Dine Brands Global, Inc. (NYSE:DIN) Q4 2022 Earnings Call Transcript

Dine Brands Global, Inc. (NYSE:DIN) Q4 2022 Earnings Call Transcript March 1, 2023

Operator: Good day. And thank you for standing by. Welcome to the Dine Brands Global Fourth Quarter and Fiscal 2022 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 that today’s conference is being recorded. I would like to hand the call over now to Brett Levy, Vice President of Investor Relations and Treasury. Please go ahead.

Brett Levy: Good morning, and welcome to Dine Brands’ fourth quarter and fiscal 2022 conference call. I’m Brett Levy, Vice President of Investor Relations and Treasury for Dine Brands Global, and I’m joined this morning by John Peyton, CEO; Vance Chang, CFO; Tony Moralejo, President of Applebee’s; and Jay Johns, President of IHOP. 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-K filing.

The forward-looking statements are as of today, and assumes no obligation to update or supplement these statements. We may also refer to certain non-GAAP financial measures, which are described in our press release and also available on Dine Brands’ Investor Relations website. As it relates to this morning’s release and our filed 10-K, our fourth quarter and full year 2022 results include the company operated Applebee’s restaurants, which was sold to one our existing franchises in October and our December acquisition of the Fuzzy’s Taco Shop brand. For calendar planning purposes, we are tentatively scheduling the release of our first quarter 2023 earnings call, Wednesday, May 3 2023. Before the market opens. With that it is my pleasure to turn the call over to our CEO John Peyton.

John Peyton: Hello, everyone. And thank you for joining us this morning. On today’s call, we will discuss our investment initiatives including the recent acquisition of Fuzzy’s Taco Shop. We’ll share our fourth quarter and full year 2022 results. Vance will offer our initial 2023 guidance and thoughts on our capital structure. And to wrap up, Tony and Jay will provide updates on Applebee’s and IHOP. Before we get into those details, let me first welcome Tony, our new President of Applebee’s. Tony started in this role in January and brings decades of operations development and franchising expertise to Applebee’s. Tony is a veteran of Burger King and Church’s Chicken. He joined Dine in early 2021, as President of our International business, just in time to masterfully lead our international franchisees through the pandemic.

And as a result of his stewardship, our international business achieved record openings last year. I’m thrilled for Tony and for Applebee’s, and I appreciate the warm welcome and support that Tony is receiving from our franchisees. While Tony is the new face of our Applebee’s brand. We also have a new brand, Fuzzy’s Taco Shop, which fulfils our long stated goal of adding a brand to our portfolio. I was enamoured with Fuzzy’s from the moment I walked into the vibrant and colourful dining room and convinced after I sampled the fresh Baja inspired tacos and delicious Instagrammable beverages. Specifically, we chose Fuzzy’s because it’s nearly 100% franchised. And like Applebee’s and IHOP, it’s the value leader in its category. Second, in addition to its 137 restaurants, it’s nurtured a strong pipeline of 125 additional units expected to open over the next several years.

We love the Mexican category because it’s vibrant and growing. And we’re attracted to the strong business model that includes a compelling lunch and dinner business 40% off premise sales and 20% alcohol sales. And finally, we love what Fuzzy’s describes as its bold and badass attitude that creates strong emotional connections with its guests. Fuzzy’s has led by Paul D’Amico, a veteran of Focus Brands, Moe’s Southwest Grill, and HMS host. During Paul’s two years with Fuzzy’s, he and his management team strengthened operations, marketing effectiveness, and menu innovation. While building an impressive pipeline for future growth. We’re extremely pleased to have Paul and his entire team as part of the Dine family. Our focus now is to ensure that Fuzzy’s benefits from the economies of scale that we offer from our technology, our shared services and our supplier platforms and to accelerate Fuzzy’s already robust momentum.

The Fuzzy’s acquisition end of the year on a high note for us, but it didn’t distract us from the continued impact 2022 cause across the industry, inflation, hiring and retention challenges, supply chain delays, and of course uncertainty regarding the strength of the consumer. Yet against this tough operating environment Dine delivered solid results for the fourth quarter, and for the full year 2022. I attribute our positive performance to the strength of our value oriented brands, our operational and marketing agility, and the commitment and hard work of our franchisees and seasoned brand teams. Vance will provide more detail on our results. But key highlights are that Applebee’s posted its eighth consecutive quarter of positive comp sales.

