Dine Brands Global, Inc. (NYSE:DIN) Q3 2023 Earnings Call Transcript

Dine Brands Global, Inc. (NYSE:DIN) Q3 2023 Earnings Call Transcript November 1, 2023

Dine Brands Global, Inc. beats earnings expectations. Reported EPS is $1.46, expectations were $1.32.

Operator: Good day and thank you for standing by. Welcome to Dine Brands Global’s Third Quarter 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 [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today. Please go ahead.

Brett Levy: Good morning, and welcome to Dine Brands Global’s third quarter 2023 conference Call. I’m Brett Levy, Dine’s Vice President of Investor Relations and Treasury. This morning’s call will include prepared remarks from John Peyton, CEO; and Vance Chang, CFO. Following those prepared remarks, Tony Moralejo, President of Applebee’s; and Jay Johns, President of IHOP, will also be available to address questions from the investment community during the Q&A portion of the call. Please remember our safe harbor regarding forward-looking information. During the call, management will 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.

A Chili’s Grill & Bar restaurant filled with happy customers enjoying a meal.

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 will also refer to certain non-GAAP financial measures, which are described in our press release and also available on Dine Brand’s Investor Relations website. For calendar planning purposes, we are tentatively scheduled to release our Q4 2023 earnings before the market open on February 28, 2024. And to host a conference call that morning to discuss the results. With that, it is my pleasure to turn the call over to Dine Brands CEO, John Peyton.

John Peyton: Thanks, Brett, and good morning, everyone. Thanks for joining us. Today, we’ll provide updates on Dine’s Q3 results, and how we’re advancing our strategic growth agenda or as we call it, our recipe for growth. Vance will then provide a detailed financial update, including an update to our full year guidance metrics. And following those comments, Tony and Jay will join us for Q&A. To start, I’ll share some thoughts on what we’re seeing with respect to guest behavior and the consumer mindset. During the quarter, we noticed that guests are limiting their discretionary spending and have become more selective with where they choose to spend their money. Despite this, we believe that eating out continues to be an occasion our guest value across our brands.

We’re seeing our guests maintain spend in family and casual dining brands while tightening their wallets on quick service brands. We’re also seeing guest traffic on weekends and key holidays outperform the competition, further indicating that guests prioritize a full-service experience even if it means they’ll have to skip out on their next quick service dining occasion. At the same time, we believe the decreased personal budgets are leading guests to ask, where should we go to eat less and should we just cook at home more. This means we’re not only competing with other restaurant brands, but also with home-cooked meals. In general, we see guests prioritizing dining in and enjoying a full restaurant experience, which aligns with Dine’s core strengths of providing abundant value and exceptional experiences, quality is deeply ingrained in the DNA of each of our brands.

This is particularly important during the upcoming holiday season, when restaurant visits increase. So now turning to our results. Our third quarter results highlight the resilience of Dine’s franchise model. Despite lapping strong comps and an increasingly competitive landscape, we posted solid EBITDA results. First, Q3 revenue of approximately $203 million versus $230 million in the prior year, the difference is largely a result of the refranchising of 69 company-owned restaurants in October of last year to a franchisee. While company-owned revenues are now zero, because of the refranchising, we benefit from the consistency of royalty income combined with reduced operations-related expenses. Second, adjusted EBITDA of $60.6 million compared to $63.6 million in Q3 of 2022.

Thee difference, again, is due to the refranchising of the company-owned restaurants. IHOP posted its 10th consecutive quarter of comp sales growth, up 2% year-over-year and outperformed the family dining segment on sales for eight out of the 13 weeks of the quarter. Average Q3 weekly sales for IHOP were $37,800 exceeding pre-pandemic highs. And Applebee’s same-store sales declined 2.4%. However, average Q3 weekly sales for Applebee’s were over $52,000, which also surpassed pre-pandemic highs. Throughout the quarter, we continue to focus on initiatives to drive growth and efficiency. First, we leverage investments in technology, marketing and training to improve both guest experiences and loyalty programs. Second, we introduced menu innovations and supported marketing initiatives to further engage our guests and better understand what they’re looking for in our brands.

