-store sales growth year-over-year. And as I've told you before, we're leaning into our scale. Our strategy is to build one common digital architecture for both brands that enables us to do more than either brand could invest on its own. And we remain on track to have approximately 75% of our digital technology tools modernized or new by the end of the year, and we expect this advantage in innovation to accelerate in 2022. In fact, this quarter our digital sales resulted in 20% of total system sales compared to only 6% in the third quarter of 2019. Third, we're investing in new sources of revenue, think virtual brands, ghost kitchens, and consumer products that will contribute to our growth and to our franchisees' bottom line. And finally, we have a renewed focus on our very profitable international business and the potential to significantly grow our footprint. Here too we've hired a new VP of International Development, Enrique Kaufer, with global experience from GNC. He'll be focusing on expanding in four core markets where we currently enjoy momentum and scale. We're looking forward to sharing more details on these and other initiatives during our investor conference in New York City in spring of next year. So in 2022 and beyond, you'll see us invest in growth initiatives to a greater extent than we have in the past. As a result, you can expect a balanced approach to capital allocation that incorporates returning cash to shareholders, judicious ROI-driven investments in both organic and strategic growth, diligent management of our debt, and maintaining the financial flexibility needed right now to address any remaining uncertainty from the pandemic, as well as potential opportunities to pursue scalable acquisitions at the right time. With that as context, our performance year-to-date and our cautiously optimistic view of the remainder of 2021 and 2022 enables us to reinstate both our quarterly dividend in Q4 and our share buyback program. We're also able to share EBITDA guidance for the remainder of 2021, and Vance will discuss details on both our guidance and our dividend and share repurchase programs in just a few moments. I'd like to conclude with an update on our ESG efforts. We've recently issued our initial ESG report entitled Dine Together, which can be found on our Dine Brands' website. As we've grown our business we've broadened our vision to include our impact on the environment and society. This makes good business sense as it resonates with team members and guests who increasingly are looking closely at how businesses and brands contribute to society. Our ESG strategy and report is devoted to four focus areas: our planet, our people, our food, and our governance. For us, our business and our social responsibilities are inextricably linked. And while I'm encouraged by the progress we've made, we've got a lot more to do to meet our goals, to deepen our impact, and innovate our systems. And with that I'll turn it over to Vance to discuss our financial performance.

