Hello and welcome to the Second Quarter 2020 Dine Brands Global Earnings Conference Call. My name is Patty and I will be your conference operator today. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Mr. Ken Diptee, Executive Director of Investor Relations. Sir, you may begin.

Good morning and welcome to Dine Brands' second quarter conference call. I'm joined by Steve Joyce, CEO; Tom Song, CFO; Jay Johns, President of IHOP; and John Cywinski, President of Applebee's. Before I turn the call over to Steve for opening remarks, please remember our Safe Harbor regarding forward-looking information. During the call, management may discuss statements forward-looking and involves known and unknown risks, uncertainties, and other factors which may cause the actual results to be different from those expressed or implied. Please evaluate the forward-looking information in the context of these factors which were detailed in today's press release and 10-Q filing. The forward-looking statements are as of today and assumes no obligation to update or supplement these statements. You 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. With that I'll turn the call over to Steve.

Thank you, Ken. Well, good morning everyone and thank you for joining us. Before we get started, I know the last few months have been challenging for everyone, so I hope you're all safe and doing well. I'd also like to recognize our franchisees and team members for their continued hard work during these difficult times, which has brought out the best in our team across both our organization and system. From creating resourceful ways to drive our business during these times to having a solid focus on our guests and welcoming them back into our restaurants. Our approach has generated some good progress. With that let's turn to the second quarter results. When we last spoke to you, we provided a look into the sequential improvement in weekly comp sales trends for April. Notably after reaching lows in late March, the sales trajectory for both brands continued to improve through June as dining restrictions were eased and states began to gradually reopen. Guests who felt more comfortable about restaurant dining were eager to get out after a long period of staying in home whether that was through off-premise, outdoor, or indoor dining. We set out to bolster this variety of options to meet the different needs of our guests and establish stringent safety protocols that would instill confidence and keep guests coming back. Despite the impact of COVID-19, our brand showed meaningful progress in recovery, which we believe reflects the successful execution of our off-premise business and the affinity guests have for our brands. While our restaurants have always offered guests rest in a place to enjoy being with friends and family, they've continued to savor our great food increasingly in the comfort of their own homes as the strong growth of our off-premise business demonstrates. We remain optimistic…

Thank you, Steve. Good morning everyone. I hope that you and your families are all doing well. Given the circumstances, I'm going to first review the financial initiatives and decision that Dine has taken during the pandemic. Then I'll discuss our financial results for the quarter. First, we responded by fortifying our financial position during this challenging period for our industry. As a reminder, we borrowed a total of $220 million from our revolving credit facility in March. As of June 30, the entire amount remains strong. At the end of the second quarter, we continue to have a strong liquidity position and significant cash on our balance sheet totaling $342.5 million, of which $278.5 million is unrestricted. I would like to highlight that non-current restricted cash increased by $16.4 million due to Dine voluntarily doubling its interest reserve, to enhance our securitization structure. In addition to further support our securitization, we voluntarily accelerated the funding of quarterly interest. And as of today for example, we have already fully funded interest payments due on September 8. We did not repurchase our common stock during the quarter and anticipate this will continue for the foreseeable future. Turning to our G&A. We made some very difficult decisions to furlough approximately one-third of our corporate staff which led to the sharp decrease in G&A for the second quarter of 2020 to $30.9 million as compared to $39.4 million for the second quarter of 2019. This represents a 22% decline. The decrease was mainly due to lower compensation expenses as well as reductions in other discretionary costs. I would like to clarify that during this quarter of extreme austerity, we were able to reduce our gross cash G&A to approximately $27 million which includes capital expenditures. However, we are not changing a $30 million…