This has been a huge area of focus with activity across both IHOP and Applebee’s, as we advance culinary innovation and the opportunities to lean into abundant value. And third, we remain highly focused on new development initiatives. And we’re driving ahead with plans in this area to support unit growth overtime. These three areas make up our recipe for growth. Now, let’s review the quarter highlights for each brand, starting with Applebee’s. As I mentioned at the start of the call, Applebee’s comp sales were down 2.4%. However, Applebee’s continued to maintain sales volumes by executing promotional tactics such as All-You-Can-Eat Wings, to increased demand throughout the quarter, while still looking to advance its plans to drive traffic over the long-term.

Applebee’s guests want compelling value and a great dining experience at an affordable price. Our strategy leverages fan favorite menu items, new culinary options and promotional offerings that appeal to both new and existing guests. Although there’s been a decline in guest traffic, our check levels have shown an increase, compared to 2022. In Q3, Applebee’s offered several promotions to drive profitable traffic. For example, during our seven-week, All-You-Can-Eat Wings program, we sold £7.1 million of bonus wings, that’s about 114 million individual wings. The campaign performed better than our internal expectations, driving incremental sales, tickets and franchisee margin dollars and introducing new guests, particularly Gen Z to our brand.

In October, we brought back the iconic Dollarita, for the first time since 2020. And while we’ll wait to speak to the full results of this month-long promotion on our Q4 earnings call, we’re pleased with the preliminary results. On the technology side, Applebee’s is far along in its effort to redesign and re-launch its website and app, details of which will be revealed in the coming weeks. Two months ago, we launched Applebee’s guest experience program, using Qualtrics Experience Management Platform to gather valuable feedback from our guests. We’re pleased guest participation surpassed industry benchmarks and our own expectations, and this positive engagement highlights our guests’ strong connection with the brand and provides us with valuable insights to meet and exceed their expectations.

During the last five months, Applebee’s culinary team has tested more than 200 new menu concepts ranging from different cuisines to innovation of current menu items. We also have new beverage concepts rolling out in 2024, which are also generating positive anticipation throughout the franchise system. During the quarter, Tony strengthened his leadership team by hiring two industry veterans, a new Vice President of Culinary who brings a contemporary and innovative mindset to our menu, and a new leader of development focused on conversions, developing our new prototype and our remodel program. Menu innovation and development are key focus areas for the brand, and we look forward to providing progress on these initiatives soon. Now on to IHOP.

The quarter’s comp sales growth was fueled by the introduction of the brand’s new menu combined with compelling offers. The data we’re gathering from our loyalty program enables us to methodically plan promotions and menu offers that are most likely to appeal to our guests. As a result, we continue to see the brand gaining traction amongst the younger demographic. During the quarter, we focused on breakfast equities that span dayparts, balancing both suite and savory options to meet all cravings. First, in early July, we introduced Pancake Tacos, which came in sweet and savory flavors for a limited time with three Pancake Tacos for $6. We sold nearly two million Pancake Tacos in just four weeks, and they were hit in the restaurants and on social media.

Overall, the campaign had over one billion media impressions. At the end of August, we introduced biscuits with flavors like fresh strawberries and cream and bacon egg and cheese. Our biscuits premiered with a special introductory offer of breakfast biscuits with a side for $7 before becoming part of our core menu in September. During the quarter, we also expanded our waffle category, our original chicken and waffles is one of our top-selling menu items for dine-in and to-go. And after receiving guest feedback asking for more variety, we expanded to add new flavors, including our new Nashville Hot Chicken & Waffles. And finally, as we discussed on our Q2 call, we launched one of our most comprehensive menu updates in Q2 and the new and expanded categories of Benedict and Crepes are performing well.

HOP has always been known for its family-oriented menu and guest experience. So to celebrate the brand’s 65th anniversary, IHOP brought back its kids eat free promotion during the month of August, and it’s all-you-can-eat pancakes for $5, both helping IHOP outperform the Black Box family dining index in comp sales, check and traffic during the promotion. The brand continues to build its consumer packaged goods program. In partnership with Kraft Heinz, we’re selling our 100% Arabica coffee in approximately 25,000 retail stores. Additionally, in July, we introduced a new IHOP Iced Late with Cold Foam at Walmart with planned expansion to other retailers in Q1. Shifting to technology. We’re on track for the new point-of-sale system to be completed by early 2024, and the tablet rollout is progressing accordingly.

