Ladies and gentlemen, thank you for standing by. Welcome to the Q2 2021 Dine Brands Global Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. I would now like to turn the call over to your host, Mr. Ken Diptee. You may begin.

Good morning, and welcome to Dine Brands second quarter 2021 conference call. I'm joined by John Peyton, CEO; Vance Chang, 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 to be different than those expressed or implied. Please evaluate the forward-looking information in the context of these factors, which are detailed in today's press release and 10-Q filings. 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' website. With that, I'll turn the call over to John.

Good morning, Ken. Good morning, everyone. Thanks for joining us today. We're pleased with our strong Q2 results, and I'm excited for you to hear from Vance Chang, our talented new CFO. I'll start by defining this moment in time. The restaurant at this time is clearly driving our rebounded Dine Brands and Americans are returning to indoor dining. And now that Americans are back, we're pivoting from triage to acceleration. And what I mean by that is we're accelerating the innovation and the reinvention of the guest experience. Today, I'm thrilled to report that our investments in innovation and the resiliency of our franchisees and team members is clearly paying off. During Q2, both Applebee's and IHOP posted significant improvements in comp sales. And this is important both brands are fundamentally improved businesses due to off-premise sales. And I'm seeing that for myself, I've been on the road, I've now met with 61 franchisees and toward our restaurants in Ohio, New York City, Connecticut, New Jersey, Vegas and Atlanta, and each conversation with a franchisee or a team member, or a restaurant manager reinforces for me, our unique advantages that ensure our business is built to win. First, we've got two iconic brands that thrive based on guest connection. Collectively Applebee's and IHOP has been serving communities for more than a 100 years. Both brands are beating their concept because our guests have long-lasting emotional connections that endure even during these tough times. Second, our guest satisfaction is strong and that's impressive because many of our restaurants are operating with less labor than they're used to. And finally, we worked side-by-side with experienced talented franchisees who are doing extraordinary things, and as a result, are emerging from the pandemic with stable financial fundamentals. Our brand posted meaningful improvements during…

Thank you, John, for the warm introduction, and good morning, everyone. I'm excited to be here today and look forward to working with all of you in the months and years ahead. It's great to be with everyone on my first earnings call as CFO of Dine. During my first month at the company, I've been meeting with team members and franchisees and reviewing plans. The onboarding process was instrumental and reinforced my confidence in the business in our direction. I spent the past 20 years of my career, advising, investing and building high-growth consumer healthcare companies, providing strategic leadership during times of meaningful change. While we all continue to emerge from the pandemic, we know there are very real challenges still ahead of us. And I recognize the obligation we have with leaders within our industry. For me, it's a humbling responsibility as we work together to maximize the full potential of the enterprise and to deliver a profitable growth for all of our stakeholders, including our shareholders, franchisees, and team members. John just highlighted some of our baseline results. Let me spend now a few minutes talking about the financials. I'll begin my remarks with a review of our cash position. The continuing improvement in our business has helped us maintain our strong cash position. We finished the second quarter with a total unrestricted cash of $259.5 million. This is a 44% increase over the first quarter's unrestricted cash balance of $179.6 million. Turning to our operating results, franchise revenues for the second quarter were $167 million compared to $67.9 million for the same quarter of 2020. Turning to the company restaurant segment, sales for the second quarter were $38.2 million compared to $16.8 million for the second quarter of 2020. Rental segment revenue for the second quarter…