Thank you, John and good morning, everyone. I'll start with a review of our operating results. Franchise revenues for the third quarter were $161.1 million compared to $121.8 million for the same quarter of 2020. Excluding advertising revenue, franchise revenues increased 30% primarily driven by higher domestic franchise restaurant same-store sales. Turning to the company restaurant segment, sales for the third quarter were $35.3 million compared to $27.4 million for the third quarter of 2020, an improvement of 29%. The improvement was mainly due to an increase in customer traffic. Rental segment revenues for the third quarter of 2021 were $31.3 million compared to $26.2 million for the same quarter of 2020, an increase of $5.1 million. This included an increase in percent rental income based on franchisees' retail sales and a decline in level rent adjustments. Adjusted EPS for the third quarter of 2021 was $1.55 compared to adjusted EPS of $0.80 for the same quarter of 2020. The increase was primarily due to higher gross profit partially offset by higher G&A expenses. Now regarding G&A. G&A for the third quarter of 2021 was $43.7 million compared to $36.9 million for the third quarter of 2020. The increase was primarily due to higher personnel costs associated with our incentive compensation accrual, which will fluctuate based on the company's performance. Regarding our GAAP effective tax rate, our effective tax rate for the third quarter of 2021 was 24.9% expense compared to a 9.4% benefit for the same period of last year. Our effective tax rate for the third quarter of 2021 varied from the rate for the same period of last year primarily due to the onetime recognition of income tax benefits from the release of unrecognized tax benefits in the third quarter of 2020. I'll now provide highlights from the cash flow statement. Our highly franchised model generated adjusted free cash flow of $146.1 million for the first nine months of 2021 compared to $35.6 million for the same period of last year. Cash from operations for the first nine months of 2021 was $145.6 million compared to $36.7 million for the comparable period of 2020. The improvement in both was primarily due to a favorable change in working capital and improvement in gross profit partially offset by an increase in G&A expenses and the recognition of excess tax benefits on stock-based compensation. As of September 30, almost all of the $62 million in royalty advertising fees and rent payment deferrals that Dine Brands provided to 223 franchisees has been repaid. Repayment of deferred amounts started in the third quarter of 2020. The collection of these balances during the first nine months of the year had a favorable impact on cash from operations for the first nine months of 2021. A few comments on our balance sheet and capital structure. The continued improvement in our business has helped us maintain our strong cash position and financial flexibility. We ended the third quarter with a total unrestricted cash of $304.2 million. This compares to unrestricted cash of $259.5 million at the end of the second quarter. Our leverage ratio as of September 30 was 4.36 times compared to 4.94 times as of June 30 with our leverage ratio well below 5.25 times, and the quarterly principal payments on the company's senior secured notes are no longer required. Our debt service coverage ratio also improved to 4.8 times as of September 30 from 4.6 times as of June 30. Turning to the outlook for commodity inflation and labor challenges. We're seeing its effects on the cost of pork, eggs, poultry, paper, and packaging products. Based on current conditions, we now expect commodity inflation in the range of approximately 6% on average across both brands for 2021. This compares to our previous expectation for inflation of approximately 4% to 5% for the year. Increases in commodity and labor costs at our franchisee-owned restaurants could impact us if our franchisees are faced with a sustained decline in the operating margins. At company-owned restaurants, these costs impact us directly. As of Q3 2021, we owned and operated 69 Applebee's restaurants, representing 2% of the 3,439 restaurants in our system. Now, I'll briefly discuss our 2021 financial performance guidance. Our guidance for G&A and capital expenditures remain unchanged. We reiterate expectations for G&A to range between approximately $168 million to $178 million. We expect G&A to be near the high end of the range, with Q4 being the quarter reflecting previously discussed deferred G&A costs, including professional services and travel expenses and continued incentive compensation accruals based on company performance. We also reiterate expectations for capital expenditures to be approximately $19 million inclusive of approximately $7 million related to the company restaurant segment. Given the strong recovery in our business, we now have better visibility to provide additional guidance. Please see our press release issued this morning for complete details. We're introducing guidance on one additional metric adjusted EBITDA. Consolidated adjusted EBITDA for the year is expected to range between approximately $245 million and $250 million, demonstrating the continued strong recovery from 2020 that we have been experiencing in the last few quarters. Moving to capital allocation. As John discussed earlier, we have seen several quarters of improvement in performance, which has positioned us to declare a quarterly cash dividend of $0.40 per share for the fourth quarter. Our capital allocation priorities are to maintain an attractive dividend yield while concurrently making additional CapEx and G&A investments in the business to support long-term growth. We also intend to opportunistically repurchase our shares. Our level of repurchases will primarily be based on our analysis of the company's intrinsic value. At the end of the third quarter, there was $70.2 million remaining on our current repurchase authorization. We believe our strategic priorities will continue to drive additional shareholder value. To close, we're very encouraged by our strong results this year through the third quarter, including the improvement in our comp sales, our robust off-premise business, and significant generation of adjusted free cash flow. Now, I'll turn the call over to John Cywinski, who will provide an update on the progress at Applebee's.