With a Q4 increase of 1.7% and full year comp sales growth of 5.1%. IHOP had its seventh consecutive positive quarterly gain at 2% and full year comp sales of 5.8%. In 2022, we returned over $150 million to our shareholders via dividends and buybacks. And we retired $40 million of our outstanding debt last quarter. Despite economic pressures across the industry, the strength of our value oriented brands was apparent as we were able to meet guests where they are because our franchisees excel at providing delicious food, great experiences, and fun welcoming restaurants. Meanwhile, our brand teams excel at delivering innovative marketing menu and operational programs. In addition to those core competencies, our 2023 innovation and growth agenda includes continued investment in the technology, marketing and training needed to enhance and accelerate our IHOP and Fuzzy’s loyalty programs.

A robust technology agenda that includes new POS for IHOP and Applebee’s, adding artificial intelligence that drives the recommendation engine on our digital channels, and technology that improves the guest experience like fly by, server handhelds, functionality for our apps that includes dining ordered in advance and joining waitlist for seating, payment options and the ability to review the restaurant. Third, we’re focused on building our portfolio of virtual brands that currently includes grilled cheese and super mega dia. And we’re now testing a chicken and a cheesesteak concept. We’re also leveraging IHOPs brand equity into national CPG partnerships, watching IHOP branded coffee with Kraft Heinz and cereal with General Mills. And finally, we’re testing new brick and mortar concepts, like dual branded restaurants, kitchen of the future pickup windows as well as offering compelling and targeted incentives to franchisees to accelerate the construction of new restaurants.

The past few years have reminded us to expect the unexpected, we’ve learned to react quickly and decisively to new challenges and opportunities. And as a result, our teams are better equipped and more prepared to meet the changing needs of our guests. In 2023, we anticipate that Dine will deliver steady results against a still difficult macro environment. We’ll continue to invest in innovation and technology that strengthens us for the long term, and will diligently focus on managing our balance sheet, optimizing our debt structure and returning cash to shareholders. We’re confident that our team our strategy and our momentum will serve us well and 2023 and beyond. And with that we’ll turn to Vance who will offer more details on our financial performance.

Vance Chang: Thank you John, as you mentioned, Dine is well positioned to leverage our cash flow generation ability to drive long term growth. We accomplished quite a bit in 2022, despite the volatile operating environment. During the year, we posted EBITDA above our four-year target. Return capital to shareholders beyond pre pandemic levels, and completed our first acquisition, since the combination of IHOP and Applebee’s. Our fourth quarter total revenues were $208 million, reflecting positive comp sales growth at both brands, and offset by the refranchising of our company operated Applebee’s units, resulting in a decline of 9% on a year-over-year basis. For the full year we generated $909 million in total revenues, which was 1% higher than the prior year, despite the refranchising of the 69 restaurants.

G&A for the fourth quarter of 2022 was $59 million, compared to $49 million for the same quarter of last year. We ended the year with $191 million of G&A expenses, up from $172 million last year due to strategic growth investments resulting in increased professional services, including one-time items such as Fuzzy’s acquisition costs. These higher costs also were related to our return to normalize operations to support franchisees, including higher occupancy costs and travel conference expenses and software maintenance costs. Excluding the various one-time items our 2022 G&A would have been approximately $182 million just below our expectations for the year. We generated consolidated adjusted EBITDA of $57 million in this quarter compared with last year $60 million quarterly results.

Our consolidated adjusted 2022 EBITDA of $252 million was ahead of our guidance and modestly below last year’s $253 million. Finally, adjusted earnings per diluted share for the fourth quarter and full year were $1.34 per share, and $6.20 per share, respectively, outpacing last fourth quarters $1.32 per share, but below 2020 ones $6.54 per share. Inflation on restaurants, food costs and supplies remain elevated. Although more pronounced, IHOP given continued cost pressure on eggs and wheat. Applebee’s and IHOP experienced 18% and 21% inflation for the year respectively. Without the impact of eggs and wheat, IHOPs 2022 inflation would have been around 17%. Applebee’s Q4 inflation was 11% and improvement from 23% during the first half of 2022.