Great job, Vance, and welcome to the team. Your timing is good. I'm very pleased to report the Q2 was an exceptional quarter for the Applebee's brand. When compared with our 2019 baseline, April, May and June comp sales were positive of 11.7%, positive 8.1% and positive 11.4% respectively. This combined plus 10.5% resolved marks the best quarterly sales performance throughout the 14-year history of Dine Brands. Of course, that excludes the anomaly of the 2021 versus 2020 pandemic year. Restaurant sales delivered approximately $53,000 per week throughout the quarter. To put this in proper perspective, the months of March, April, May, and June in sequence ranked as Applebee's four highest weekly sales month under Dine's ownership. I'm particularly proud of our franchisee partners and the entire Applebee's team as they continue to showcase their restaurant-level excellence within an obviously challenging environment. According to Black Box Intelligence, Applebee's has now outperformed the casual dining category on comp sales for 25 consecutive weeks by an average of 596 basis points. As expected with guests returning to our dining rooms, we experienced a natural shift from off-premise sales to dine-in sales in Q2. To better understand this trajectory dine-in mix moved from 67% in April to 72% in June with 16% car side to-go and 12% delivery in June reflecting this gradual migration to a normalized post-pandemic mix. Applebee's off-premise weekly sales in June was $14,700 per restaurant and as a percentage of total sales, it's reasonable to assume our off-premise mix may ultimately settle in the low-to-mid 20% range. I should note this represents about double our pre-pandemic off-premise mix of 12% illustrating Applebee's enhanced relevance within this convenience driven occasion. Given the importance of this business, we are expanding our initial drive-thru tests to include an additional six units in…

Thanks, John. Congratulations on another great quarter. Good morning, everyone. I'm pleased to report that IHOP solid trajectory continued this quarter. Our second quarter comp sales improved sequentially by 17.8 percentage points compared to the first quarter and outperformed the family dining category as well by 150 basis points according to Black Box. Another indication the health and stamina of our business is the growth in domestic average weekly sales every month in the first half of the year. For the second quarter, average weekly sales were 28% higher than Q1. Average weekly sales per week were approximately 38,000 in April and increased to just over 39,000 by June reaching a high for the quarter of approximately $40,000. As dining room capacity and restrictions were eased and consumers satisfied their longing for a sit down meal to pay at IHOP, our off-premise sales mix moderated as anticipated. Off-premise sales account for 26.1% of sales mix for the second quarter, compared to 33.3% for the first quarter. However, we continue to believe that we will retain the majority of the on-premise sales growth attained over the last 15 months, partly due to changes in consumer behavior. According to a May 2021 survey by McKinsey & Company consumers intend to continue with many digital behaviors even after COVID-19 subsides, including restaurant curbside pickup. In fact, our net offering in terms of dollars improved each month in the second quarter. Additionally, off-premise comp sales increased 169% in the second quarter of 2021 compared to the same period of 2019. For the second quarter, our sales mix consists of 73.9% dine-in, 13.9% delivery and 12.2% to-go, approximately 85% of our domestic restaurants are open for standard operating hours or greater and approximately 27% are operating 24X7. We believe that having more restaurants operating on…

Thank you, Jay. Great results. Thank you, John, and Vance for and your entire teams for all the great work you did this past quarter. So these are terrific results. And with that, we're looking forward to taking your questions and we'll turn the call back over to the operator.

[Operator Instructions]. Our first question comes from Brian Mullan with Deutsche Bank.

Hey, thanks, everyone. Congrats on a good quarter. John Peyton, last call you shared some really helpful goals or numbers that you've challenged each Brand President to get to from a gross openings perspective over the next several years. So with those longer-term goals out there, John, I'm wondering if we can zero in on your net unit growth expectations rather than gross. Do you expect Dine to experience domestic net unit growth in 2022? And do you expect it at each brand and then longer-term what's the right way to think about the net unit growth potential? Is it 2%? Is it 3%? Just any thoughts would be great.

Yes. Thanks, Brian. So when it comes to net unit growth, what I mentioned last time and can reinforce this time is that particularly when it comes to IHOP, I believe that they can improve on the pace that they've done, which is historically about 40 or 50 new restaurants a year, and that net unit growth for IHOP and for Dine overall will be positive in 2022. When it comes to Applebee's, we are concluding a purposeful three-year effort to work with our franchisees to close those restaurants that were underperforming or the market moved away from them. We're now at the end of that process that John Cywinski really effectively managed over the last three years. And we expect Applebee's to begin to return to net positive growth more like 2023 and beyond versus IHOP in 2022.

Great. Thank you. And then as a follow-up, IHOP, it was great to see the brand get close to 2019 levels in June on that two-year stack basis. I believe California has only fully opened on June 15. Just wondering if it's safe to assume that, that you may be exited the month of June better than that and might even be back to flat or better at this point in July.

Well, at this point, we're not going to talk anything beyond the end of the second quarter, as far as how things are trending or anything, but I think your facts are right that California was not open the entire quarter. So it clearly helped us when we got to June and everything did open up.