Thanks, Tom and good morning, good afternoon, everyone. I've been looking forward to sharing these results. Given all that's unfolded since we last spoke about 90 days ago. I plan to provide detail on Q2 as well as a review of what's transpired here in the month of July. Let's start with a bit of context. Pre-COVID, the Applebee's brand had tremendous momentum. We posted a 3.2% comp sales increase through March 8, meaningfully outperforming the casual dining category and delivering 10 consecutive weeks of positive sales to start the year. Once the pandemic emerged in March, we temporarily closed about 250 restaurants and quickly moved to an off-premise business model. As a result, April comp sales declined 70.4%, May sales declined 54.1%, as we began to reopen our dining rooms and June sales were down 29.3%, as we began to see a real shift in momentum. Four primary factors impacted our Q2 results. The most obvious was the closing of dining rooms, which represented approximately 85% of our business pre-COVID. Once dining rooms began to reopen, the government-imposed capacity constraints represented another meaningful variable with most geographies in posting a 25% to 50% capacity restriction. Another factor limiting our revenue recovery is the understandably cautious nature of the American consumer in this environment, which of course, varies depending upon the geography. And finally, we chose to discontinue all national marketing back on March 18 and we've been on a self-imposed media hiatus through almost all of Q2. In hindsight, this was absolutely the right strategy as we allowed our ad fund to replenish, while waiting for the right time to reintroduce Applebee's to America. Now let's talk about where we are today. I'm very pleased to announce that 1,600 Applebee's restaurants are currently open for business in the U.S.,…

Thank you, John. Good morning everyone. I hope you're all doing well. IHOP's performance continued to be impacted by the effects of governmental mandated restrictions on restaurant operations due to COVID-19. This was consistent with the overall family dining category according to industry data. For the second quarter IHOP's comp sales declined 59.1% as traffic remained challenged primarily due to dine-in restrictions with statewide stay at home orders continued high employment and temporary restaurant closures. However, I'd like to highlight that our weekly comp sales for the second quarter improved since the week ending April 5. In fact the brand posted 12 consecutive weeks of sequential sales improvement in the second quarter. Additionally comp traffic improved sequentially every week during the quarter as states begin to gradually allow dining rooms to reopen with capacity restrictions which were generally around 50%. As we entered the third quarter our performance in July reflected the resurgence of coronavirus cases and dining room restrictions put in place by state and local governments due to the spike. Additionally, we did not utilize national media through the first three weeks of July. As a reminder we discontinued our marketing late in the first quarter except for some basic local marketing and a brief off-premise campaign. Regarding daypart performance, every daypart's sales and traffic improved sequentially month-to-month in the second quarter. While the overall sales improvement from April to June was fairly even across all dayparts breakfast was approximately 200 basis points behind launch and dinner respectively. Mainly due to statewide mandates to remain at home and rising unemployment there were essentially less people stopping for breakfast on their way to work. Additionally the breakfast category in general has faced some pressure compared to other meal periods. According to NPD group, breakfast or the morning snack occasion…

Thanks, Jay. To recap, both Applebee's and IHOP posted steady improvement in weekly comp sales and traffic during the quarter. Our off-premise business continued to deliver substantial growth as guests became more familiar with the to-go service. We ended the quarter with a strong cash position and ample liquidity. Lastly, we are well-positioned to withstand current industry headwinds and stand to benefit from the potential opportunities to expand our market share. Now, we'll be pleased to open up the call to any questions you may have. Operator?

[Operator Instructions] We have a question from the queue -- from Mr. Jake Bartlett from SunTrust. Your line is open, sir.

Great, thanks for taking the questions. My first one is about -- I just want to make sure I understand how many stores are offering dine-in currently after California was shut back down? I think some of the numbers you've given were at the end of June. So, maybe just to clarify that. And then, also in terms of Applebee's -- and glad to hear the detail on average weekly sales stores with offering dine-in, I think, it was 39,000. How does that compare to the similar period last year? I'm just trying to get a gauge how those stores really are comping versus stores with only off-premise.

Okay. So, let's start with opened restaurants and then John answer, the Applebee's.

Yeah. JK, this is John. 1,450 plus restaurants have dining rooms open at Applebee's and that number is fluid. It literally fluctuates on a daily weekly basis. California being the most recent where we lost, I think, 90-plus restaurants in terms of shutting down dining rooms, and I'll come back on the other question after Jay speaks to IHOP.

