Dine Brands Global, Inc. Q1 FY2023 Earnings Call

Good day, and thank you for standing by. Welcome to the Dine Brands Global First Quarter 2023 Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to the speakers today. Please go ahead.

Good morning, and welcome to Dine Brands Global's first quarter 2023 conference call. I'm Brett Levy, Dine's Vice President of Investor Relations and Treasury. This morning's call will include remarks from John Peyton, CEO; and Vance Chang, CFO. As discussed in the last call, Tony Moralejo, President of Applebee's; and Jay Johns, President of IHOP will be available following those remarks to address questions from the investment community in the Q&A portion of the call. 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 filing. The forward-looking statements are as of today, and we assume no obligation to update or supplement these statements. We may also refer to certain non-GAAP financial measures, which are described in our press release and also available on Dine Brands' Investor Relations website. For calendar planning purposes, we are tentatively scheduling the release of our second quarter 2023 earnings after the market close on Wednesday, August 2, 2023, with a call the following day before the market opens. With that, it is my pleasure to turn the call over to Dine's CEO, John Peyton.

Thanks, Brett, and good morning, everyone. Thank you for joining us for our first quarter earnings call. In Q1, we delivered a solid financial performance despite the challenging and dynamic economic environment. This is thanks to the focus and execution of our outstanding team members at Dine, our terrific franchisees, and the restaurant teams. This morning's discussion focuses on our financial results, our strategy, and expectations. I'll provide perspective on our business performance and highlights for Applebee's and IHOP, followed by some color on Fuzzy's and our international operations, and Vance will provide a more detailed analysis of the macro environment and our financial results. Our performance during the quarter demonstrated the stability of our asset-light model. Q1 marked Applebee's ninth and IHOP's eighth consecutive quarter of positive comp sales, increasing 6.1% and 8.7%, respectively. Q1 consolidated adjusted EBITDA was $66.3 million compared to $65.2 million for the same quarter in 2022, and we opened 21 gross new restaurants globally, demonstrating our franchisees' belief in our brands and their appetite for development. Following the quarter, we completed a $500 million refinancing of our senior secured notes that were due in June 2024, and we reduced our debt by approximately $200 million. There was a significant level of bond investor demand, which is a great endorsement of our strategy and the positive outlook for our business. Within the sector, there are some signs that pre-COVID dining patterns are beginning to return. However, the situation remains somewhat unpredictable. And accordingly, we're keeping a close eye on three key areas: guest behavior, commodities, and labor. Let me share a little bit more on each of these. First, the guest. Like others in the industry, in late Q1, we started to see signs that economic concerns may be impacting what has been a very resilient guest, and therefore, we're closely monitoring traffic and price sensitivity patterns. One trend that we have noticed is that American consumers are becoming more discerning about the value they expect not just in terms of price, but also in terms of factors like cleanliness, speed of service, and convenience. The key to success now more than ever is the on-premise guest experience. Our franchisees and their teams are focused on delivering outstanding experiences, which helps us earn and keep guest loyalty and trust. Next is commodities. We expect to see the cost of goods prices continue to moderate as the year progresses. Q1 improvement was driven by easing costs of coffee, eggs, and poultry, although wheat and beef remain elevated. We expect cost easing to be more prominent in the second half of the year based upon our proprietary data and analysis. Our scale and relationships with our suppliers continue to serve as tools to help our franchisees address these cost pressures and find the best possible prices. And third is labor. Based upon information from our franchisees, Q1 staffing levels continue to improve, while filling late night hours remains challenging. For the first time since 2019, however, franchisees on average are seeing revenue rise at a rate that offsets increases in labor costs. While we are addressing near-term challenges, we continue to invest in three key initiatives to drive long-term growth. These include providing superior guest experiences through menu and technology innovation, attracting new and returning guests through engaging and relevant marketing and loyalty strategies, and investing in our future by expanding the global footprint of our brands. Regarding Applebee's, its results were driven by the brand's Q1 success in offering innovative promotions and abundant value programs for our guests. This is helping the brand to sustain sales and our overall consumer guest appeal. We recently completed an extensive research effort to update our understanding of our Applebee's guest profile, and we learned that we are now serving more of the coveted 18 to 34-year-old guests compared to pre-pandemic as well as more guests with children. We are seeing an increase in higher-income guests than 2019, in the $100,000-plus household income category. Our guest demographic is increasingly diverse compared to 2019, and our deal-based dining is highly motivating to our target guests, driving both acquisition and retention. And that last data point particularly influences Applebee's strategy and marketing. The brand kicked off 2023 with value platforms and guest favorites, including two for $25 offers of two entrees and a full-size appetizer, all-you-can-eat boneless wings, riblets and shrimp, a great example of our ability to showcase abundant value that drives traffic. Stay tuned for new menu innovations still to come later in 2023. The impact of relevant