Our next question comes from Jake Bartlett with Truist Securities.

Great. Thanks for taking the question. My first one was on or I guess I had one and a follow-up. But my question is just on, IHOP, I'm trying to understand the impact of the more limited operating hours into I think that's 24X7. Can you remind us kind of what your normalized late night sales, mixes, and what you're seeing now, and maybe just so we can understand the opportunity as staffing levels improving and you're beginning those sales.

Hey Jake, Jay -- this is Jay Johns. On IHOP, obviously we have some restaurants that are still not fully back to their standard operating hours and most of that is the later time of the day it's evening and/or overnight. So we don't have many restaurants doing 24X7 as we did in 2019. So those are the opportunities for us and we're making progress every week slowly, but surely, as people are staffed and capable of expanding their hours, the franchisees are doing that, and we're confident we'll get fully back there. But I can't predict for exactly when that's going to happen, et cetera, but we're doing very well. And at the breakfast daypart, even at the lunch or dinner, remember for us lunch is oftentimes late breakfast. So everything up through lunch we're doing really well. It is just the hours that some of the restaurants that we've got to get back before we can get fully back to those PM and overnight hours to help our business.

Okay. And then I guess I had a question on, I'm just thinking the operating costs inflation that you're seeing in the business in the back half of the year. You gave guidance for commodity inflation for the year. Could you please let us know what commodity inflation was in the first half so we can understand what is expected in the back half. And then if you could talk about any sort of cost efficiencies that you expect to offset some of those pressures and especially from the perspective of franchisees, so that we can feel good that their margins are solid enough to reaccelerate growth. And maybe within that question, what kind of pricing level you're expecting…

Hey Jake, this is Vance. So I think John made a reference to this earlier, but we're expecting our inflation costs to go between 3% to 5% -- 4% to 5% for the year versus last year on the whole. So that is part of the headwinds that that's going to -- that we're facing. On the saving side, we talked about tablets, we talked about just the technology innovations all those things step by step will help with the operating cost of the franchisees. A lot of these initiatives are New York. So we're still monitoring. But we're making progress towards that end.

And Jake, this is John Cywinski with Applebee's. The -- you asked a question about franchisees. We've used a bit on what I'll characterize is discounting. And we've been leaning into core equities with full margin. The return to dine-in and in particular, guests who are choosing to indulge a bit with appetizers and drinks, Teremana I referenced has helped our check and that's really we got the late night business coming back on weekends. And so they've been able to mitigate it to the best of their ability. They've always been very responsible on pricing. They understand it's a long-term game and in particular Applebee's is a value oriented brand with value oriented demographics. So we'll navigate this just fine.

Okay. Just to clarify what was the commodity inflation in the first half of the year?

Yes, the first half of the year, we said it was about 2%.

2%. Great. Thanks a lot.

Our next question comes from --

I should mention one other point that I think applies to both brands anticipating the environment that we've been in, both brands aggressively simplified their operation and their menu, which eliminated those products and complexities that challenged margins. And so we hedged well in advance of what we're seeing right now on the commodity front, which has helped a great deal.

Our next question comes from Brian Vaccaro with Raymond James.

Thanks and good morning. On Applebee's, John, I think you said, you don't expect to sustain double-digit comps in the second half. And I guess it seems like segment trends remain pretty robust through the July period. I'm just trying to understand why the brand wouldn't continue to outperform. Can you just help us understand what some of the puts and takes are in that second half comment? And are you seeing that in the quarter to-date period, or is it just sort of layering in a degree of conservatism?

Brian, you always have a -- this is John. You always have a wonderful way of edging into a question we want to answer. So we'll decline respectfully on Q2 or Q3 visibility, certainly with July. The -- so hard to forecast. I mean, we talk a lot about this as a team in this environment, given that these $53,000 sales volumes per week are unprecedented. It's harder to gauge we're outperforming the category by 600 basis points. So we know that execution and innovation are driving a lot of that. But there's also -- there's some benefit from the environment and government stimulus and all of that. And Toronto's double-digit rate would be unprecedented. It's hard to forecast. We're naturally conservative in our view. And I know I'm not answering your question directly, but as John and I -- and the team talk about this, it's hard to frame a specific expectation on Q3 and Q4 at this stage, with that said we'd love Q2.