IHOPs Q4 inflation remained at about 20% consistent with a 21% during the first half of 2022. Our menu pricing, our Applebee’s franchisees continue to focus on their value positioning, with an approximate seven and a half percent average menu pricing adjustment in Q4 year over year. IHOPs franchisees have taken approximately 10% year-over-year pricing in Q4 as they continue to deal with more elevated inflationary pressures. Turning to our cash flow statement, balance sheet and strategic uses of capital. Our full year 2022 cash flow from operations came in at $89 million compare with $196 million in the prior year. The variance was primarily due to the change in working capital we saw in Q1 of this year, and discussed in the prior three quarters.

Our capital structure including undrawn capacity of the upsides variable funding note, and our asset light model continued to provide the business with ample liquidity and operational cushion related to our covenants. We ended the year with total unrestricted cash of $270 million versus $355 million at the end of the third quarter, as we utilize our liquidity to fund Fuzzy’s acquisition and to retire $40 million of bonds in Q4. The bomb buybacks were done at a discount to face value, averaging below 97% of par with a net impact of $1.2 million of principal savings, and over $1.5 million of annualized interest expense savings. As we prepare for the upcoming anticipated repayment date of our class A-2-1 bonds in June of 2024. We’re currently encouraged by the improvements in the securitization markets, and we’ll look for the best window over the next several months to refinance our notes.

On capital allocation. In addition to organic investment to drive growth, our capital allocation focus going forward will include both debt and equity buybacks. We returned over $151 million of capital to shareholders in 2022. Through dividends and stock buybacks, outpacing our pre pandemic average. We also have $100 million authorization from the Board for bond buybacks to optimize our capital structure opportunistically. Before I turn to our 2023 guidance, I wanted to share additional colour on our recent Fuzzy’s Taco Shop acquisition, which closed in December of 2022. This 137 units fast casual Taco concept generated over $220 million in 2022 system sales. Its efficient square footage units generated $1.6 million in average unit volumes, with the newer cohorts achieving sales well in excess of that average.

We’re encouraged by the integration process thus far and optimistic about the value creation opportunities as part of our investment thesis. Finally, I would like to share our financial guidance for 2023, first limit touch on development. Our Applebee’s development plans call for 10 to 20 net fewer restaurants in 2023. Are IHOPs development plans are targeting the opening of 45 to 60, net new restaurants for the year, with 10 restaurants already opened in Q1 of 2023. Second, we’re forecasting an expected G&A range of $200 million to $210 million, including non-cash stock based compensation expense and depreciation of approximately $30 million. Third, our 2023 adjusted EBITDA guidance is targeted to be in the range of between $243 million to $255 million.

Lastly, we anticipate 2023 gross CapEx spending to be in the range of $33 million to $38 million. Although the effective CapEx levels will be about $10 million lower due to TI reimbursements related to certain projects, which will flow through our operating cash flows for GAAP accounting purposes. Overall, this guidance reflects our current view of the headwinds and tailwinds in 2023. And the cost structure required to navigate through the different scenarios. Our operating philosophy is to focus on how we can protect the downside, while investing for the upside to create long term risk adjusted returns for shareholders. Next, please allow me to introduce Tony Moralejo, for his perspective on the business as our new President of Applebee’s.

Tony?

Tony Moralejo: Thanks, Vance. Yes, I’m absolutely proud and excited to be leading Applebee’s, a brand that I personally and professionally admire so much. Having worked in restaurant franchising across multiple categories for nearly 30 years. I know a franchisor wins when franchisees succeed. Based on my experience and involvement with the Applebee’s leadership team over the last few years, I can confirm that we have an incredibly talented and stable team committed to a successful strategy that doesn’t waver and produces winning results. We would not be in this position it’s not for the intelligent and passionate base of Applebee’s franchisees that were closely and collaboratively with the Applebee’s leadership team. Together we remain committed to driving business results.