Thank you, Vance and good morning everyone. I'm really proud of our team and our franchise partners as they delivered another exceptional quarter for the Applebee's brand. After posting a 10.5% comp sales increase in Q2, Applebee's delivered a 12.5% increase in Q3, when compared with our 2019 baseline. This marks Applebee's best quarterly comp sales performance under Dine Brands' ownership, highlighted by sequential improvement throughout the quarter. Additionally, our Q3 year-to-date comp sales increase of 5.3% has surpassed our record-setting 2018 performance. I'm also pleased to report that our company restaurant portfolio is now our number four ranking comp sales performer throughout the system. To put all this in proper perspective, according to Black Box Intelligence, Applebee's has now outperformed the casual dining category for 35 consecutive weeks by an average margin of more than 600 basis points. I attribute our sustained success to three primary factors; superior restaurant level execution, breakthrough marketing innovation, and our genuinely relevant brand positioning. Applebee's is that affordable little escape from your everyday, in a turbulent world where that's familiar and comfortable place right around the corner where you can simply come as you are. In many respects, we're kind of like a good friend which clearly resonates with America in this environment. Most importantly, America trusts Applebee's; we consistently see this in our data, and it's certainly evident in these unprecedented results. This momentum is also reflected in our brand attributes where Applebee's continues to rank number one within casual dining on brand awareness, affordability, menu variety, convenience to go and deliver awareness, and advertising awareness. In addition, Applebee's continues to outperform the category average on key metrics such as overall experience, staff makes me feel valued, family-friendly, great-tasting food brand, affinity, and importantly, visit intent. As I break down the quarter, weekly restaurant sales averaged $51,000. In fact, March through September sales have been remarkably consistent with each month delivering record high volumes under Dine ownership. Applebee's Q3 sales mix consisted of 73% dine-in, 15% car side to-go, and 12% delivery. Of particular note, is the fact that our weekly off-premise volume continues to hold very steady at about $14,000 per restaurant. The off-premise volume is more than double our pre-pandemic level and supported by ongoing technology investments in our call center I-arrived notification and new kitchen printers which significantly assist team members with order accuracy while reassuring our guests that we have it right. I should also note that dining room volumes continue to escalate as they are now approximately 90% of pre-pandemic levels, reflecting guest demand for dining out again. Our dine-in business is also bolstered by relevant investments in QR code menus, Pay & Go mobile payment and handheld server tablets making it easier for our guests and our team members as we expand these initiatives in 2022. Additionally, one of the interesting insights from my perspective throughout the pandemic is the shift in our age demographic. Dine-in guests have become even younger, while not surprisingly our boomer guests have shifted their behavior to more off-premise dining. At present about 51% of Applebee's guests are under the age of 35, with millennials being our largest segment at 33%. Looking forward to next year, we still have meaningful headroom with our late-night weekend business which remains a bit constrained due to labor challenges after midnight in about 500 restaurants. I fully expect this current late-night headwind to become a meaningful opportunity and a very leverageable tailwind in 2022. As I stated previously, having a sophisticated supply chain is a huge point of difference in this environment. Our supply chain organization is indeed best-in-class and a real difference maker in navigating the current challenges facing the industry. Bottom-line, those with scale and strong supply chains will likely prosper moving forward, while others struggle to compete. This is more evident today than ever before. And one of the reasons I absolutely love Dine's position in the market. Now, a big part of our Q3 success was the innovation behind Disney's Jungle Cruise, Dwayne Johnson's Teramont tequila, and with today’s show dubbed the song of the summer Fancy Like, which has since become known as the Applebee's song. It's rare that an artist writes a song about your brand and its relevance in everyday life, but that's precisely what happened this summer as Walker Hayes showcased date-night and Applebee's, and it connected with America like nothing I've seen before. After 18 months of lockdowns our objective was simple: make America smile. So we partnered with Walker, created a couple of ads featuring real folks across the country letting loose and having some fun. And as they say, the rest is history. It's a lucky strike extra that Walker Hayes and his family have always been loyal Applebee's guests. That's a fact. And I honestly can't think of a better embodiment of who we are and what we stand for as a brand than the lyrics to the song. For a little context on the media front, Q3 included a favorable spending comparison versus Q3 of 2019, and I expect a favorable comparison in Q4 as well to close out the year. Needless to say, because of sales performance and collections we are well positioned heading into next year from a national media perspective. As John referenced on the development front, 2021 represents the conclusion of our planned portfolio optimization. Looking forward we plan to close less than 1% of our restaurants in 2022, while returning Applebee's to net new unit growth in 2023 with annual acceleration thereafter. In closing, Applebee's business momentum is steady and strong and our fundamentals remain rock solid. Franchisee financial health, confidence, and optimism in our future are equally strong even in the face of labor and supply challenges. Bottom-line, Applebee's is exceedingly well positioned to thrive in this environment, and we very much look forward to 2022. With that, I'll turn to my partner Jay for an overview of the IHOP business.