promotions, menu innovation, and affordable dining options drives Applebee's continued number one ranking across key industry consumer metrics, such as convenience and variety according to our proprietary third-party tracker. Brand awareness also remains at an all-time high. Shifting to development, Tony brings tremendous expertise to the Applebee's brand. In this regard, he knows what it takes to entice franchisees to invest in new or converted restaurants. Under Tony's leadership in Q1, Applebee's launched a financial development initiative for franchisees that's intended to drive openings in 2024 and beyond. At the same time, the Applebee's team is hard at work creating an ROI-driven next-gen prototype that reflects how our guests interact with us now. Shifting to IHOP, we're proud to celebrate the brand's 65th year. On February 28, we celebrated IHOP's National Pancake Day, a day we embrace every year. On that one day, IHOP restaurants serve nearly 1 million pancakes while providing guests with the opportunity to earn loyalty rewards through our International Bank of Pancakes program. In March, the brand previewed its new sweet and savory crepes. This menu innovation leverages an IHOP breakfast favorite, freshly made crepes in new flavors for breakfast as well as lunch and dinner. Crepes were the first of several menu items that will continue to launch during Q2. Once the new core menu is rolled out in its entirety, it will be IHOP's largest menu innovation in a decade. We'll share more details about the complete menu program next quarter. IHOP's development plans are also progressing. We added 19 new IHOP restaurants globally during the first quarter. Similar to Applebee's, IHOP also introduced a financial incentive to accelerate development in 2024 and beyond. Now I'll provide an update on four key IHOP innovations intended to drive growth. First, the loyalty program is a key engagement opportunity for us, and we're pleased with its evolution so far. Sign-ups continue to grow. We've enrolled 5.5 million members in the first year, and those members represent roughly 5% of sales. We're also seeing more than 8,000 downloads of our app per day, which is a 3x increase following the launch of the app and the loyalty program. Loyalty allows us to unlock more opportunities to engage with and better understand our guests, through targeted promotions to highlight value and elevated in-restaurant experiences. Ultimately, the program drives frequency, share of wallet, and average check. Second, as reported last quarter, IHOP entered into licensing agreements to create IHOP-branded breakfast cereal and IHOP-branded coffee. These products are now available in thousands of stores nationwide. They help drive organic traffic and deepen loyalty for IHOP. Importantly, a percentage of all revenues will be designated for national advertising via the National Advertising Fund. Third, during the quarter, IHOP introduced two more virtual brands. The first is TenderFix by actor Noah Schnapp, a chicken tender concept with meat and plant-based options. The second is Pardon My Cheesesteak, a partnership with the sports podcast Pardon My Take, which, as its name suggests, is a cheesesteak concept. These new virtual brands are already in over 500 IHOP restaurants and quickly became among our virtual brand top performers. We remain bullish on the opportunity presented by virtual brands. Finally, we continue to invest in new technology that drives efficiency for our franchisees and a more seamless experience for our guests. For example, IHOP's new point-of-sale system is now in over 50% of its restaurants, representing 800 locations. We expect the rollout to be largely completed by the end of Q2, with the next phase for franchisees including the introduction of our server tablets and enhanced operating procedures. Now I'd like to provide some color on Fuzzy's and our international operations. Our Fuzzy's brand is progressing smoothly through integration activities across HR, finance, tech, QA, marketing, and operations. In addition to the 125 new unit pipeline that we inherited, we're leveraging Dine's scale to support the brand's expansion. We're seeing interest from existing IHOP and Applebee's franchisees and have already set up several exploratory meetings. Fuzzy's is leaning into its roots. It just kicked off its Baja branding initiative, which serves as a point of differentiation from other fast-casual taco brands and will activate all elements of the guest experience, such as store design, menu, and other branded touchpoints. We're encouraged by the metrics we're seeing from the Fuzzy's loyalty program, with over 500,000 active members. Fuzzy's loyalty guests visit more often and have a higher check than non-loyalty guests. As we continue to integrate Fuzzy's, we look forward to sharing more on its plans and progress in coming quarters. Finally, International continues to be a growth engine for Dine as we work with franchisees to strengthen and grow the Applebee's and IHOP brands in four key regions: Puerto Rico in the Caribbean, Mexico, the Middle East, and Canada. At the end of the first quarter, we had 217 IHOP and Applebee's restaurants and 56 ghost kitchen locations in 16 countries and two U.S. territories. Recent international successes include a fantastic grand opening in Dubai of the first dual-brand Applebee's IHOP location in the Middle East and our most recent IHOP opening in Nassau, the Bahamas, in early April, resulting in our highest sales opening on record, reaching $135,000 in sales in its first week. Before I turn the call over to Vance, I want to touch on our commitment to do good. Our upcoming 2022 ESG report reiterates our commitment to four critical areas of our business: people, planet, food, and governance. The report will highlight the progress we're making and what lies ahead, especially in ways we affect the communities and neighborhoods we serve, including economic opportunity, climate change, and nutrition. Additional updates and progress can be found in our ESG report, which is scheduled to be released later this week. Now, Vance will join us to talk about our financial performance in more detail.

