Hello and welcome to the Fourth Quarter 2020 Dine Brands Global Earnings Conference Call. My name is Grace, and I will be your operator for today's call. [Operator instructions] Please note that this conference call is being recorded. I will now turn the call over to Ken Diptee, Executive Director of Investor Relations. Sir, you may begin.

Good morning, and welcome to Dine Brands' fourth quarter and fiscal 2020 conference call. I'm joined by John Peyton, CEO; Allison Hall, Interim CFO and Controller Tom Song, CFO; Jay Johns, President of IHOP; and John Cywinski, President of Applebee's. Before I turn the call over to John, please remember our safe harbor regarding forward-looking information. During the call, management may discuss information that is forward-looking and involves known and unknown risks, uncertainties and other factors, which may cause the actual results is 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 assume 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 John.

Thanks Ken. Good morning, everyone. And thanks for joining us. I'll start by saying it's an honor for me to join Dine Brands. I believe in Dine Brands because I believe in restaurants, restaurants are essential to strong communities and human connection. And people appreciate that now more than ever before. I believe we're on the cusp of a restaurant renaissance. And as we enter what we expect to be the beginning of the end of the pandemic, all restaurants face a common challenge. And that's the eating out in America has changed. Those who win the new era of restaurants are those who remained resilient and those who invested in new menu and service innovations and new technology during 2020. And that's the story of Dine Brands with solid fundamentals, two category main iconic brands, and certainly the most talented team members and franchisees in the industry. Let me pause and tell you a bit about my story. As a teen I worked at my parent's restaurant, it was called the Southern Omelet Station in West Philadelphia. And I was certainly humbled and stunned by the almost 24x7 demands required of my parents. After college I went on to work as a consultant for PwC. I then was at Starwood Hotels, and most recently at Realogy. I joined Dine because I believe in the power and the lure of strong brands. 20 years ago, a mentor of mine who was a marketing wizard taught me that brands win when they're different, better and special, and our brands are truly different, better and special. I have for example is a pancake obsessed breakfast innovator that makes the most important meal of the day, also the most fun. And Applebee's embodies what it means to be all American and locally relevant.…

Thank you, John. Good morning, everyone. I'll begin with a business update. Then review our results for the fourth quarter, and the full year. Lastly, I'll discuss our financial performance guidance for 2021. During a very challenging year, we took steps to maintain our financial flexibility, including drawing down $220 million in March 2020 from our revolving credit facility, all which remain outstanding as of December 31st. As John just mentioned, we plan to repay the $220 million during the month of March. Due to this proactive measure we continue to have very strong liquidity. We ended 2020 with total cash and cash equivalents of $456 million, which includes restricted cash of $72.7 million, excluding the $220 million drawn from our revolver, cash on the balance sheet was $64 million higher at the end of 2020, compared to a year-end 2019. The increase was primarily due to the temporary suspension of both our quarterly cash dividends and our share repurchase program. These steps were taken a response to COVID-19 pandemic and the need to maintain financial flexibility. Additionally, we maintain tight G&A management during the year of austerity, and were able to lower compensation costs following the difficult decision to furlough approximately one third of our corporate staff for several months during 2012. Turning to our financial results, I'll begin with the notable changes on our income statement. For the fourth quarter adjusted EPS was $0.39, compared to $1 78 for the same quarter of 2019. For 2020, adjusted EPS was $1.79 compared to $6.95 in 2019. The year-over-year decreases due to a significant decline in customer traffic, resulting from governmental capacity restrictions on dining and operation. This led to declines in domestic comp sales at both brands and a decrease in number of Applebee's and IHOP effective restaurants and…