Thanks, John and congratulations on the impressive results again this quarter. Good morning everyone. IHOP's business continued to improve. Third quarter comp sales were essentially flat relative to the same quarter of 2019. This reflects a sequential improvement of three percentage points compared to the previous quarter. Our strong results led to IHOP outperforming the family dining category for the second consecutive quarter according to Black Box. I'm excited to report that domestic average weekly unit sales are back above our pre-pandemic levels for the first time this year. Average weekly sales for the third quarter were slightly above $36,000 per week, exceeding the average for the same quarter of 2019. Approximately 83% of our domestic restaurants are open for standard operating hours or greater, and approximately 27% are operating 24/7, which trails pre-pandemic levels of approximately 45% that were operating 24/7 previously. We believe that additional upside as more restaurants resume standard operating hours as well as overnight. For the third quarter, off-premise sales accounted for 23% of sales mix, which is more than double the mix for the third quarter of 2019 and reflects significant retention compared to the same quarter of 2020, when restricted in capacity stricter indoor capacity restrictions and governmental mandates related to COVID-19 were in effect. We believe we can retain most of our off-premise dollar volume, and we're confident that our strong off-premise business will be complemented by the demand for in-restaurant dining. For the third quarter, our sales mix consisted of 76.7% dine-in, 13.1% delivery, and 10.2% to-go. To build on our achievements and remain the leader in family dining, we're going to continue to focus on what we can control. This framework includes a new approach to marketing, launching a loyalty program, development, and virtual brands. I'll briefly touch on each of these starting with marketing. Consumers are generally more tech-savvy now than ever before. We believe the shift in our media strategy to place a greater emphasis on digital marketing will greatly leverage our guest connection with IHOP and drive incremental visitation. This brings me to our engaging loyalty program. According to a study by Datassential, nearly 50% of those surveyed said that loyalty incentives are critical when choosing a brand. We're focused on leveraging our investments in CRM and consumer-facing technology, doubling down on our commitment to modernize our guest relationships and importantly, drive incremental visits. We're optimistic about our very creative and fun loyalty program, which we plan to launch over the next few months. Regarding development, since early 2020, consumers' dining behaviors have changed significantly. As a result, IHOP has been able to quickly pivot and adapt. Simply put, we're focused on meeting guests in the channels that they frequent and trust either in our restaurants or off-premise. Our guests want to access the brand in ways that are most convenient for them. We believe that Flip by IHOP, our new innovative fast-casual concept that leverages IHOP equities and brand affinity will meet the evolving needs of guests. I'm happy to report that our first Flip by IHOP opened on September 21 in Lawrence, Kansas. And while it's too early to share any of the results, we look forward to providing more information in the months ahead. We expect to open our second location in New York City in the very near future. We've expanded our pilot strategy for Flip, which was originally focused on locations only in large metropolitan cities to now include suburban areas and non-traditional venues as well. We're laser-focused on doubling our historic unit growth and believe that Flip will nicely complement our three other development vehicles which include our traditional formats, nontraditional and a new small prototype scheduled to test later this year. Importantly, all of these formats can be done in conversions, which we believe amplifies the opportunity. Due to the impact of the pandemic, there are more potential sites to develop in areas we may not have had prior. Turning now to virtual brands. We see a lot of potential and flexibility with virtual. We continue to see this as a huge industry trend with the opportunity to drive incremental sales in a cost-effective manner, especially at non-peak hours like PM. We'll have more details as our progress continues on testing. Changing gears to technology innovation at IHOP. It's imperative that we reach our guests on their terms, and with approximately 56% of IHOP's guests being aged 34 or younger, technology is a key factor in becoming and staying more relevant. Today's guests expect us to offer services that make their lives easier, such as the ability to pay with their own phones and IHOP being available on all the major delivery service providers' platforms. We've invested in innovation to enhance the guest experience, whether they're in our restaurants, off-premise and across all day parts. One of our biggest opportunities has become more relevant for more occasions. Great food and menu innovation are permanent staples at IHOP. We're known for providing freshly served, high-quality food while also allowing guests the option to customize their orders, particularly breakfast items. With that, I'm very pleased to report that our breakfast daypart comp sales for the third quarter increased 8% relative to the same period of 2019. This is a testament to the execution of our strategy. We focused on providing abundant value and variety while also increasing IHOP's appeal across other dayparts besides breakfast. This brings me to providing guests with great value. Understandably value plays an increasingly major role in dining decisions in part because many consumers still remain under financial pressure due to the pandemic. We have research that shows that our guests equate value with affordability. A great example of this is our IHOP Hour menu, which was introduced in September 2020. This IHOP’s first ever afternoon and evening focus value-oriented menu. I'm pleased to say it's been well-received and generated incremental traffic for our franchisees. Last September marked the one-year anniversary of IHOP Hour, which continues to drive incremental traffic generating approximately eight percentage point lift in traffic and sales during the available hours. This actually equates to a low to mid-single-digit increase in overall sales. Lastly, in conjunction with our Halloween pancake expansion, we announced that Ryan was the winner of our third annual kid chef contest, which is coordinated with Children's Miracle Network Hospitals. The event was a huge success and supports a great cause. To close, we have several reasons to be optimistic. Off-premise sales dollar volume remains robust. We outperformed the family dining category according to Black Box for the second consecutive quarter. We're focused on strong unit growth, and overall we've made great progress this year and I'm looking forward to returning to positive comp sales. And now I'll turn the call back over to John Peyton, for his closing comments.

Thanks, Jay and congratulations to kid Chef, Ryan. We're super proud of him and thanks, John and thanks, Vance, and to your entire team for all the hard work and delivering on our solid quarter. The road to recovery from the pandemic has certainly been a winding one for all of us. And despite the twists and turns, we at Dine know where we're going. We're focused on both the here and now of supporting our franchisees and giving guests the experiences they know and love. And we're also focused on the long-term plans and actions that we need to undertake to accelerate our growth. Most importantly, we never lose sight of the fact that the key to hospitality is those very special intimate human connections between our guests and our team members, however and wherever those connections occur. And with that we're looking forward to taking your questions.

Our first question comes from Brian Mullan with Deutsche Bank. Your line is now open.

Thank you. Congrats on a good quarter. John, in the prepared remarks, you referenced you recently hired a VP of Development at IHOP. Can you maybe remind us is this a new position at IHOP, or is this replacing someone who was at IHOP when you joined? And then related, can you just talk about your expectations for the position, what the person brings to the table? Just highlight any few things you'd like to see him help change moving forward? I know you want to double the historical unit growth pace by 2023. Any tangible action items you could highlight for us?