Thank you, John. As you just heard, our brands are performing well, and our comp sales continue to grow year-over-year. I want to begin with an update on our fundamentals before I provide a little color on the successfully completed refinancing of our A-2-1 debt. On the top line, consolidated total revenues, excluding the refranchised Applebee's restaurants, increased 11% in Q1 versus the prior year to $211 million. Total revenues reflected solid franchise revenues, which grew 12% to $180 million compared to $161 million for the same quarter of 2022. The improvement was due to a strong comp sales growth at both brands and the inclusion of the first full quarter of Fuzzy's Taco Shop, excluding advertising revenues, franchise revenues increased 14%. Rental segment revenues for the first quarter of 2023 improved by 11% to $32 million compared to nearly $29 million for the same quarter of 2022. The rental segment margin increased from the prior year primarily due to lease buyouts and operating lease renewals and extensions. For our company restaurant operations, sales decreased approximately 97% to $1 million for the first quarter compared to $39 million for the same period last year. This was mainly due to the refranchising of our Applebee's company-operated restaurants last October, offset by our three Fuzzy's company-operated restaurants. General and administrative expenses increased nearly $10 million or 23% to $51 million in Q1 of 2023 from $41.5 million in Q1 of 2022. Excluding one-time items, G&A was $49 million in this quarter. The increase was primarily due to our active investments in personnel costs, professional services, occupancy, and system maintenance costs. Adjusted EBITDA for Q1 of 2023 increased to $66.4 million from $65.2 million in Q1 of 2022, resulting from an increase in gross profit offset by an increase in G&A expenses. Adjusted diluted EPS for the first quarter of 2023 was $1.97 compared to adjusted EPS of $1.54 for the same period of 2022. Turning to the statement of cash flows, we had adjusted free cash flow of $2.3 million for the first quarter of 2023 compared to an outflow of $10 million for the same quarter of last year, driven primarily by cash from operations, partially offset by an increase in CapEx. Cash provided from operations for the first quarter of 2023 was $16 million compared to cash used in operations of nearly $8 million for the same period of 2022. The variance in operating cash flow was primarily due to a favorable change in working capital resulting from a decrease in bonus payments and the timing of disbursements. CapEx for the first quarter of 2023 was $16 million compared to roughly $5 million for the same quarter of 2022. We finished the first quarter with total unrestricted cash of $182 million. This compares to unrestricted cash of $270 million at the end of the fourth quarter. Our current cash balances reflect the busy last 12 months of capital usage. We utilize our balance sheet and the borrowing capacity available under our credit facility to invest for the future and complete our Fuzzy's acquisition in Q4. We returned $21 million of capital to shareholders through dividends and share repurchases in the quarter, while concurrently lowering our debt balance. This is a testament to Dine's cash generation ability and our disciplined approach to capital allocation to generate value for shareholders. We also utilized our liquidity in the quarter and opportunistically repurchased nearly $70 million of debt at a discount, which was on top of the $40 million from Q4 that we bought back. We were very pleased with our refinancing transaction based on the strong demand interest from our bond investors. This speaks to the strength of our steady and strong cash flow generation franchisor model in today's environment. Turning to Applebee's performance, Q1 represented Applebee's ninth consecutive quarter of positive comp sales growth. The continued improvement results in Q1 average weekly sales of approximately $56,800 per restaurant with a volume split of 23% by off-premise sales, of which 11% is from to-go and 12% from delivery. For IHOP, this marked the eighth consecutive quarter of positive comp sales growth, with average weekly sales of approximately $38,200 per restaurant. Our off-premise business was 22% of sales with a 14% mix for delivery and 8% from to-go. Our franchisees continue to deal with commodity inflationary pressures. These cost tensions remain more prevalent in items like beef and grain prices, as John mentioned. Applebee's experienced roughly 3% unfavorable pricing in Q1 compared with 11% in Q4, while IHOP costs were 11% higher year-over-year, down from 20% in Q4. Pricing increases on certain essential commodities, such as coffee, eggs, and poultry have dropped significantly. Our brands are currently price contracted at similar levels to last year, helping to meet our current needs but with the flexibility to benefit from inflationary pressures continuing to recede. We are holding our commodity pricing outlook for the rest of the year in the low to mid-single digits, with most inflationary costs easing in the second half of the year. We're encouraged by our performance in Q1 and remain confident in our ability to deliver on our 2023 financial guidance. However, with the current macro uncertainty, we're taking a more prudent approach and leaving our outlook unchanged across all metrics despite the strong Q1 performance. Along with executing on our strategies to deliver results and investing in our business, we're equally focused on managing our balance sheet and returning cash to our shareholders. We believe we are well-positioned to leverage our cash flow generation ability to drive long-term growth. Now I will hand the call back to John for some quick remarks before we open it up for Q&A.