Thanks Allison and good morning. Good afternoon, everyone. I'm very proud of what this Applebee's team accomplished in 2020 and remain extremely optimistic about our business prospects here in 2021. In partnership with our franchisees, we fundamentally altered our business model to adapt to this new environment. Applebee's comp sales progressed from minus 49.4% in Q2 to minus 13.3% in Q3 to minus 1.9% in the month of October, when we last spoke. Almost immediately thereafter, the country experienced a rather abrupt resurgence of COVID, directly impacting our Q4 trajectory. As a result in November comp sales were minus 15.0%, while December came in at minus 30.1%. Now the good news is that business is now improving its comp sales for January in the first three weeks of February combined, were minus 18.1%, rolling over a very strong 3.3% increase from the same timeframe last year. Additionally, given COVID related restrictions, we scaled back our media spending in December, January and February. It's also important to note that not all casual dining brands are impacted equally by these restrictions given each brands geographic distribution. Applebee's has a disproportionately heavy penetration of its restaurants in the Northeast and Midwest two geographies, obviously hardest hit by dining restrictions. While reflected in these recent results, this will ultimately and disproportionately benefit us, as restrictions are eased over the coming months. For context at the end of December 412 of our dining rooms were closed due to government-imposed mandates. Thankfully, the landscape has changed dramatically over the past month in virtually all of our 1,600 dining rooms are now open for business. In many respects, our current operating environment feels very similar to late summer of last year. If you recall, when we saw Applebee's sales momentum accelerate as restrictions were eased, including our…

Thank you, John. Good morning, everyone. We are very optimistic about the road ahead for IHOP for several reasons. First, a quarterly comp sales improved meaningfully from a decline of 59 1% for the second quarter to decline of 13.1% for the fourth quarter, reflecting a net increase of 29 percentage points since the pandemic began. Second, the brand is well positioned to benefit from pent-up demand when restrictions on dining capacity are eased, and we have a strategy in place to capture it. Lastly, our development pipeline remains strong and new opportunities are being pursued. As we close out in the fourth quarter, IHOP's comp sales declined 30.1% which is on par with a family dining category. Our performance, especially the final six weeks was adversely impacted by the resurgence in Coronavirus cases. We were particularly impacted in California and Texas, which collectively comprise approximately 25% of our domestic restaurants. Our result for January 2021 improves to minus 26.8% representing a gain of 10 percentage points from December. February's comp sales through weekend in February 21 were down 27.6%. For the same period, our sales mix consisted of 66% dine-in, 16.9% To-Go and 17.1% delivery. As we continue to navigate the ever-changing environment, we have four strategies to help the brand drive growth. Number one, focusing on our PM Day part number two, value, number three maintaining our gains in off-premise sales and number four development growths. To address our first and second strategies of PM Day part and value, we want IHOP happy hour on September 28, which offers our guests a wide array of value options during the afternoon and evening hours or later depending on the location. We believe this new value platform will not only play an important part in strengthening and expanding our PM…

Thanks Jay. We have a tremendous team. And I want to thank Allison and John and Jay. It's truly because of their leadership, particularly during the pandemic that Dine and its brands are poised to enjoy significant upside potential in 2021 and beyond. Understanding, our meaningful change in performance trajectory will not happen immediately. But I'm confident in our ability to restore sustainable same-restaurant sales momentum in the second half of 2021. As more people are vaccinated and guests who are eager to dine out returned to our restaurant. I have absolute faith that our franchisees and our talented team members will lead us into a new restaurant renaissance. Our strong fundamentals remain intact. We're positioning Dine for long-term growth, and continuing to evolve with a gift centric, data driven organization. And so with that, we're pleased to take your questions. Thank you.

[Operator Instructions] The first question comes from the line of Jake Bartlett from Truist Securities.

Great, thanks for taking the question. My first is really on the regional performance. And I understand there's a lot going on with weather and restrictions being tightened. But can you give us a sense of how stores performed in the markets that have had the least restrictions when thinking of markets like Florida? In terms of how their sales - how the indoor dining has been recovering? And then what's been happening with the off-premise mix in markets like that.