Sure, Brian. Thanks for the question. I mentioned we hired three Vice Presidents of Development. So I'll specify on all three. The VP of development at Applebee's is a new position. It was a shared position in the past, a person with multiple responsibilities. We're now devoting one senior role only to development. The same is true for international. We've had an international leader of the business that was responsible for both development and operations. Now we've added in a senior leader who is only responsible for development. And at IHOP, to your point, it was a replacement of a leader who we had. Our hopes and expectations for Jake and for all of our VPs is to bring a strategic approach to the way in which we develop our restaurants and the way in which we work with our franchisees. And when I say strategic, I think that we can be much more assertive as an organization in bringing opportunities to our franchisees and doing extensive analysis of the markets to demonstrate the potential for new restaurants and that we can move from being order takers to bringing the market and the opportunities to our franchisees. That's my expectation not only of Jake but of our other two development leaders as well.

Yes. This is Jay Johns at IHOP. As John had said, it is a replacement position. And we really want to become more strategic with our development. It's not just about hitting certain numbers. It's about how we're doing the market planning to add additional restaurants to the markets we're already in. How do we start in territories maybe we haven't been in before? This is where some of our new vehicles may come into play; you think about Flip, the smaller prototype. This starts to open up some other territories that we may not have gone to before. So we needed some new thinking and some fresh thinking and that's where we're going with that.

Okay. Thank you. And then a follow-up on IHOP. Jay, you mentioned, I think, 27% of the locations are now 24/7. I think you said it was 45% prior to the pandemic. My question is, do you anticipate that going all the way back to where it was? And is staffing the only issue here, or are there perhaps other considerations for franchisees? Are there some franchisees who maybe don't want to, for whatever their reasons may be? Any color would be great. Thanks.

Thanks, Brian. I think that it's a combination of a few factors. So, obviously staffing is part of it, just the economics part of it as well, right? When the pandemic happened, people were trying to cut costs, they're trying to make things easier to execute because you have less staff. That's also important that things are easier to do, and they tighten down on what hours they were operating. I think we've seen it slowly coming back, but it's not going to all come back at once. This is going to be location by location and franchisee by franchisee. As they get staffed, as they see the ability to get back open more hours, you'll see that. And I think we'll, what typically would happen, no different than sometimes in a new restaurant opening. That's almost what this has been like. The franchisees have had almost reopen their restaurants from doing to-go and off-premise only to now getting the dining room open. The next stage will be how do you get to usually what we call 24/2 which is to stay open 24 hours on just Friday and Saturday night where the busiest opportunity is and then you expand from there. So I think we'll get back a lot closer to where we were. I just can't give you a timeline on when that's going to be. But it will continue week by week and month by month as we move until we get back much closer to where we were in the past.

Thank you.

Our next question comes from the line of Jake Bartlett with Truist Securities. Your line is now open.

Great. Thanks for taking the questions. My first was on the comment, on Applebee's and I'm not sure if I got it right, but I think you mentioned quarter-to-date same-store sales were 5.3%. Maybe if you can just confirm the comments on the fourth quarter to date sales level. And if that's right, what would have driven the deceleration? We saw pretty consistent monthly improvement throughout the third quarter. So maybe just some comments there. And then also, on the IHOP side, anything you share on the quarter-to-date would be helpful.

Hey, Jake. Good morning. This is John. The year-to-date through Q3 comp sales figure for Applebee's is plus 5.3%, while within the quarter there was a 12.5% increase versus 2019. Those are both versus 2019 and sequential improvements throughout. We love the trajectory and the momentum and it's what we expected and is obviously creating a very healthy environment for our franchise partners.

Yes. This is Jay. On the IHOP side, again, we've been making improvements throughout the year and getting very close to flat this past quarter. We're still down a little over 8% for the total year. The first quarter was still pretty tough for us. But we've been making progress ever since, and we look for that to continue to improve as staffing improves, et cetera. But we're not sharing anything about fourth quarter right now.

Got it, got it. And just as I look, this is on the Applebee's side. As I look at the cadence struck in the quarter, there was an improvement, as I mentioned, as you guys mentioned, which is different than other concepts have seen. So trying to understand what drove that? You mentioned the summer marketing kind of viral hit there. Any reason to think that that wouldn't continue to accelerate, just given your marketing plan, or was there something unusual in the quarter from a marketing perspective that maybe shouldn't be replicated?