Our loyalty program, International Bank of Pancakes is steadily growing now with seven million members. More information will be provided next quarter. Quickly touching on Fuzzy’s. We added Fuzzy’s to our existing portfolio because it’s a young, compelling brand with the potential for substantial growth over the next decade by capitalizing on the scale and resources of Dine. In September, I attended the Fuzzy’s Annual Franchisee Conference called Family Reunion. I was blown away by the terrific energy from the franchisees who all seemed energized by the brand and its plan for new menu offerings, future restaurant designs and marketing innovation. One of the biggest moments from the franchisee conference was the unveiling of Fuzzy’s new Baha strategy, a comprehensive plan and state of mind that takes the brand back to its roots, embracing the Baha lifestyle and cuisine, it includes new restaurant design elements, a menu refresh and enhancements to the overall guest experience.

Testing will begin in Q4 with a full national rollout planned in Q1 of 2024. On the international side of the business, we opened 16 units so far this year. Our main focus remains on opportunities in our core international markets of Puerto Rico and the Caribbean, Latin America, Middle East and Canada. International division delivered strong comp sales growth and is the incubator for our dual-branded IHOP, Applebee’s restaurants, of which there are now six open in the Middle East and Canada. Before I turn it over to Vance, I want to emphasize that our brand teams and franchisees are expertly navigating a still challenging economic environment through smart, compelling marketing, engaging promotions and best-in-class service. Their commitment to upholding the highest standards is central to our recipe for growth, and it will continue to steer us forward.

And with that, I’ll turn it over to Vance.

Vance Chang: Thank you, John. As you just heard, we had a mixed quarter in terms of comp sales, but we continue to see the strength of our business model, reflected in our ability to generate steady cash flow and EBITDA. On the top line, consolidated total revenues excluding the refranchise Applebee’s restaurants, increased to over $200 million in Q3 versus $195 million in the prior year. Our total revenues decreased 13% to $202.6 million compared to $233.2 million for the same quarter of 2022. The change was primarily due to the refranchising of the Applebee’s restaurants in October of 2022. If we exclude advertising revenues, franchise revenues increased 6.4%. Rental segment revenues for the third quarter of 2023 remained flat at $29 million compared to the same quarter of 2022.

The rental segment margin increased 3%. Our company restaurant operations sales were approximately $0.3 million for the third quarter compared to $38.2 million for the same period of last year as we only had one company-operated restaurant in Q3. G&A expenses increased nearly 5% to $48.6 million in Q3 of 2023, up from $46.3 million in the same period of last year, mostly due to an increase in compensation-related costs, offset by a decrease in occupancy costs. Adjusted EBITDA for Q3 of 2023 decreased to $60.6 million from $63.6 million in Q3 of 2022. Adjusted diluted EPS for the third quarter of 2023 was $1.46 compared to adjusted diluted EPS of $1.66 for the same period of last year. Now let’s turn to the statement of cash flows. We had adjusted free cash flow of $54 million for the first nine months of 2023 compared to $52.4 million for the same period of last year.

Cash provided by operations at the end of the third quarter of 2023 was $79.3 million compared to cash provided from operations of roughly $63.5 million for the same period of 2022. CapEx through Q3 of 2023 was $32 million compared to $19.5 million for the same period of 2022.We finished the third quarter with total unrestricted cash of $98.2 million compared with unrestricted cash of $98 million at the end of the second quarter. Additionally, we continued to return capital to investors. Through Q3 2023, year-to-date, we’ve returned approximately $203 million of capital back to equity and bond investors, including debt reduction as part of our refinance, demonstrating our prudent capital allocation strategy. Next, let me discuss Applebee’s performance.

Q3 same-store sales were negative 2.4%, as we lapped strong comps from the year prior, and we continue to face a price-sensitive consumer environment. However, as John mentioned earlier, Applebee’s sales results have remained fairly steady, as average weekly sales were over $52,000, including over $11,000 from off-premise, we’re close to 22% of total sales, of which 11% is from to-go and 11% is from delivery. IHOP sales continued their positive momentum throughout the quarter with Q3 same-store sales growth of 2%. Average weekly sales were over $37,000, including over $7,000 from off-premise or close to 20% of total sales, of which 7% is from to-go and 12% is from delivery. On the labor front, our franchisees are reporting that restaurant staffing continues to steadily improve, as more and more people return to the workforce, labor shortages are reduced, helping alleviate operational challenges in our restaurants.