Jake, this is John Cywinski. It's a good question. I won't quantify what we see. But suffice it to say those geographies with very few restrictions perform well, you see a not surprisingly a larger percentage mix than the national average for dine-in. And he may in fact see the inverse of what we saw in our most restricted geographies where two thirds of our business was off-premise and a third on-premise. In those least Restrictive geographies, we see the inverse of that. And we'd like the revenue results that we see. And we're anxious to get the full national brand back to that point. We have significant variability, as across the country, geographically, and in some of those geographies that you reference are benchmark geographies for us, they paint a picture as to what's possible. It's very favorable.

Hey, Jake, this is Jay Johns at IHOP. I would say - to most everything that John said the only other thing that I might add is that you asked about To-Go business and how that holds up as well. And I think there's an absolute direct correlation between openings up and not having restrictions and the performance of those restaurants, it's logical, it's factual. But I do think that To-Go business has held up really well even as restaurants have opened up or maintaining a lot of that To-Go business, most of that To-Go business hasn't moved forward. So clearly one of the keys versus just as these areas open up, we're going to do a better job.

Great. That's really helpful and a question on John on the Applebee's, you made the comment that last week's average weekly sales were the strongest since the COVID crisis began. Is that to imply that same store sales were actually were positive for Applebee's last week?

Jake, it won't. Again, I'll resist quantifying that. But I'll make two points. Number one, the last week data that I referenced is not in the data that was disclosed in our release, which is only through the first three weeks of February. Suffice it to say it was a significant trajectory shift in a very favorable fashion, from what we saw earlier in February. Make sense?

It does. And then my last question here really on the closures at IHOP. I just want to clarify when you mentioned the 100 stores that were possible, that you were looking at. Was that just a comment on the domestic side, I noticed that this fair amount of international closures this quarter, but less than I expected on the domestic side, which is great. But wanted to just to clarify that and then two just to clarify that the closures on the kind of the majority of closures you think are ended, I think you would use the word concluded in terms of kind of assessing those stores. So should we expect elevated closures bleeding into the 2021? Or has this system essentially kind of been cleaned up already? And now we're kind of set for some symmetrical net growth?

Well, I think to begin with your question about what was the 100 referring to, that was referring to potentially domestically up to 100. And what I mean by that program; that was a special program that we had done this research on these restaurants and work with franchisees on those particular locations. And that program has come to a close. Now as a regular course of business there's always going to be other closures et cetera. But as far as exit the program that's over at 41.

Okay. And is that program involving kind of lifting any penalties for closing? And was there any kind of promotion of trying to clean up the system.

Well, obviously, we work with the franchisees too, together on this too, in a way to help their position for the rest of their portfolios in many cases, so we work directly with the franchisees on that and on how we work those out of the system. But like I said that program was a unique thing that we put together. I'm not going to share specific details on what fees were et cetera. But that program is over, we're back to kind of running the business with a normal review of any kind of requests franchisees have at this point.

Your next question comes from the Nick Setyan from Wedbush Securities.

Hey, thank you. Is the marketing now back and then also, on the virtual brands, is there a like a target weekly sales number internally that you guys or at least just directionally, you guys are willing to share especially since there is a peer benchmark out there?

Hey, Nick, this John Cywinski. On the marketing front, we love our position will be as you look at the year, we're a bit like in Q1 quite candidly, as I mentioned, we did pull back on media spending in January and February, which means Q2 Q3 to Q4 are going to look pretty favorable when you assess the full year. Virtual brand, your question on is there a threshold in any new investment and keep in mind this is very capital light. It's a fairly easy investment. Our operators execute well. We do expect a minimum threshold of incremental sales performance. You could call that directionally a percentage point but we believe there's significant upside beyond that, but it's just too early Nick to begin to frame that we only have 10 plus days in market and what I will tell you is we see steady improvement sequentially from one day to the next.

Got it. And then the question on margins, the Applebee's gross margin, I think it's 102.6 for the quarter, is that just a reflection of the recovery of some of the deferrals. And then on then IHOP is 7.3, any kind of an outlook there sort of both for 2021, at least directionally and what's really going on there with the gross margin and IHOP.

So, this is Allison. The gross profit margin on Applebee's you'll see there's an increase in bad debt year-over-year but we're not giving any guidance related to 2020 other than G&A - sorry 2021 other than G&A and CapEx.