Jake, the progression was solid from the low 12% range to the high 12% range. As I mentioned, remarkably consistent since March, all-time highs under Dine ownership. It's fundamentally restaurant execution and innovation, not just marketing innovation, culinary innovation, technology innovation, advertising, media, you name it. The team is locked in in partnership with their franchisees, and we have visibility to a 2022 plan and it quite frankly fires us up. So I'm not going to speculate on a future look. But suffice it to say the brand has probably a tighter partnership and a more optimistic partnership with its franchisees than I've seen in my five-year tenure.

Great. And then last question is just on really getting down to franchise profitability and some of the drivers there. You mentioned your 6% commodity inflation for the year. Could you remind us what that would and what inflation was for the third quarter, what that implies for the fourth? And then given I assume that the accelerating pressure, what are franchisees doing to offset that? How much pricing might they be taking, how is there. Do you have a sense as to whether your profitability is taking a hit here or there's offset such as less discounting or pricing or what have you?

Thanks for the question, Jake. So look on inflation, generally speaking, I'd say it takes about 2 to 2.5 points of menu pricing to cover 10% of commodity inflation for our franchisees. We do provide pricing elasticity tools to our franchisee partners to help them with pricing decisions. And depending on the franchisee, they've been tracking anywhere between 1%, 2%, 3% of menu pricing increases per year in the past two years to cover inflation.

Yeah. And Jake, this is John. On the Applebee's side, I would say, if you look generally speaking full year 2021 versus a year ago, 6% bump in commodity costs, our franchisees continue and they're independent operators. So they take independent actions. They tend to be highly strategic and measured in how they apply pricing. And if I look at 2021 versus 2020 as an example, the average price increase throughout Applebee's from our franchisees would be about 3%. And historically, as Vance referenced, typically between 1% and 2% on an annual basis.

Got it. Thank you very much. Appreciate it.

Our next question comes from the line of Brian Vaccaro with Raymond James. Your line is now open.

Thanks, and good morning. I wanted to start out on the Applebee's advertising and obviously you saw some huge successes this quarter. But John, can you help also just frame how much the spend was up say versus Q3 2019? And just ballpark your expectations on where spend levels might shake out moving through 2022? I imagine Q1 2022 will be up a lot versus Q1 of 2021 because you didn't spend much this year. But just any context on you can provide on the year overall would be appreciated.

Hey, Brian. Good question. I probably won't specify the numbers to the level you’d like. In the first quarter of 2021, we reduced our spending. Therefore, the full year is somewhat backloaded, with elevated spending in the second, third, and fourth quarters compared to the 2019 baseline. On a full-year basis, our media allocation remains fairly comparable. Again, we cut back in the first quarter. We’re well positioned for the rest of the year. Looking ahead, for the reasons I mentioned, I expect the brand to be in great shape as we enter 2022 from a media standpoint. I like our position.

That's helpful. Shifting focus a bit, could you provide some insight into staffing levels at each brand? I'm interested in understanding where the average levels stand, as well as identifying areas of tightness. What percentage of units may still be significantly below 2019 levels, however you choose to define that? Additionally, can you outline any impact on performance you might be experiencing at either brand due to staffing issues?

Hey Brian, this is Jay Johns. I'll begin with IHOP and then pass it to John. The franchisees are still facing staffing challenges, and there are several hundred restaurants that are more affected than others. You can see this in some of them still having reduced operating hours, primarily due to staffing levels. Once they are able to hire enough staff, they plan to return to regular operating hours. This situation is slightly affecting our business. Earlier, we discussed how we're missing almost half of our overnight hours, which is likely impacting us by a couple of percentage points due to reduced hours compared to 2019, and this is linked to staffing. Progress is being made as more restaurants open additional hours each week, but it’s a gradual process and remains very fluid. One week we make progress, but the next week we find ourselves behind again as another restaurant nearby experiences the same staffing issues. It’s very competitive out there, and people will quickly change jobs for an extra dollar an hour. It will take some time for this to stabilize, but currently, I would estimate that our restaurants are about 85% staffed.

On the Applebee's side, we are experiencing similar challenges, particularly during late-night hours on Fridays and Saturdays, around 11 PM to 1 AM. Staffing is gradually improving, but it's not yet at full capacity. Brands that have established trust with guests and foster strong cultures among team members and franchisees are better positioned. Our 30 partners exemplify this with their exceptional culture and expertise in recruiting and retaining staff. However, I must admit that we are not fully staffed at the moment, and late-night weekends remain a significant challenge for the industry, although things are improving.

Okay. And then more broadly just on the labor environment. Are you hearing in kind of the recent conditions, are you hearing from your franchisees that they're starting to see any green shoots of improvement as delta concerns seem to be easing? Are you seeing application flow increase, or maybe turnover declining? Any color on those dynamics?