Thanks, Vance. As we look ahead, we will continue to actively support our franchisees to mitigate the impact of an increasingly uncertain environment. We'll make ongoing investments in our brands and ensure they remain visible and relevant for guests seeking assurances of quality and value. Our system is focused, nimble, and steadfast in the execution of our plans to accelerate growth and profitability for the benefit of our shareholders and franchisees as we work to deliver on our 2023 guidance. Now I'll hand the call back to the operator. As a reminder, Jay and Tony are both on the line along with me and Vance, and we're all here to answer your questions. So operator, please open the queue, and we'll begin Q&A.

Thank you. Our first question comes from Eric Gonzalez of KeyBanc. Your line is open.

Hi, thanks, good morning. You said in the prepared remarks that you're seeing signs of economic concerns impacting the guests. I'm wondering if you could give us some more specifics on what you're seeing to warrant that comment. And perhaps you can comment on how comps trended in the first quarter, what you saw as you exited the first quarter, and how trends performed in April?

Hi, Eric, it's John, good morning. What we're seeing from our guests the last couple of quarters can be described as steady state and that the guest has been resilient during the past two quarters, as well as they were last year. At the same time, our comments allude to the fact that we see what's happening in the economy overall; we see the increased reporting over recession, and we see the increased reporting over consumer sentiment. We consider the industry in general. But in that context, we have reiterated our guidance for the full year based upon what we're seeing in our business and what's being reported by our franchisees.

Okay, fair enough. My second question is just congrats on the securitization transaction. I'm wondering if you can give more details on the financial impact, and maybe if you're able to provide a guidance range for interest expense to perhaps speak to what the EPS drag will be on an annual basis?

Sure, that's a great question for Vance.

Sure. Yes, so Eric, the refinancing transaction is $500 million of debt and the rate is at 7.8%. So if you're doing the math in terms of what it was before to what it is now, it translates roughly to a $7 million net income impact per year after tax.

Got it. And then maybe just one last one real quick, on the rental income, it was a little bit higher than it's been in the past. I think you said there’s some lease developments going on there. Could you talk about what the run rate might be going forward? Should we expect that sort of $10 million rental income or is it closer to 7% to 8% where it's been in the past going forward?

Yes, I think, we don't provide specific guidance on rental income separately. But the variables that impact rental income are sales improvements which lead to percentage rent increases, and lease buyouts, which introduce some variability in rental numbers. For the most part, it's not a line that drives a lot of volatility in our P&L.

And thank you. Standby for our next question. The next question comes from Jake Bartlett of Truist Securities. Your line is open.

Great, thanks for taking the questions. My first is on kind of the dynamics within the industry and what you're seeing at your two brands in terms of trade-down. We've seen very strong results from limited service and fast food, suggesting maybe there are some trade-downs from casual dining. One of your large competitors said that they thought they were getting trade-downs from casual dining into the family dining space. To the extent you can measure it, what are you seeing in terms of trading out or in of each brand?