We have questions from Brian Vaccaro from Raymond James.

Hi, thank you and good afternoon. I had a couple questions on the quarter to date trends. You mentioned for each brand. And I appreciate the comments on average weekly sales and the improvement you're seeing there. I think he said Applebee's high up 6% and I wasn't sure if that's compared to kind of the reported AWS in the fourth quarter, or were you comparing that to December? So could you just so we're on the same page? Could you disclose kind of average weekly sales for each brand in that quarter-to-date, period?

This is Jay in IHOP. Are you talking about in the fourth quarter, you talking about the what -

No. In the quarter-to-date period. You improved 6% but what does that mean? Is that versus December or is that versus the around 27 you did in the fourth quarter, just trying to get sort of a current average weekly sales check basically, for both brands?

Well, for IHOP we have actually, I think my comment was we had improved 10 percentage points from December into January. So clearly, when things were really shut down the last six weeks of Q4, we were struggling. We have come back nicely in January, February. And if you look at the trends on our sales going all the way back to last year, we were making great progress and trends were going great until the last six weeks of the year where we took a little bit of a dive and then we're coming back slowly out of that. And the correlation that I see is directly related to the closures is as cities are starting to open up now, I'm seeing that that's going to trend the right direction. But I don't want to give any real specific numbers on that in quarter right now.

Hey, Brian. This is John C, the Applebee's front way as I referenced, we were down 30%, 30.1%, I believe, for December, and at about 12 percentage points favorable move down 18% in the first seven weeks of the quarter, very similar January and the early part of February. Keep in mind some pretty meaningful weather impact in a couple of those February weeks, and then we are just now as I referenced beginning to reengage with meaningful national marketing, which we believe has - will have a significant impact.

Hey, Brian. This is John Peyton. Just to make sure I answered the question and we're answering it accurately. So for those first seven weeks of January and February, we're comparing number one to same week prior year. And then each of the weeks in January, February is improving relative to the last. Does that make sense?

Yes, no, that's helpful. I appreciate that. And also, I just wanted to ask you in terms of given how important having dining rooms open is to the overall sales. And I appreciate it. I think it was 80% of Applebee's and 70% at the end of December. But what does that look like today? In terms of the number of units I guess you said 99% at Applebee's, but what does that look like in IHOP today, percent dining rooms that are open.

We've only got about 33 restaurants that are not open for some form of business right now. And we've got about 200 that may still be doing mostly To-Go or patios only right now we've got a heavy presence in California obviously. So there's a lot of our restaurants and still are impacted.

And Brian on the Applebee's front, we've got about 10 dining rooms currently closed, half those in California half in Oregon. Expect them to be open very soon, which is great news.

Yes, that's great. And I appreciate you mentioned and shifting gears a little bit to the development side. Appreciate the update on the IHOP side, I guess assuming no major setbacks in the broader COVID recovery narrative, will you expect to return to net unit growth at IHOP in '21? Or perhaps that could take into '22? And then what's a reasonable expectation on closures at Applebee's this year?

Yes, on the IHOP, this is Jay. On the IHOP, we're just not giving any guidance yet on exactly how this is going to play out. We clearly have franchisees that are interested in developing, but they're still in the middle of COVID right now, they're still in - so that the rate at which that comes back, we're just going to have to wait and see how that plays out.

And, Brian, on your question regarding Applebee's, we certainly haven't forecasted, it's difficult in this environment, other than to say, as John referenced, franchisee collections on royalty and advertising are superior. And we're very optimistic about this 1,600 unit portfolio as you know we did. We've cleaned up much of this kind of the non-viable assets over time over the last three to four years. But we'll resist framing any expectation or number at this point in time?

All right, fair enough. And then just last one for me, I wanted to ask on Cosmic Wings. Could you highlight some of the key differences on Cosmic Wings versus neighborhood wings? Or perhaps comment on your approach to marketing the concept or other differences that are worth mentioning there? And so if I missed it, but is there an expected timeline on when it might be offered from all 1,600 domestic locations?