I wouldn't – this is John. I wouldn't quantify anything, Brian. The marketplace is improving generally speaking. And in those late-night hours is where we specifically see the challenge. And one would have to imagine that each and every brand in this industry approaches this challenge differently. I do love the fact that we have a strong culture. We have an aspirational brand, and we have sophisticated franchisees who know how to navigate. So I believe we are very well positioned on this front, relative to others in the category.

Okay. And then just one quick clarification if I could, just on the franchisee profitability comment you made at Applebee's, is it right that the strong sales leverage you're seeing versus 2019 and some of the ops improvements I think you rolled out as well. Is it right that that's sufficient to offset sort of the near-term COGS and labor pressures we're all aware of? We're store margins and profitability can sustain solidly above 2019 levels in your view moving through next year?

Yeah, Brian cash is flowing well. And certainly, revenue is a big part of that. We're working both sides of the equation. Revenue growth puts our franchisees in a terrific position, but we're also working on the cost side: productivity, throughput, efficiency, technology, and taking steps to reduce costs. You've heard us reference in the past some PwC work that we've done, historically in Applebee's that has removed 200 basis points of cost from the P&L, we very much took a hiatus on that initiative. Over the past 18 months, we will be activating that again in 2022, which represents meaningful opportunities. So yeah, revenue would be the biggest lever there. And as a result, they're in very good shape.

All right. I’ll pass it along. Thank you.

Thanks, Brian.

Our next question comes from the line of Eric Gonzalez from KeyBanc Capital Markets. Your line is now open.

Thanks for the update, and congratulations on this quarter's results. I would like to ask about the recently announced capital allocation strategy. The payout ratio seems to be on the lower end for a highly franchised business. Should we consider that as a baseline, or can we expect this 25% payout ratio to be maintained in the upcoming quarters? Additionally, could you provide some insight into the level of share repurchases we should anticipate as we plan moving forward? Thank you.

Thanks for the question Eric. So as you know we've added a really strong track record of returning capital to our shareholders and that will remain one of our top priorities. For dividends, we think that the $0.40 quarterly dividend represents a healthy dividend yield and payout ratio as a starting point to grow from as you pointed out. Going forward, we will continue to evaluate and balance our capital allocation strategy focusing on the things that John talked about earlier, which are investments in business and technology and other growth initiatives, returning capital to shareholders, debt management, and more importantly, maintaining financial flexibility to address any remaining uncertainty from the pandemic. Now on the buybacks, our goal is to support the stock opportunistically with ROI in line, based on our view of the intrinsic value of Dine, and we'll do that with our 10b5-1 plan and will be other consistently supporting our stock.

Yes, Eric, it's John Peyton. I would add that the key word is our approach here is to be prudent. And I said to you the last couple of quarters when we got comfortable that we've had some sequential quarters of predictable and sustainable performance, we would return to the dividend, and that's what we did. And now we want to see another couple of quarters of predictable and sustainable growth, as we think we're on the other side of the pandemic, and that will enable us to look at the dividend and potentially increase it over time. But we think it's best to be prudent right now given this point of time.

Understood. Earlier in the call, someone asked about the inflation or implied inflation for the fourth quarter. Could you provide some comments on that? Also, what is your early outlook on inflation for next year, including any insights on hedging or outstanding contracts?

Based on what we can see, second-half inflation is about 10%. And I talked about it earlier, just generally speaking, it takes about two to 2.5 points of menu pricing increase to cover a 10% hit on commodity inflation pricing. So John and Jay both talked about the fact that in the past year or two our franchisees have been taking anywhere between 1% to 3% of pricing increase per year, so that's covered what we've seen so far.

And the second part of your question about next year we're going to wait until next quarter Eric, when we do our guidance for 2022 to talk about costs and all of our guidance as part of one conversation.

Great. Thanks for taking my call. On the development side, when you think about your approach, how are you thinking in terms of new versus existing? Are you thinking about anything in terms of with your capital allocation maybe buying in franchisees to drive some consolidation? And how are you thinking about company ownership?

Brett, I'll speak on the Applebee's front since we're kind of newest to the game. As you know we've spent the better part of the past four years optimizing the brand, pruning the system, we closed about 300 underperforming low-volume restaurants. So we're ready for growth. We plan to close fewer than 1% of our portfolio next year, and we've lined up a number of franchise partners and plan to build 15-plus new restaurants in the near term as soon as we can activate those sites with our new development partner. As John referenced, some of those will be traditional, some of those will be conversions. There's a high level of enthusiasm there. And then I do expect that to accelerate moving forward for the Applebee's brand, which is refreshing. We've been building to this in setting the system up for this new level of growth in this very modest closure rate for quite a while, and the pandemic got in the way of us activating it. But we're ready now and we're moving forward beginning next year.