Yeah. On the IHOP side, we've got basically 78% of our restaurants are open without restrictions with 1,320-plus restaurants. We've got 244 restaurants now that are back to doing on-premise only. It's mainly driven by the California change. That's 14% of our system was off-premise. And like I said, we've still got about 8% that are closed at the moment. I guess for us, in California, we have a larger footprint. I think that Applebee's does out there. Clearly it has an impact on us. We've been doing on average about 35% of our business in to-go across the nation. So that ticks up in California obviously when the dine-in goes down. But, in looking at our numbers, I mean just as a comparison, when we have a location that -- if you look at all of our restaurants that are open for dine-in, they're running a little less than 30% down in sales. If you look at restaurants where they're only doing off-premise, those restaurants average down about 57%. So, it clearly makes a difference over 20% difference if you don't have the dine-in.

And then Jake your final question, the $39,000 weekly volume per restaurant that I referenced as recent as last week that would be to your question, about 15% drop from a year ago average weekly restaurant volumes last year. Keep in mind for brand, it's $2.4 million, $2.5 million annual volume, would be about $46,000 weekly. So, we're getting close, and we're seeing sequential improvement each month.

But I think it's also important to note that those numbers are highly variable depending on market. So, we've got some folks that are pretty close to where they were in on occasion ahead. We've got some folks, particularly in California, that are obviously given the restrictions are struggling. So, those are averages and it's varying quite significantly across the board.

Yeah. I think Jake that's an important point. You could look at a state like California where you have a comp sales number of a 50 -- minus 50%. And you can have some other geographies that are positive comp sales. And we have -- we certainly have that right now of late.

Great. And would you be able to share on the Applebee's side much like Jay, just shared on the IHOP side. The percentage down for dine-in versus off-premise, I think we can kind of roughly do the math but if you could help us out that would be great.

The percentage down, look the delta between – I'll just frame it this way. The delta between total system performance in dining rooms would be about 200 to 300 basis points. In other words, if those dining rooms were open you'd see a 200 to 300 basis point lift in system comp sales.

Great. And then last question. It was really on the – you shared on the last call some breakeven estimates for sales declines at the store level. Have those changed now that you've had experience with dining rooms being open? Just if you can update us on kind of breakeven cash flow, sales levels and basically kind of what – I guess what that would mean for restaurant margins going forward?

Tom, why don't you help with that?

Yeah. Jake as Steve alluded to there is a tremendous amount of variability. So we did indicate more view on averages is applicable in a highly stressed environment also benefiting from the fee relief program that we provided in Q2. So at this point, you do have a range where – depending on where our franchisees are located. They're experiencing a variety of different cash flow situations and we are closely monitoring that. I will speak to our company operates portfolio, which we have obviously a lot of visibility. This is our North and South Carolina Applebee's. And so we've obviously experienced dramatic improvements in portfolio is performing in line with the entire Applebee's system. And there we anticipate from a four-wall profitability perspective to be EBITDA positive for the year, and so hopefully, that gives you a little bit of indication just as a data point.

Great. Thank you very much.

Yeah. And I think the point that Tom made that's important is, we are very closely working with our franchisees on their financial health, which obviously has been significantly enhanced by the PPP program. However, we're working very closely with the leadership groups as well as monitoring every single franchisee in terms of where they stand so that we know when people need help and individually we will work with them to help everybody survive.

Thank you.

Your next question comes from the line of Mr. Nick Setyan with Wedbush. Your line is open, sir.

Thanks for taking the questions. It's great to – obviously, it's great to see the trends here in July, and the cadence of the topline. Tom, just to address a couple of the bigger concerns out there relative to the Q2 closure rates and relative to the Q2 gross margins where are we headed in the near term? Can we safely assume that those gross margins in Q2 were as bad as it's going to get? And also just kind of address, what your thoughts are around unit closures for each brand?

Yeah. So, we haven't updated guidance. We suspended it as you know Nick. But let me give you some context into why some of these – normally, we wouldn't be able to provide some color on that. But the reason why it's a little tough is simply, because you had circumstances, for example, the instance of the IHOP franchisee that had some closures. And then we were able to get a good amount of them transferred to a new franchisee. And so we did have some closures that we deemed permanent during the quarter, but the predictability of that is going to be difficult to determine at this point. With respect to gross margins a lot of that is influenced obviously by our collections experience. And as I mentioned that the good news there is our collections are getting to be very strong coming out of the release program. So we believe the relief program had a good intended effect. The PPP program provided a lot of liquidity into the system. And now as Steve mentioned, we are monitoring our individual franchisees very closely.