2022 is the second consecutive year of strong sales performance. Applebee’s closed out 2022 with a Q4 comp sales increase of 1.7% on top of last year’s 9.1% increase versus the same period in 2019. And a full year comp gains of 5.1%. Q4, mark Appleby’s eighth consecutive quarter of positive comp sales growth. Our solid momentum resulted in q4 average weekly sales of $52,500 per restaurant. Volume across our sales channels was split with 76% generated by on premise sales and 24% from off premise sales, with 13% coming from to go and 11% from delivery. Applebee’s continues to be recognized as a leader in the sector. From a brand attribute perspective, Applebee’s leads the casual dining category in key metrics such as convenience, affordability, variety, family friendly, and brand awareness.

Applebee’s also leaves on team engagement and great place to work rankings. At the same time, the brand and franchisees remain dedicated to positively impacting the communities we serve, and recognizing local here heroes who are doing good in the neighbourhood platform. Applebee’s category leadership position and overall success is driven by our relentless focus on the guest experience. While we aim to exceed expectations of service and quality. Our marketing efforts continue to bring innovation fun and value for our guests, as evidenced by our aided and unaided brand awareness, which hit all-time highs. Beyond our traditional brand approach, we partnered with Paramount and Tom Cruise on Maverick Top Gun. We also leveraged our guest strong relationship with Live Sports.

Thanks to our partnership with Football Night in America and Sunday night football on NBC. America’s number one primetime show. Most importantly, we launched campaigns focused on affordability and value, which remain top of mind for our guests during these inflationary times. Our marketing, culinary and operations plans in 2023, we’re continue to build emotional connections with our guests by listening to what they want, while keeping a pulse on emerging trends to deliver the products, services and interactions they crave. Touching briefly on development, in 2022 the brand open 16 restaurants globally, with four of those openings occurring domestically, while effectively managing restaurant closures to minimize the impact on the portfolio. We ended 2022 with just 13 restaurant closures.

Over the last two years now, the restaurant industry experienced rising land acquisition costs and construction cost inflation, while franchisees experienced downward pressure on operating margins, while our franchisees remain on solid financial footing, thanks to an all-time high AUV. These factors resulted in low new build ROI, hampering our ability to ignite new unit growth. My top priority is to ensure our franchisees are successful. So I’m going to leverage my development background and work closely with franchisees to create new, financially attractive development opportunities for the entire Applebee’s system. To wrap up, I see continued momentum for Applebee’s because the brand, our strategies and our talented brand and franchisee teams represent the necessary ingredients for future success.

And with that, let me hand it over to Jay.

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Q&A Session

Jay D. Johns: Thank you, Tony. As you’ve already heard, IHOP delivered seventh consecutive quarter of positive comp sales, illustrating our progress and resilience despite continued volatility. While the operating environment may be challenging, it isn’t detracting from our strong consumer connection and purpose to serve more joy to more people. IHOP posted positive 2% comparable store sales growth in the fourth quarter, and it represented the brand seven consecutive positive quarterly gain. Average weekly sales of 38,200 were modestly ahead of the prior years 37,500. Our to-go business was 22% of sales and continue to be led by the 14% mix for delivery and traditional takeout generated the remaining 8% of sales. The off premise business is also supported by our two virtual brands, with over 1200 restaurants offering thrilled cheese and Super Mega Dilla.

We’re excited to celebrate our 65th anniversary in 2023 throughout the year. Our brands food and restaurant experience remain as relevant today, as it ever has been. We continue to leverage our marketing strength not only through our brands legacy and value proposition, both of which were on display as we kicked off the year by bringing back our iconic Rooty Tooty Fresh ‘N Fruity at a value price of $6, but also by leveraging our relationships. One example is our recent partnering with Marvel Studios for an exclusive value movie tie-in to Ant-Man and the Wasp: Quantumania, spend $30 and get a movie ticket with Fandango. Our current quality and value campaign focuses on our new sweet and savory crates Bogo, which is running through March. We’re also driving innovation across all aspects of our business.