Brett, this is Jay at IHOP. Obviously, we've been doing development for quite some time. And as I just referenced earlier, we're going to try to be more strategic about this and how we develop markets and how we start in territories maybe we haven't been in before. This is where a lot of our new vehicles come into play, like Flip and our small prototype. And I think that's going to open up more territory still. And I think in some markets there's a lot of opportunity to bring in some new franchisees as well into the system besides the ones that we already have.

And Brett, it's John Peyton. Just wanted to address two of the questions that you asked as well, which is you asked about our own funding and if we would use that to potentially consolidate franchisees. And the answer to that is no, we're much more likely to use our funding to encourage franchisees to develop in the form of key money or incentives. And we've got a program like that already in the marketplace for Flip. You also asked about our inclination to own restaurants. And there too I would say we're not inclined to own additional restaurants. One of the reasons we're performing so well this year is because of the asset-light model that I mentioned in the opening comments. And our intention is to remain a highly franchised business.

Right. Just following up on that. With the existing units that you have in place what are your thoughts on your company-operated? Is that something you see as a good fertile testing ground and you want to hold on to it, or is that something that you'd look to get yourself back to the 100% level?

Yes, it's certainly a fertile testing ground, while we have them, and we'll have them because of COVID right. Our intention to sell them has been delayed. What we're proud of is, we purchased a portfolio that was underperforming, and because of the management team that's been in place there, it's now one of our top five performing portfolios both in our same-store sales improvement as well as guest improvement. Originally, the company said we'll hold them for two or three years; two years of COVID has delayed that. And so we've got another year or two to go, and then we'll report back on where we are.

And then just on moving into another direction. Can you talk a little bit more about how you're thinking about the pacing of your loyalty rollout not just at IHOP, but also as it makes its way over into Applebee's?

This is Jay. As far as IHOP goes, we're actually going to be in test in piloting this at the end of the year here in the fourth quarter. And our intention is to roll this out system-wide probably in the first half of next year.

And Brett, on the Applebee's front, we have significant investments on the in terms of personalization and customization from a CRM perspective. We continue to believe the best form of loyalty is to wow that guest every hour, 1.5 hours that they're there and ensure a high degree of affinity for the brand and loyalty and repeat visitation. So we believe in restaurant execution, and it's one of the reasons the brand is performing so well.

Thank you.

Our next question comes from the line of Nick Sapien with Wedbush Securities. Your line is now open.

Thank you and congrats on an incredible quarter. Just given the momentum we're seeing here in Q3 and out of Q3, the EBITDA guidance, just given the year-to-date EBITDA in Q4 implies a step down in Q4 maybe even a little bit above the step-up in G&A. So I guess I just wanted to kind of get the puts and takes around the implied Q4 EBITDA.

Sure, Nick. Good question. We do expect Q4 performance to hold strong, but we also do anticipate higher G&A costs from activities such as consumer research and product development, franchisee support services and headcount, travel expenses, et cetera, that we more or less paused until now, and plus the continued incentive compensation accrual based on company performance. So you're reading it right and that's our guidance so far for this year.

Yes. It's John P. I'll give you a good example that we're happy to have, which is our Applebee's annual conference is back on. In November, we'll have 350 people, who are really excited to come together and celebrate the brand. They haven't gotten together in almost two years. And Nick, in my mind, that's an expense worth having in the fourth quarter to bring the team back together in all of our franchisees after a two-year absence.

Yes, that makes sense. When you refer to roughly doubling the historical unit growth rate of IHOP by 2023, could you clarify what that specifically entails? In 2019, it was below 1%, but prior to that, it was 3%. Are we discussing a growth rate of 5% or 6% in net units for 2023, or are we considering a different figure?

Well, I've talked about this. Typically – this is Jay. I've talked about this typically in our units we've developed. So to put it in perspective, I think historically over the last decade we've developed about 40 new restaurants a year. So to double that you're looking at it more like 80 restaurants by the time you get to 2023. So we're not doing future guidance that far out on exactly what those numbers look like. So that gives you a ballpark idea of what we're talking about as far as amount of development.

That's very helpful. And then just last question. Cosmic Wings any update there?

Nick I know you'd be asking about that. This is John. We love Cosmic Wings. I referenced that we held off on a very meaningful expansion to DoorDash, the number one delivery player because of supply challenges in particular around boneless wings and bone-in wings. I anticipate expanding Cosmic Wings from a delivery perspective to DoorDash in very early Q1. That supply of product will be there. And the reason we're being prudent and thoughtful on that front is we're going to generate some incremental demand there. We want to be able to satisfy it. And then the final point I'll leave you with is a little tease that in a couple of weeks there's going to be some meaningful news on the Cosmic Wings front. So stay tuned. And there will be something buzzworthy that comes across the transom very soon.

Sounds good. Looking forward to it. Thank you very much.

Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.