One other comment, I've been in this business almost 40 years. I've never seen a quarter like this quarter. I sure hope we're not going to see anything else like this. So it's getting better and it's got to get better from here. So it's a remarkable period. I mean, I just have never seen anything like a quarter like this and it's just good to have it behind us and good as be moving forward with some momentum.

Yeah, absolutely fair enough. And then just on the marketing for both brands. Clearly, the Applebee's marketing has had some – has really worked. How are you thinking about the rest of the year? Are we back to pretty much a normalized cadence? Are there going to be any period short periods or long periods where you're going to go off again? Is menu innovation going to come back with the value focus? How are we thinking about all of those things?

Yeah. Let me – let both folks address their individual brands. But in general, our view is we're going to make sure that our marketing efforts are sufficient to the opportunity. And that we're on air when we need to be. There are some – obviously, as we have every year some planned gaps, but they're carefully planned so that we don't believe that they're going to cause drops in the momentum. And the interesting thing for Applebee's it had a lot of momentum going into this. And so now we want to obviously, recoup that. IHOP was doing okay but we are hoping to pick-up from that and they're showing that they're running neck and neck with the competition at this point. Applebee's looks like they're actually running a little ahead of the competition so obviously, we want to maintain that positioning. What you will see is we have significantly increased the level of digital. Because of the fact that a lot of the efforts that we're doing are about off-premise and we want to make sure that we're communicating to our 10 million or 11 million members between IHOP's program and Applebee's program about specials that we've got available and reasons to come either pick-up or come into the restaurant and dine. And so you'll see us shifting a little bit more towards the digital side as we've done and had some great success. And then obviously as we bring additional technology to bear where use your own device and a technology menu that allows us then to continue to grow our ability to communicate with customers. You're going to see us probably step up those digital efforts and then obviously we're going to continue to be on air with commercials that we think drive folks either to off-premise or into the restaurant. So Jay you want to talk a little bit about IHOP?

Yes. We just went back on the air on the 22 this month. And I would think for us without disclosing what we're planning on doing I think, the calendar of using marketing will look more similar to what we would typically do. We intentionally turned off our marketing for a long period of time to save that money for the more appropriate time to start marketing we think the appropriate time is now. I think the other thing we'll do is we've already pivoted behind the scenes a couple of times as to when we were going to start marketing and what we wanted to market, et cetera. And I think that we'll continue to do that the rest of the year. This is a very fluid situation still as you can see with them closing down dining rooms in California again. So we don't want to spend a ton of marketing dollars pushing just a get back into the restaurant message if those restaurants aren't going to be open for dine-in or they have too much of a capacity restriction. So we're going to be watching the situation closely. We do have the funds and we will be doing marketing. What we market, we will pivot as time goes by to think about what's the value play we want to do, what the innovation we want to talk about, what's the capacity in restaurants, how do you keep supporting the off-premise to-go message. We'll balance all of that and make good decisions through the balance of the year to market the right things.

And then Nick, on the Applebee's front we're pretty good at this. We know how to market effectively in this environment. We've demonstrated that. Our fund is healthy. That's really important. That was the benefit of taking that 90-day hiatus will continue market. Our objective is to maintain top of mind awareness and we'll have extraordinary sensitivity to the environment. That's everything from how our guests feel about dining out both from a dine-in perspective and an off-premise perspective to the variability across the country in terms of government restrictions. We can effectively drive demand as to the constraint on that demand. We will actively seek that out. And then to your final question there'll be a balance of value orientation and innovation probably less innovation to be quite frank in this environment given our reduced menu which has had some significant operational benefits. And then the final point that I would make is, the media landscape is going to be different. America needs its sports. And I'm hopeful that some of those currently restricted media vehicles become available. As a result, I anticipate that the media landscape generally speaking as we go into next year is going to have less demand. And for the first time in a long time an absence of inflation which is good news. And then you have the election variable, which will be interesting come November.

Thank you very much.