Brian, I'm glad we piloted Neighborhood Wings last year, as you know, we did so and in several 100 restaurants what we learned was very clear. The brand itself, the virtual brand needs to be differentiated and separated in some respects in terms of positioning from Applebee's. The menu itself needs to be proprietary and perhaps buzz worthy. Our teams need to be able to execute that brand well and the naming was important. We along with the targeting, we had a very specific demographic here a bit more youthful, a bit of a male skew, Cheetos lovers, delivery lovers, wings lovers. And given that demographic profile, the naming and the positioning felt quite naturally to us. But you'll notice we did not incorporate the word or the name Applebee's in that, so Cosmic Wings, we validated that with consumers with that demo in particular, it resonated exceptionally well. And your question on timeframe again, Brian, what was that question?

Yes, just thinking I think you said it COSMIC WINGS is currently offered from about I think it was 1,250 Applebee's units and just wondering when it'll be - if and when it will be available across the system domestically.

I would expect so 1250 is with our partnership with Uber Eats and where they have a strong presence, obviously, we will have a strong presence. Could this brand be expanded in terms of the distribution channels? Yes. And I'll resist how that may unfold, but you can draw your own conclusions, Brian, it's been very well received. And so I would anticipate exploring all options moving forward after the first couple of months.

Your next question comes from the line of Todd Brooks from C.L. King and Associates.

Hey, thanks for taking my question. First, if we could talk maybe weather and storm impact we had that couple of tough weeks and actually still some tough weeks for Texas and a couple of the other states down south but especially looking at the weekly IHOP sales, they've been remarkably consistent across the first seven weeks and it's just a bit of a surprise to me given it looks like almost a quarter of the stores are in that kind of Texas, Georgia, Virginia, North Carolina belt so if we could talk maybe about the IHOP performance and lost store days of both brands due to the winter weather that we've had down south.

Well, I think on the IHOP side, there's interesting drivers on our side of what as we talked about before, capacity is probably the absolute most important thing. Obviously, we get weather like that close restaurants down, we had about 200 restaurants across our system that were closed for multiple days because of weather impact as it spread across the country. So clearly, we have some impact on it. I don't think we've teased out all of the information as far as the total impact, we could say is only related to that. Holidays are a big impact for us as well. So when you look at the first quarter, so far, it's been a lot of different holidays, a lot of different weeks that are a little odd compared to just a regular run rate week. As soon as we started to gets the momentum going one direction than the weather hit. This past week, we were rolling over National Pancake Day from last year, which we cancelled this year and have moved to a spread out through April events. So there are a lot of things that just don't sync up for a while. So you may be seeing some odd numbers just because there's a lot going on in this data that is somewhat inconsistent when you look at it. I think the general trend I would say, though, is if you look at take a step back and look at the big picture, we are trending the right direction, we keep having these little hiccups that happen on given weeks, but I feel that this is about right to make a nice move forward for us as the capacity restrictions are lifted.

And Todd on the Applebee's front, had it not been for weather we would have seen sequential improvement from January to the first three weeks of February. I won't quantify it. It's a little less than 100 basis points of impact.

Okay, great. That's helpful. Thanks. And then can we talk going back national advertising wise, John, I think you said Applebee's back on in the past week or so. And Jay, I don't think you commented if IHOP is back on yet or not. But this has been such a positive driver for the same store sales recovery in fiscal 2020 in the second half of the year. Can we talk about maybe share a voice that's out there now that you're going back into national advertising and then anticipated or hope for lifts as you start to leg into especially those bigger weights, when you get into Q2 through Q4.