Hi Jake, it's John. I'll address that thematically, and then we'll ask Jay and Tony to talk about it as well. There are a couple of important points to keep in mind. One is the context of having several consecutive quarters of comp sales growth, including the last quarter. This indicates that we appeal to multiple demographics, including financial demographics. Our brands have always been positioned as value brands, and they’ve performed well during tough times. All three of them do. We look back to the 2008, 2009 recession when Applebee's and IHOP overperformed and are in a favorable position. It explains our good results; we know that people value experiences over goods right now, and we are benefiting from that. Recently completed research at Applebee's, which was some of the most detailed we've done in a while, showed that our share of guests with household income over $100,000 has increased. So while some guests may be looking elsewhere for less expensive options during tough times, we're also gaining guests and overall we're pleased with the performance. Jay, do you want to talk about IHOP specifically? And then Tony will follow up.

Yes, John. Hi Jake, good morning or afternoon wherever you may be. On the IHOP side, we just haven't seen much trade-down that we can attribute to people moving around. One thing we try to do from a strategy standpoint is always have value opportunities for our guests, not only in price point but abundant value. With our loyalty program, we can offer very unique values to people as part of that program. But we also have to provide great innovation, new products, and new reasons for guests to come and experience us; by balancing all those things, we believe that keeps a broad array of customers coming back to IHOP. We cater to a diverse range of income levels, and we try to maintain that diversity to achieve stability.

Great, that's really helpful. Jay, if you could provide a bit more detail on the menu launch you mentioned, I’m trying to understand how much of a driver you think this could be? What are the significant changes, and what makes you excited that this could be impactful?

We have been ensuring we maintain relevance with our guests through our menu, which is one of the biggest factors in that. The menu rolled out at the beginning of Q2, but we previewed some of these things earlier. For example, we launched our new crepes, both breakfast and dinner options, with a buy-one-get-one offer. This promotes value and encourages trials. These are new signature dishes that are well-received. We also introduced brand new eggs benedict that have been promoted since early April. We aim to dominate all breakfast categories and keep upgrading our offerings.

Great. Last question, Vance, I wanted to dig into what the balance sheet looks like post-refinancing here. The biggest unknown for me is what the revolver balance has done; it went up for a couple of quarters. I guess that would speak to your approach to cash. What is the situation with that revolver? Did you pay it down? Did you use some of it, or are you conserving cash? Also, what about your approach to buybacks? You're likely to have a lot of available cash to buy back shares. Could you discuss the focus on share buybacks?

Sure, Jake. The revolver availability is still above $220 million, and we've drawn $100 million from it back late last year. We didn't pay that down, but we didn't draw on it anymore. We used cash to reduce our debt and conduct bond buybacks, as you can see in our filings. So we have plenty of liquidity, and it's important to maintain a prudent approach to balance sheet management in this environment. Regarding stock buybacks, our capital allocation priorities are always to invest in the company, return cash to shareholders, and manage our balance sheet. Since the beginning of 2022, we have spent $80 million on Fuzzy's, returned $160 million to shareholders through dividends and buybacks, and used $200 million to reduce our balance sheet. This approach will continue, considering our stock's trading levels and the intrinsic value.

One moment for our next question. The next question comes from Nick Setyan of Wedbush. Your line is open.

Thank you. I wanted to ask about Fuzzy's contribution in Q1. Would you be willing to tell us what the royalty contribution from Fuzzy's was? And also, what the margin on the company sales was?

Hi Nick, it's John. We're still in the integration process for Fuzzy's and ensuring our financial reporting aligns. Because they didn't have to publicly report before, we're currently focusing on talking about Fuzzy's qualitatively. We're likely a quarter or two away from starting to reveal quantitative financial measures. But we're certainly making progress.

Fair enough. I also wanted to revisit pricing for both brands and your thoughts on how pricing will change as the year progresses.

Sure. I'll provide a general overview that applies to all three brands and then invite Tony and Jay for their insights. The good news is that the pressure to raise prices across all brands is easing a bit since the inflation rate peaked last year—both in terms of cost of goods in the restaurants. It's been easing the last couple of quarters, and we expect it to continue easing by year-end. Vance mentioned that for the first time since before the pandemic, average sales across the system rose at a rate that offset increases in labor costs. While the pressure is valuable, it is not as intense as last year, which is encouraging for pricing going forward. Tony, do you have any specifics from Applebee's franchisees?