Your next question comes from the line of Mr. Jeffrey Bernstein from Barclays. Your line is open, sir.

Great. Thank you very much. Two questions. One it seemed like both brands you talked about independence and potential for significant store closures, I'm just wondering what you've seen already or what your expectation is in terms of the industry as a whole, or whether any particular brand is more or less vulnerable? Presumably that creates a market share opportunity for you. And it does raise the question because I think many people think of franchisees as "independent operators." So I'm just wondering whether you guys see yourself vulnerable to more closures in your system at either brand? And then I had one follow-up.

So, let me start and then I'll ask others to speak. So look you're seeing the same numbers that we're seeing where people are projecting upwards of 75% or higher of independents closing. So obviously there is going to be a lot of buildings available for conversion. And you had several brands that when pre-virus were struggling. So obviously -- and you've seen some of the numbers they're closing a lot of restaurants. We're, obviously, looking at this all very carefully. There are some restaurants that will probably close. A lot of those restaurants were marginal before they started. So it's -- this is sort of just hastened the potential loss of a couple more units. We are not viewing this as a major change to either of the systems, and obviously we're prepared to step in and assist where we think it makes sense with individual franchisees. We're also prepared to look at restaurants long-term that probably are on the margin anyway and say, okay, well do they have a long-term viability or not? Now is good a time as any to try to figure out a way out of those restaurants, provided we get replacements for them. So it's a combination of efforts that we think is mostly upside for us. And we think at the far end of this episode, I think what you're going to see is the companies that emerge with strong financial capabilities are going to be in a really good position for growth and that's the way that we're viewing it. Tom, you want to comment on what the brand guys talk?

Yeah. I think the one thing independents don't have and to your point on whether or not franchisees are viewed as independents. We view them as independent operators, obviously, but they're affiliated with a national brand with all of our resources. And I did mention we are bringing back resources as appropriate. We also have a very strong liquidity position and we are willing to step in. We did that in the past. We have our own company operated portfolio obviously Jeff. And so we have a number of levers that we can apply that true independents probably don't have at their disposal.

Yeah. I'd just say from the IHOP side. Keep in mind like I said we opened 13 restaurants this year at the beginning of the year. We have a strong desire for growth on the IHOP side and had a lot more restaurants that we're planning on opening this year that we allowed deferrals for franchisees. So we think our growth engine is going to get going again once this passes. But as Steve said, we have a long history of working with franchisees and trying to find replacement restaurants or finding new owners in some situations, because the reasons why restaurants closed down are varied, there is a lot of different reasons why those things happen. And we assess those situations and figure out is this restaurant viable with a little different structure with a new ownership group or not, or does it just need to be replaced with a new restaurant. So we assess all those things as we're making these decisions. I would expect, we will have more closures. How many though is -- it's just too many variables to even, kind of, think through what that might look like right now. And any time we get those situations, we're trying our best to save the restaurant through a different franchisee, or to not have a permanent closure. That's why we have temporary closures that we talk about, because we tend to get those restaurants back. And as you heard Tom say, we lost 49 restaurants in a bankruptcy deal and we're going to get probably 41 of those back here pretty soon.

And then Jeff this is John. The reason I'm bullish on Applebee's is the -- if you look at the categories, you look QSR and fast casual and casual dining, in particular the one category that is absolutely disproportionately reliant upon independent restaurants is casual dining. 90-plus percent of all restaurants in casual dining are independent, which means strong vibrant brands with scale who are well-positioned will benefit significantly. It would be the one category that stands out in terms of opportunity.

And to clarify, I think at the beginning of your comments Steve you mentioned something about -- you thought -- you hearing numbers of 75% of independents were potentially closing. I just want to make sure I heard that correctly.

Yeah. Yeah, those are the headlines that we've been seeing. I've seen numbers 75% to 85%. I don't know whether that's right or not. I've also seen the restaurant association saying, they think the total number for the industry could be one-third to 40% of losses and most of those being in the independent range. So I think the discussion around scale and brand awareness and the ability to do digital work and the technology we can bring is just out of reach for most independents and that's why you're seeing them bear the brunt of this. And so our expectation is -- there is no question we will close some restaurants, but we don't think the number is going to be a big number. And when people write articles about the industry being under terminal, they'll throw things in like that bankruptcy. And they say look IHOP's closed 49 restaurants. They don't come back and say but they reopened 41, which is pretty much the case as we've seen in a couple of these instances so far. So our expectation is we're going to keep most of our restaurants and we'll have some closures, but then we're going to have a lot of growth opportunity afterwards.