On the commodities front, our outlook for the full year for our franchisees remains consistent with what we previously provided. Both brands in the flat to low single-digits range through the remainder of the year as costs turn deflationary. Applebee’s commodity costs improved by over 2% versus a year ago and over 80% of Applebee’s purchase prices are protected through the end of the year. IHOP’s commodity costs have improved 3% versus last year and is basket needs are locked at a similar level to Applebee’s. While our data indicates that overall consumer inflation continues to ease, we do expect inflation levels to remain moderately elevated in 2024. Now I would like to provide an update on our financial guidance for the year. Starting with our G&A.

We’re reducing the top end of our expected G&A range for the year, as we take proactive measures in managing our G&A spending. Our new 2023 G&A forecast guidance is $200 million to $205 million compared to our prior guidance of $200 million to $210 million. With EBITDA, we’re raising the lower end of our adjusted EBITDA range. Our expected adjusted EBITDA range is now $245 million to $255 million compared to our prior guidance of $243 million to $255 million. We’re also maintaining our CapEx range of $33 million to $38 million. Finally, moving on to development. Development is an important growth driver, and we have strategies in place across both brands to sustainably expand our footprint, both domestically and internationally. Through year-to-date, IHOP has opened 29 domestic restaurants, and many of those were conversions.

However, as we enter the fourth quarter, our franchisees are still experiencing some near-term development headwinds including permitting and construction delays, which could cause some of the openings to slip to 2024. As a result, we now expect IHOP development to be between 20 to 30 net openings for 2023, compared to 45 to 60 net openings, we previously stated. Again, I want to emphasize that this change to guidance is the result of ongoing construction delays that have made it more challenging to accurately forecast the timing of these openings. IHOP still has a strong development pipeline as franchisees are excited to expand the brand, and we remain bullish on IHOP’s long-term growth. On the Applebee’s side, our development guidance remains unchanged, and the brand continues to execute the three-part plan we outlined last quarter, which includes the creation of a new restaurant design that matches the modern needs of our guests.

Despite the mixed quarter in terms of comp sales, we continue to see the strength of our business model highlighted by our steady cash flow generation and EBITDA and we remain focused on executing on our strategic priorities to drive long-term shareholder value. So now I hand the call back to John, and we’ll open it up for Q&A.

Brett Levy: Thanks so much, Vance. And as a reminder, Jay and Tony are both on the line along with me and Vance, and they’re here to answer your questions. So Kathy, please open up the queue and we’ll take the first question now.

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Q&A Session

Operator: Yes. Thank you. [Operator Instructions] Our first question comes from the line of Eric Gonzalez with KeyBanc Capital Markets. Please proceed with your questions.

Eric Gonzalez: Hi, thanks. Good morning. My question is about Applebee’s. I’m wondering, if you could talk a little bit more about how the quarter progressed from a traffic perspective. You’re on airiness wings for a good part of the quarter. So can you talk about how the promotion went? What you saw is that promotion roll off? And also I’m curious about the return to DOLLARITA, maybe if you could talk about what drove that decision to bring it back after the multiyear? And anything you can share about your expectations for that promotion in terms of traffic improvement in the fourth quarter. Thanks.

John Peyton: Sure. So Tony, why don’t you take both of those questions about Wings and DOLLARITA?

Tony Moralejo: Yes, happy to, Eric. We don’t traditionally talk in detail about traffic, but it’s obviously something we monitor closely. What I’ll say about the quarter is that we were pleased with the performance of All You Can Eat Boneless Wings. We experienced quarter-over-quarter traffic improvement, profitable sales, and we brought younger guests into Applebee’s. As for DOLLARITA, I’ll say the specifics on DOLLARITA’s performance for next quarter, but we’re really excited about what we’ve experienced so far. And I’m happy to share that 93% of all the transactions involving DOLLARITA included the purchase of a food menu item. As for why, guests want two things from Applebee’s, every time they visit us. They want great value and they want a great experience and DOLLARITA delivers on both. So you’ll continue to see Applebee’s innovate with best-in-class marketing campaigns that will continue to surprise and delight our guests.

Eric Gonzalez: Got it. And then if I can maybe just ask about the overall operating environment, specifically on value. From an industry perspective, are you seeing an uptick in promotional offerings from the competitors and how is the brand reacted to one of your largest competitors coming back on air with value? Have you seen any sort of impact when they’re back on air?