Yes, John. In comparing Q1 '23 to Q1 '22, we saw Applebee's franchisees implementing under 6%, about 5.6% in price to protect margins. This increase was lower compared to our direct peers. Q1 results indicate our franchisees are not pricing out of the guest comfort zone. Guests continue to spend on dining experiences, which is encouraging.

Thanks, Tony. What about IHOP?

On the IHOP side, inflation is easing, and pricing is following suit. For Q1, we implemented around an 8% price increase that has been implemented in the menu. We have another menu print planned for later in the year, which will provide an opportunity for further refinement. We also use a third-party vendor to help franchisees take price strategically, avoiding random competitor comparisons.

Got it. One last question, could you bracket your operating cash flow for the year?

Vance, can you address that?

Certainly. As I mentioned previously, we've experienced unusual working capital flows in the last few years. This year, we are expecting normalized working capital trends. You can refer back to your EBITDA assumptions to model operating cash flow. I remind you that we're expecting about $10 million in TI reimbursements through our operating cash flow this year. Thus, when looking at CapEx, please consider traditional CapEx in the appropriate section.

Thank you very much.

One moment for our next question. Our next question comes from Jeffrey Bernstein of Barclays. Please go ahead.

Thank you very much. Two questions: first, just following up on the prepared remarks when you referred to the late first quarter slowdown. Are you saying that’s a broader industry comment in terms of macro factors that consumers are seeing, or have you not seen a change in behavior in recent weeks or months? How would you respond if there were a slowdown?

My comment is about the industry in general, and that we are watching it, and we will respond if we need to. I think it would be helpful for Tony and Jay to share the philosophy each brand has regarding communication with their guests based on the current economic climate.

With Applebee's, we focus on delivering abundant value. In an uncertain economy, we double down on what our guests need. In Q1, we executed targeted campaigns, like our all-you-can-eat promotion that ran at $14.99 and drove tremendous results. It effectively combined great food with generous portions and great value, contributing to our competitive edge.

Similar to that, in tough times, IHOP adjusts value offerings. Whether it's a buy-one-get-one crepes offer or loyalty member promotions, we can pivot between value-based messaging and innovation-based messages. This flexibility is vital in changing weathers, leveraging strategies we've already designed, and executed over time.

Just one more point: All three of our brands learned during the pandemic to be much more agile. Their marketing engines are now more responsive to marketplace changes, benefiting us in uncertain times. We always focus on value, menu innovation, and guest experience. This remains our focus, and we will likely dial up value this year, but we prioritize those three areas.

Understood. For a follow-up, I wanted to clarify your commitment to supporting franchisees. What does 'active support' entail, and what is the most significant request you're receiving from franchisees during discussions recently?

We support our franchisees in numerous ways. My comments reference that all three brands have a financial incentive plan in place to encourage franchisees to continue opening restaurants short term. We should see openings supported by these incentives in 2024. At any time, we assist some franchisees needing help based on their core business. We provide various forms of financial relief and broader support regarding training, operations, data, and analytics. This was the precise comment I made in my opening remarks.

Thank you. One moment for our next question. This next question comes from Brian Vaccaro of Raymond James. Your line is open.

Thanks, and good morning. Following up on the health of your consumer, could you comment on what percent of sales at each brand fall under what you would consider some form of value construct? Has that changed versus the last few quarters?

Most of our guests are below $100,000 in household income, and about half are around the $50,000 range. This has remained stable; however, for Applebee's, the $100,000-plus segment has increased since 2019. Would anyone on the line like to correct me if I'm mistaken?

Just from an IHOP standpoint, we haven't experienced any major shifts in that area. The value platforms we have, like our IHOP platform, have been consistent over the last two years. A certain percentage of guests appreciate and rely on that value, and that's remained stable. The shifts are more related to promotions rather than broad market changes.

On the Applebee's side, John is directionally correct. Most guests fall into lower-income demographics, meaning affordability is crucial. We noted that there was no change in guests earning over $75,000 last quarter, but we did see a slight softening in visit intent among the 35 to 54-year-old cohort, which aligns with industry trends.

Additionally, our three brands approach value differently. Applebee's focuses on promotions like two-for-one and all-you-can-eat, IHOP emphasizes consistent value, and Fuzzy's offers deals like $3 tacos. This strategy hasn't changed, nor has the mix in terms of guest preferences.