Understood. Thanks for the color.

Your next question comes from the line of Brett Levy from MKM Partners.

Thank you for taking my call. Hope you're all doing well. I guess, if we could just try to circle back on some of the questions that were asked. I'll try to ask them in a different way to see if I get a different answer. When you look out at your breakeven propositions for units that have dining rooms versus those that are off-premise only, what do you think the sales gap is? What kind of -- is it possible that the margins given the operational improvements you're making can actually expand beyond where they were, or are these incremental costs that you're introducing for greater off-premise and safety? Are those enough to overwhelm any of the recovery?

So that's a great question. So I'm going to have Tom weigh a little bit, on the margin. So, here's the way to think about it. We've got some incremental costs associated with PPE, making sure that, guests are safe associates are safe. But those have been offset and probably benefited from a more tightly grouped menu, with a focus on the things that are really moving. So one of the benefits of this is in both brands we have had extensive menus. And have been working with franchisees to try not to bring that number down. Obviously everybody feels their guests, like something different. So hence the proliferation of products on the menu, but this has allowed us to tighten the menu, in conjunction with the franchisees in a way that allows better execution in the kitchen. And also provides better cost management, as a result. So our view is coming out of this, we have the opportunity to maintain that off-premise. And return to comparable dining room levels, over a period of time. Your guest as to the recovery line is as good as mine at this point. Well, I think, we'll know a lot more this fall. But the opportunity on the upside is, if we gain back those restaurant sales. And we maintain the bulk of the off-premise that puts us in a better position from a revenue standpoint than before. And with a lower number of different items on the menu, a higher efficiency in the kitchen, we're probably going to be more profitable. Now that's notwithstanding, sort of food cost spikes that we're seeing whether it's in pork, or beef, or whatever. But those will presumably settle out as well. So the opportunity going forward for profitability in the restaurants is probably better than it was provided we return everybody back into the dining room. And so, the combination of those two we feel is potentially an upside in the long-term.

So Brett, let me give some additional data points here. So with respect to the incremental costs, we did ask both brands' operations teams to assess the onetime cost of reopening of the restaurants. So those are indeed cost of borne to enhance sanitation standards. And that averaged out to about $3,000 per restaurant. The ongoing costs add up to about approximately $1,000 per week. And so they're not insignificant. They are incremental to the restaurants. Now when you look at dining rooms that are open, versus that are in off-premise mode only, I'm going to apply this number to both brands, because it's about the same. There is 30-point sales lift if the dining rooms are available to be open. So again, if you look at our averages that we put out there with respect to comps for both brands that's, a blend of dining rooms are open, and dining rooms are closed. And if the dining rooms open you got a 30 percentage point lift. When we think about -- even those restaurants are open, let's keep in mind, they're not open 100%. So using our North and South Carolina restaurants as an example, they're subject to six-foot distancing or 50% restrictions. That's very typical of dining rooms that are open. So they're capacity constrained. And that puts a cap on some of the sales performance even in those restaurants that are open. For Applebee's in particular, there is a restriction on the late night operations or the bar, past certain hour. So again, we feel as things improve in the country. And some of these incremental -- it's not a digital function of dining room being open or not, we think there is some room for improvement. As even those restaurants with dining rooms open have additional restrictions lifted.

So I would just state from an IHOP standpoint. If you talk to our franchisees they will tell you there are puts and takes on this right? In some ways, how to reduce menu probably reduces some food cost you get more efficient with what you're managing et cetera. And some franchisees have seen less prep labor, because they're not making as many things that we were doing before. But the takes, the amount of cost for the ongoing sanitizer, gloves, masks et cetera are probably outweighing that right now. So if you talk to the franchisees, they would probably tell you, none enough puts too many takes right now. I think what the key things Steve said though was, we have a huge top line opportunity coming out of this. Because we have taught people how to use this for to-go and to do off-premise. And as Steve said, we can maintain, even half of the increase we've gotten on that. And get our dining rooms back with full capacity, our sales are up. And that flow through and that leverage is going to lead to higher profit. So there is a big opportunity for us. But if you ask the franchisees right now while they're still down 35% in sales, they will tell you it's not working for them right now. We got to get the top line back.