Hey, Todd. This is Jay. On the marketing front, we never went completely dark, we were always doing some kind of marketing via digital or one-to-one, we cut back some on the what you would see as the big larger national TV campaigns et cetera. So just like Applebee's, we have spread our budget a little differently this year, just based on capacities et cetera. And we are very confident we have a great plan for the year, both with innovation and marketing and how we're going to come to market with things. So I feel very comfortable, we've got a really good plan, we should have plenty of money. As long as the bottom doesn't fall out of this thing again, which was some kind of COVID resurgence, it's really bad, and I think we're going to have a nice portfolio of things to promote. And we're going to have a lot of money to do that when we get into the second, third, fourth quarters.

And Todd on the Applebee's side, you referenced that we have something this year that we didn't have last year, we know how the brand has performed as restrictions ease, and guests are more willing to dine out. So that trajectory you referenced last year, May through September, we move from minus 50% to our first positive week of sales. And we really had an exceptional team and they understand how to message both rationally and emotionally. And that pacing and sequencing of messaging with our guests, as we evolve out of this pandemic is something where they really do have a finger on the pulse so to speak. And you're seeing the start of that right now. And I anticipate it will unfold and perhaps that trajectory will look similar, if not better than what we saw over a five-month timeframe last year.

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

Great, thanks. And good morning to you guys. Good afternoon from us. If you could talk a little bit more on how you're thinking about the capital allocation plans. Obviously, debt paid down is going to be the biggest and the most immediate but when you look at not just to the shareholders, but what else can you do in terms of investment in the infrastructure, and also franchisee support. And then John Peyton, I have a question for you.

So in terms of the capital allocation strategy, obviously, we wanted to pay down the $220 million that we borrow in March, which we're going to do this month. We really can't see at this point, because the industry conditions are very variable at this time. We definitely want to continue to look at our dividend. Our repurchase of shares, investment both organically and none organically. But it's really difficult to I believe anything data at this point, just do the industry conditions.

On the on the M&A front? Obviously, you are not looking for names, but what kind of criteria make your wish list if you were To-Go outside of your own system?

Sure, Brett. It's John, I'll take that. And I'll just tack a little bit onto the last thing that that Allison mentioned, as well. when it comes to capital, there's, obviously there's the thing about dividends and shareholder, shareholder return and buyback, but we're also looking at investments in technology in virtual brands based upon our learnings from Cosmic Wings, possibly exploring the acquisition of a third brand. So we're looking at all of that, as we look toward 2022 and beyond. When it comes to M&A, we're - when we do think about it, we'll be looking at a tuck-in acquisition, certainly substantial enough that it's accretive but with the potential to grow to the size of our current brands or close to it, we're certainly interested in a high growth category that is complimentary to the two segments that we're in, and not competitive with our existing brands.

And then, John, just you talked about all the things that you viewed as positive, as you join in to the Dine story. And now excluding capacity and restrictions, because those are obviously challenges outside of your concerns. Where do you see the greatest opportunities for low hanging fruit? And what do you still see as the largest challenges and impediments to not just recovery but to meaningfully take share from your peers? Thanks.

Sure, thank you. So in the short term, the biggest opportunity is vaccine, vaccine, vaccine. And we are optimistic that that people all of us are anxious to get out see other people, hug other people and reestablish a sense of connection and community and restaurants is the place to do that. Over the long term, we are focused on and we've been investing throughout 2020 in the digital technology that necessary to facilitate off-premise dining. We think that the growth in off-premise is incremental for us. We don't think - we think it's going to settle somewhere above where we were pre-pandemic. We think it's introduced new consumers to our brands. And we think we're now in the consideration set for takeout and delivery in a way that we weren't before, because we demonstrate our ability to deliver. So one of the best for the future is certainly off-premise dining, facilitated by our investment in digital and things like that.

Thank you. And that is the time that we have for questions today. I would know like to turn the conference back to Mr. John Peyton for any closing remarks.

Just want to say thank you to all of you for your questions. For Allison and me, this is our first time speaking with all of you, and we enjoyed it. I'm looking forward to the conversations throughout the day. And to our veterans, John and Jay, thanks as well for telling the story of your brand, and answering the question so well. And we appreciate all of your interest and investment in our company and look forward to talking to you throughout the day. Thanks very much.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you all for joining. You may now all disconnect.