Tony Moralejo: Yes. Happy to take that one as well. We’re a brand that’s built on value, Eric. And I guess now they can counter on us when the economy is struggling or they face financial uncertainty. Again, with the All-You-Can-Eat Boneless Wings promotion, we had strong results. It’s an excellent example of abundant value and it ignited a Tik-Tok challenge that again introduced our brand at younger guests. It’s compelling and provides the value that our guests increasingly seek in this environment.

John Peyton: Eric, it’s John. I would just add in that both brands think about value in three buckets. There’s the everyday value, which is on their menu every day. There’s special moment in time LTO offerings, and then there’s exclusive value via the loyalty program. And what both these brands do well since they’ve been positioned as a value brand in the category for a decade is they know how to read the market, they have great data about their customers, particularly IHOP, most recently with its new 7 million members in the loyalty program. And so they lean into one of those three categories, everyday value LTOs or loyalty as they see the need and as they read the market and as they all do what the competitors are doing. So, they’ve got a sophisticated levers that they can pull when they need to.

Eric Gonzalez: Thanks. I’ll hop back in the queue.

Operator: Thank you. This question comes from the line of Jake Bartlett with Truist Securities. Your line is now open.

Jake Bartlett: Great. Thanks for taking the question. Mine was really about the sales drivers ahead that you see specifically at Applebee’s. You talked about a lot of test menu, new menu innovation and that 2024, I think, is going to be more of a catalyst there. What is the cadence that you expect? Should we expect kind of a more meaningful innovation really kind of out of the gate in 2024? Or is that something that you think is going to just build throughout the year?

John Peyton: Yes. Tony, you’re on center stage today.

Tony Moralejo: Yes. Look, we’re focused on innovation in multiple areas. So, with respect to our value offerings, we’re looking to create new, compelling value offerings and to complement those with our true and tried favorites like DOLLARITA, like an All-You-Can-Eat Boneless Wings. We’re focused on innovation on the culinary side with our menu. We know that we need new menu options that appeal to a younger guest. We’re focused on innovation with respect to our prototype, which Vance mentioned in his opening remarks. So, really, you’re going to see innovation throughout different parts of our business. And on top of all that, you’ll see a renewed focus on our assets. A lot of our restaurants are over 20 years old. And so they need to evolve and they need to be renovated.

So, we’ve got a reimage program that we’re launching later this year. So, you’ll see it through different stages. These are all work streams that currently are being addressed in parallel, but you’ll see them come to fruition over time over the course of the next year.

Jake Bartlett: Okay. And I want to build on Eric’s question about really the trend throughout the quarter. And I know you typically don’t provide too much detail there. But you did mention that you stressed that IHOP was very consistent throughout the quarter. So, I guess that leads me to wonder how Applebee’s trended throughout the quarter. If you can help us just with the trajectory, that would be helpful as we look forward to the fourth quarter.

Tony Moralejo: Yes. So, I’m happy to take that one as well. We don’t typically talk about intra-quarter trends. We’re just a few weeks into Q4. So there isn’t much I can share with you for Q4 otherwise as well.

Jake Bartlett: Okay. But I think you mentioned that Applebee’s was consistent in the third quarter, month-to-month, but you can’t say the same for Applebee’s, I assume?

John Peyton: So — sorry. So for Applebee’s in the third quarter, obviously, the — all you can eat promotion, I think, met or exceeded our expectations. So it was probably a stronger period within the quarter.

Jake Bartlett: Okay. And then my last question is on G&A. And you lowered the guidance a little bit for the year. I’m wondering how much of that was kind of tightening the belt there, maybe pulling back on some of the initiatives a little bit in the near term versus your incentive comp and things like that, which would be temporary. The basis of the question is trying to figure out what the impact of the lower outlook this year, what the implication is for 2024?

John Peyton: So Vance, why don’t you take that question

Vance Chang: Hey, good morning, Jake. So, it’s a mix of both. So we are constantly evaluating sort of what to pull back, what to slow down, what to accelerate within our G&A with all the initiatives we’re working on. So the short answer to your question, it’s a little bit of both. But our G&A reflects sort of the existing commitment to improve franchisee support and to improve get guest experience. And they take time, these projects. But they’re building blocks to any successful franchisor, right? So we have and will continue to apply this disciplined approach to G&A as evidenced by this quarter, when we achieve spending level below street expectation.