Nothing to add at my end, Brett.

And if you think about the franchise system just in general, if you could bucket it like what percentage of the system do you think is healthy versus of those that are still extremely or significantly challenged and might need some additional help either handholding or financially? And then what kind of bucket of your franchisees are out there saying you know what we are interested in buying more. We are interested in building more. We want to get back to the growth algorithm.

Yes. So obviously there are variances in the health of the franchisees. I will tell you it existed pre-virus. And so the virus may have made some situations a little more intense than before that. I will tell you that because all of the franchisees or the bulk -- vast majority were able to take advantage of the PPP program. That's clearly helped. And then we've got individual franchisees that we're working with who are going to need some assistance from a short-term basis to weather the storm and we plan on doing that individually with them as opposed to what we've done at when the virus started on a programmatic base system. And so that -- which is what we've always done by the way. And so our view is franchisees in general are in pretty good position but it also depends on the recovery. And so if you're telling me that we're going to get a relatively rapid bounce back this fall and into the end of next year and end of this year and then next year looks pretty normal and we're in pretty good shape. If the -- if it's an extended period of recovery then individual franchisees by franchisees or some of them are going to need some assistance and some of them will end up figuring out what the best long-term solution is for those restaurants. So it is a kind of week-by-week scenario of -- look if you look at our restaurants we are cash flowing in Northern South Carolina. We're not making a lot of money but we're cash flow. And so -- and that's not -- we've got a lot of franchisees in that position. We also got some franchisees that are in tougher markets that are not doing as well and California is a great example of -- with dining rooms closed, nobody's going to make any money. So the question is how long does that last? And do they have the sufficient funds to withstand that period of time before they reopen and then recover? And then we're going to assist individually with franchisees to help them either figure out long-term positioning of their assets or to maintain -- to sustain into a recovery period.

Thank you very much.

Your last question comes from the line of Mr. Brian Vaccaro from Raymond James. Your line is open.

Hey, yes. Thanks for taking questions. So back to the last one. You were just talking about on franchisee health. And in the past I guess a few years ago probably did a nice job disclosing sort of how many franchisees you were working with, the nine and the three that obviously healed from there. But would you be willing to maybe just frame a little bit more how many franchisees or what percent of units at each brand are operated by franchisees that are on your radar of receiving additional relief for help?

Yes. Well and the reason we're not doing that is because it's a very different situation. So the answer is, there's a handful that we may or may not begin talking with. But it's not -- it's nothing like the previous downturn for the Applebee's franchisees. There are -- obviously everybody's hurting and everybody's looking for profitability. And so -- but we don't have a -- there is not a -- one of the reasons we're doing a dramatically stepped up cooperative effort with the franchisees is to take a deep look into the sustainability longer term, if this thing runs at this level through the end of the year and next year starts out slow that changed the picture dramatically. But we're not -- there is not a -- there is no major program underway at this point.

And Brian the -- I guess the other point that I'd make is an obvious one. But the one thing that we're working hard to do is return each business the full revenue as quickly as possible considering market conditions. So Q3 is important. Q3 is going to give us some visibility to that rate of return towards positive sales.

Yes. And I think the two you've heard about were problems pre-virus they had nothing to do with the virus and those both turned out pretty well for us.

Yes. Yes. Understood. Okay. And I guess just to be clear on the status of franchisee relief more recently as the business has recovered are essentially all franchisees now paying royalties and advertising fees in the case of IHOP rental payments? And if not what percent of each brand are still receiving some level of deferrals?

Brian so for all intents and purposes, we're back to kind of a normative rate of collections on both brands. And with respect to IHOP, actually there were many of our franchisees that you saw the numbers they were struggling. Having said that, one of the conditions of PPP was that the money was used to pay, not only employees but also rent. And so we had a good rate of payment on the rents as well after the deferral period.