Thank you. I also had a question about Applebee's franchise income. We've observed it dip a bit below 4% for two consecutive quarters. Can you comment on what's driving that regarding royalty collections? Are any increases in deferrals that are noteworthy or other dynamics within that line?

Vance, can you elaborate?

Yes, there will be noise as always. What you're noticing stems from details worked out regarding the company-owned restaurants that are refranchised. So, it's a temporary shift, not a permanent change in the collection rate.

Okay, thank you, Vance. Last question, clarifying the refinancing completed in April. The new debt is $500 million, but there appears to be a gap of about $85 million. Can you explain that? I know you have unrestricted cash, but some is likely tied to IHOP gift card cash, among others.

Yes. The gap between the two numbers essentially comes from cash on the balance sheet. Even after adjusting for the transaction, we still hold gift cards and IHOP cash in our balance. So, we had liquidity sufficient for reducing absolute debt levels. We focused primarily on minimizing interest expense impact.

That's great. I'll pass it along. Thank you.

Thank you. One moment for our next question. Our next question comes from Todd Brooks of the Benchmark Company. Your line is open.

Hi, thanks for taking my questions, and good morning everyone. Two quick points: One is more of a forward-looking inquiry. We've discussed the inflation environment waning, thus not being as aggressive on price. Jay, you said the menu is set for the first half for IHOP? Can we discuss anticipated pricing for the second quarter?

Yes, this is Jay. On the IHOP side, the franchisees took about a 4% price increase with the menu trends; we'll remain close to the 8% level until fall.

Thanks. On the Applebee's side, could we expect pricing to remain steady or dip considering what we saw from Q1?

Prudent pricing decisions from our franchisees will maintain competitive pricing. The franchisees understand the current landscape and the importance of value and affordability; hence, we expect pricing to be reasonable for remaining months.

Great, thank you. Big picture for John: Coming out of the pandemic, you've highlighted the advantages of scale from market share and investing perspectives. Can you discuss how these scale advantages play out in a choppy environment? Moreover, what is your level of investment compared to other large peers?

The scale advantages matter today just as much, if not more than before. We've seen that scale applies to both the number of brands and the platforms we build. For example, we recently executed an acquisition—this demonstrates our commitment to leveraging our capabilities for better future performance. Fuzzy's, for instance, is already benefiting from our scale in multiple aspects, from supplier contracts to customer service support, along with technology systems. We'll continue building common platforms enhancing efficiency and potentially accommodating future brands.

Regarding your stance on the investment: Knowing that G&A investments come from a commitment to grow, do you see opportunities for adjusting investments if others scale back? Or are the returns compelling enough that you do not see a need to slow expenses?

Our benchmark for deciding whether to invest is not based on peers. Instead, we focus on the ROI of our investments. If we see compelling, responsible ROI opportunities within the current economic climate, we will pursue those opportunities. Conversely, if initiatives are not working, we will discontinue them. Our lens is much more about internal ROI versus comparing ourselves with how others are executing their strategies.

To add, our investments are primarily focused on driving long-term growth. For instance, our loyalty program required a comprehensive technology investment across multiple systems, but the early results with 5.5 million members translating into 5% of total sales are promising. We have levers to adjust both G&A and CapEx expenditures if needed, having been through tough times previously. This flexibility allows us to thrive while investing in our long-term strategy.

Thank you.

Thank you. That concludes our Q&A segment. I'll now turn it back over to John Peyton for closing remarks.

Hi Chris, thank you. You’re the operator of the year. You were fantastic, and thank you for your support on this call. I'll wrap up by reiterating where we started, with nine consecutive quarters of comp sales growth for Applebee's and for IHOP; these outcomes do not happen by accident. Our brands are operating on all cylinders right now. We've discussed Applebee's higher-income mix of guests, and we also recognize, through the latest research, that our guest profile is younger and more diverse, with families dining together more now than pre-pandemic. IHOP has introduced its largest menu refresh in a decade, and Fuzzy's has begun its loyalty program with 500,000 active members, spending and visiting more than the non-loyalty members. These examples explain why we experienced a series of strong quarters and why we're committed to our guidance for the rest of the year. Thank you for your questions and the hour you spent with us, and we will talk to you all soon.

Thank you all for participating in today's conference. This concludes the program, and you may now disconnect.