Our international bank of pancakes loyalty program has been well received as interest in the program far exceeded our expectations. Not only have we seen our IHOP app downloads triple year over a year and lead our category. But we added 4.4 million members in its first nine months, nearly 2 million more members than expected. And this accounted for 5% of sales by year end. We’re excited with our loyalty programs initial progress, I look forward to greater engagement with our guests and its potential. While still early. We’re receiving excellent data and developing more KPIs, as the data set becomes richer and deeper, which we hope to share at this time next year. Additional evidence of our standing with consumers can be seen through our retail collaborations.

We partnered with General Mills and recently introduced an IHOP mini pancake cereal, which debuted in restaurants stores in January. And today we’re excited to announce a new multi-year partnership with Kraft Heinz as part of our coffee business. In April, IHOP branded coffee will be on retail store shelves nationwide. These are great examples of how we’re taking new and unexpected approaches across product categories. Turning into virtual brands, which are now in more than 1200 restaurants. We’re about to launch our third virtual brand TenderFix, a chicken tender concept which serves to complement our two existing offerings Thrilled Cheese and Super Mega Dilla. These partnerships speak to IHOPs brand strength and relevance enable us to expand our reach, allowing us to be top of mind to more customers.

Our 2022 development activities were below our expectations as we highlighted on our last call, as macro issues have affected the timing of our pipeline. We opened 37 new restaurants in 2022 with more originally planned in Q4 slipping into Q1 of this year. 10 of which have already opened in 2023. The pipeline remains robust, although macro factors continue to impact the timing of openings. We’re targeting 45 to 60 net new unit openings in 2023, which represents a more normalized and solid development year. Understanding macro factors could still influence our activity. I’m confident the momentum we have at IHOP going into 2023. And I proudly speak for the IHOP system where we collectively look forward to all we’ll do together to spread more joy this year.

Let me now turn the call back over to John.

John Peyton: Thank you, Tony and Jay and Vance. If the last few years have taught us anything, it’s to expect the unexpected. Our philosophy is to focus our time and resources on the aspects of the business that we can control, while ensuring that we remain agile and decisive when confronting immediate challenges. This approach will guide us in 2023, as we invest in our business, deliver exceptional value and experiences to our guests, and drive returns for our shareholders. One final note, with the addition of Fuzzy’s and our refreshed focus on international going forward, we’re going to modify our approach to this call. Beginning next quarter, our scripted remarks will be limited to Vance and me. And then Jay and Tony will join us for Q&A. We’re making this change to ensure that we effectively manage the time of our remarks to leave as much time as possible for your questions. Thanks again for joining us this morning. And have a great day.

Operator: Question comes from the line up Eric Gonzalez with Key Bank. Your line is now open.

Eric Gonzalez: Thanks and good morning. My first question may be on the G&A outlook, you called out having some investments, I think in the guidance and the release. So these investments they’re going roll into ’23, so maybe you’re looking at a little bit higher G&A next year. If I were to go back to the analyst day a year ago, you know, the idea was that G&A would step up in ’22 and these investments would start to generate returns by the end of the year. So I’m just kind of wondering where we are in that cycle. I know some of the investments have happened, some have been delayed. So are we starting to see the tangible investments yet offset those costs? Or have the delays sort of delay, you know, impacted the timing of that cycle?

John Peyton: Hey, Eric, it’s John. Good morning. Thanks. We’ll have Vance to tackle that question.

Vance Chang: Eric. So, as we talked about in Q3, we lowered our expected ’22 G&A target, because as we said, right, some of our investments are falling into ’23, given the disruptions that we saw earlier in the year. So this, the increase reflects open positions that have yet to be filled analyzation of new positions that we did fill during 2022. Of course, there’s some inflationary cost increases and innovation projects are pushed in 2023. So overall, we expect our 2023 G&A level to be about the infrastructure that we need to support the growth going forward. As long as we continue to see progress with franchisee support guest behaviour and profitable growth in sort of a more normalized operating environment so and to answer more specifically on returns, it’ll first of all, like, I think we’re for 2023 we know it’s a complicated operating environment.

But despite the complication, we are starting to see progress with the initiatives that we’ve made last year in the context of comps development and new restaurants for new revenue sources. So our guidance effectively implies that our continued investment G&A will be funded by the early innings of growth that we’re seeing in 2023. And with of course, with longer term upside to EBITDA growth in ’24 and beyond.