Yes. It's John Peyton. I think that was a good answer. I think you did answer the question, John, which is, Brian and focus is Q2 was a fantastic quarter, when it came to our results, particularly at Applebee's and we're recognizing the fact that it was the -- there was a lot of stimulus in the economy at that time from the fed as well as from Americans returning -- leaving their homes on-time math and the restrictions ending. So it -- we have strong expectations the remainder of the year. We just want to send the message that Q2 was particularly strong.

All right. Understood. And Vance, just a follow-up, I think in your comments, you mentioned a lower unit count in the second half, but I think you said given recent closures. So I just wanted to clarify, was that something that was recent say quarter to-date, are you just more so referencing what you saw moving through the first half in terms of closures?

It's mostly quarter to-date or year-to-date. And going forward, we expect closure rate to be the same pace as in the past, nothing standing out.

Our next question comes from Eric Gonzalez with KeyBanc Capital.

Hey, just as a follow-up to maybe Jake's question earlier. I was wondering if you can comment for each brand just sustained yourself performance in the stores that are open late night, or maybe the IHOP stores that are open 24 hours. How much of a delta is there in comp performance between those two versions?

This is Jay. I think I can speak from the IHOP business; obviously we've got 24-hour restaurants. I think we're back to 27 restaurants or something like that they're going 24X7 now. Now clearly their performance is much better. They just got more hours they're operating. So when you look at the delta between those opened 24X7, those not, you do see a delta between those two, but that's pretty natural. And when you're going to be open more hours to operate, taking in more business, your sales are going to be higher. That was true pre-pandemic that will be true post-pandemic. 24X7 is not SOP for us. We -- it is not a contractual requirement that people are open 24X7. That is something that franchisees decided to do if they believe that this is beneficial for them. And so we think we'll have a lot more to get back to that, there to where we have right now, but slowly but surely those are coming online. Like I said before every week, we're getting just a few more restaurants that check into a 24X7 and then we also call it 24X2. We have another place that we're missing some restaurants from 2019 is we have people that don't do 24X7 all week, but they will do 24 hours on the weekends. So we're missing a few of those right now as well, so as those come back, those will help also.

And Eric, on the -- this is John on the Applebee's side, well each daypart lunch afternoon, dinner it is performing quite well. That late night daypart is impacted in particular by Friday night and Saturday night, I think kind of 11:00 to 2:00 AM in particular kind of after midnight, that incremental lift will come, much of that is driven by operator's judgment related to labor challenges. And so it'd be hard to just specify when that may fully be realized to capture. It will be and I'll resist quantifying that, but there's a lift there when it does happen.

Got it. So I can just allow a question into to Vance, you talked about how you may invalidate the capital allocation strategy in the third quarter. Just wondering what the decision was maybe to not bring back the dividend, you have $260 million in unrestricted cash and balance sheet, just curious is there still any reluctancy to bring back that dividend, anything you're seeing in the business that may cause you to hold off on that at the current where we are today. And then as you think about that dividend and the payout ratio in the past, it was 40-plus-percent. I'm wondering if you're thinking about moving back to that level or if you may start off something less than that?

Yes. I would like to first just highlight that we we've had a strong track record returning capital to our shareholders, and that will remain one of our top priorities. Now, although as you pointed out, we do have a healthy cash position. There are still uncertainties remain due to the emergency -- emergence of delta variant, and the potential impact that the surge in the back half of the year. So with that said, I think that the approach we'll have more details for you next quarter. But the process is going to be balancing between the use of such investment -- reinvestment in the business technology innovation and returning capital to shareholders. It's a whole holistic approach that we would take. Again, I'm not answering your question specifically and we'll have more details in the next quarter, but that's going to be our approach going forward.

Your next question comes from Brett Levy with MKM Partners.

Thanks for taking my question. You actually just touched on where I wanted to go. You said balance of investments in technology, when you think about that, how should we think about it in terms of magnitude and the pacing of the investments? And what's going to be, what obligation do the franchisees have, in terms of how they're investing in it, how they're contributing to it? What kind of partnerships you're seeing on those fronts? And also, have you seen any lift that you want to share that from any of the techs?