Okay. All right. And then I wanted to ask on the Applebee's side back to some of the operational changes that were made. In terms of streamlining the menu, could you help frame what percent of the items you've removed? And how do you plan to manage adding back items to the menu? And where could that land ultimately compared to the historical menu?

Hey, Brian, that's a good question. This is John. The proliferation of the menu in any mature brand is something that has taken place over a couple of decades. So we've taken about one-third directionally of our menu items off the menu. It will stay off that we have focused on items that are in high demand, high velocity, low complexity and we've removed -- the one-third that we've removed represent probably 10% of dollar volume, but we easily move guests to like items. Our franchisees are very enthusiastic about that. And in terms of adding items back, I don't anticipate additional proliferation will be smart and strategic. If we decide to add items, we're going to take other items off. And so that discipline has been in place for a while here. The pandemic has accelerated our movement to a simplified operation which has guest benefits and financial benefits.

Yes. This is Jay. On the IHOP side, we did very similar thing. We cut the menu by a percentage and we intend to leave most of that off as well. We think there'll be some items that may come back and more importantly, we leave ourself a little bit of space for some new innovation as time goes by. But it's not going to get back to the level that it was.

Okay. And then also on the operational side, could you provide more color on the measures that franchisees have taken to expand capacity during COVID, whether it be expanded outdoor seating or adding plastic barriers in the restaurants to optimize booth seating? Just kind of frame or quantify how important those factors have been?

Hey, Brian, John here. We have 30 partners at Applebee's. They're naturally entrepreneurial. They've been successful. And what we see both -- and of course this assumes they are permitted to have outdoor dining, which has its own complexity, but significant creativity around that. And then the -- whether it's a barrier or anything that can be introduced inside of a restaurant that allows additional capacity there's been a lot of creativity there around flexiglass items that can separate adjacent booths and eliminate the need for 6-foot distancing. Those tend to be branded. They tend to be high quality. As Tom referenced cost. Some of that is initial kind of out-of-pocket one-time cost that won't be recurring, but allows these guys to maximize their capacity in the face of constraints. All good. I mean there is a whole lot of creativity taking place right now on a daily basis.

Yes. On the IHOP side, we're doing very similar things. And this is where it's great to be in a franchise system, because franchisees are much more entrepreneurial. That is where they are similar to independent. When their survivals at stake they find creative ways to solve problems. And they've done some very interesting things. Then what we do is when we get the things that they have done locally oftentimes we'll share those as best practices out to the system. In fact, we do regular town hall calls with our franchisees. We actually had our architect on the call with them on one of our recent calls to walk them through how to execute this if your local municipalities will allow it and what are the steps to do it. What -- how to make it look and what are the specs to do that. So yes, it's been very, very successful what are they planning.

All right. Thank you. I'll pass it on.

Thanks, Brian. Thank you. So just for the question about sort of the overall industry, there is a National Restaurant Association statement out that says the restaurants have lost more revenues and jobs than any other industry. And they estimate that in June for the first three months of the pandemic, it was $120 billion in lost revenue, which is why we're working with the National Restaurant Association, International Franchise Association, National Retail Federation for more assistance for the industry and our franchisees. And then according to the Restaurant Coalition, the Independent Restaurant Coalition, they were the ones who put out the number that 85% of independent restaurants may go out of business by the end of 2020. So sobering numbers. However, one person's crisis is another person's opportunity. And our view is we're going to emerge from this thing with a lot of strength and capital and that's going to put us in a position to resume a significant growth trajectory for the company. And we are excited about seeing that momentum build and we get a recovery and full opening of all the restaurants and then take the lessons learned and have higher revenues and higher profitability as a result. It looks like a long road to that at this point, but there is a road and a vision to get there over time. So with that, I just want to close say thank you for time. I hope everyone is staying safe and healthy. This is our restaurants. We do a good job of creating a safe healthy environment with great food. So thank you again for your time and we look forward to speaking with you next quarter.

This concludes today's conference call. Thank you everyone for joining. You may now disconnect. Have a great day.