Yes, so Brett, so I will take the beginning of that question. So we talked last quarter about that we did increase our CapEx investment in technology this year and we're now at a CapEx run rate of about $19 million a year, which includes the physical restaurants in the Carolinas. But we added about, of that add last time $3 million or $4 million of it was in addition to our tech spend. We'll be able to be more clear in another quarter about what our tech spend for 2022 and beyond looks like, although, I think we've got more work to do in that area. When it comes to the way in which the investment is shared or not, with our franchisees, when it comes to the centralized systems, like I alluded to our new apps, our upgraded apps, our upgraded websites, our new CRM platform, our data and analytics platform, that's all the Dine investment that we make that our teams here use, and benefits the brands. When it comes to something digital, like the handheld in Applebee's, or the new point-of-sale system in IHOP, that installation is borne by the franchisees.

And I would say Brett; this is John -- John C. I agree with John's comment. Everything we do, from a technology perspective, we pilot and validate in partnership with our franchisees. And together we develop a business case. And they have always proven to be tremendous partners, and we'll invest in any initiative that provides a return. And in this case, these technology initiatives enable innovation, they improve the guest experience, they favorably impact food and labor and restaurant level P&L. And it just requires a little bit of time to validate because we'd like to do so over a 12 month timeframe as opposed to a shorter timeframe. And we do so in partnership. So anticipate, as John referenced some investments coming forward that will really unlock and enable some cool activity from the branch.

Thank you. Your next question comes from Nick Setyan with Wedbush Securities.

Thank you. This is for John C, if I may, you commented on the strong dollars in terms of marketing spend in the second half. Maybe too early, but do you anticipate 2022 growing in terms of marketing dollars versus 2021?

So Nick, insightful question as you know regarding 2021, we pulled back in Q1, given the environment, given the resurgence of the virus. And so back half is in a pretty favorable position, collections were outstanding, meaning ad-fund collections from our franchise partners, I anticipate that continuing in 2022. We did have the benefit of some carryover from last year in 2020, money we didn't spend because we also pulled back marketing to 2021 may not have that benefit in 2022. I expect us to be in great shape Nick with respect to the ad-fund on a comparable basis.

Hey, Nick. This is Jay Johns. As far as IHOP, same thing we had pulled back the first part of the year, it didn't make any sense to spend a lot of marketing driving people to restaurants that were partially open and maybe not staffed wonderfully. So the timing has to be right to do that. We obviously picked that back up in the second quarter. I think if you think about how we ad-fund more some changes how we do a budget for our marketing is it's relative to how much ad-fund dollars we're going to have. We get a percentage of the sale; the sales go up you'd have more money to spend. So as you know our sales for the first quarter, we didn't have as much spend. We didn't have as much money. As sales have improved, our ad-fund spending has increased for the second half of the year and on into next year, it will be zero relative to what our sales are the higher sales go, the more ad-fund money we've got.

Perfect. And Jay, I hate to come back to this, but it's important just because off-premise over invested too late into that so much. Can you maybe just contextualize, and I think you said 27%, now 24X7, what was that percent pre-COVID approximately?

On a typical basis, we've got half, a little over half of our restaurants that operate at 24X7 and then there's another percentage, another small percentage on top of that to do 24X2.

Okay. Okay. And, I mean, the assumption is that, virtual brands et cetera, I mean they're going to benefit from the late night hours. That's just why I think a lot of us want to get our arms around this question. And then just lastly, I think you said, obviously you gave us the gross openings number on IHOP implies second half, positive net openings. Do you think Q3 will be positive net openings or is that going to be largely weighed to Q4?

I don't think we're going to disclose kind of the timetable on all of this. Obviously, I did just say for the first time that I think we're going to get to between 40 and 50 new restaurants this year. And you already know our closures from the first two quarters. So you know all of that math. And you also heard Vance say that our closures going forward would be more of a typical run rate that we always do. There's no bulk of closure. We already did that, I announced we thought we'd do a 100, we really only did 41. And so we're in good shape and that [indiscernible] happened to do those big closures that's behind us now. So we'll be back to kind of normal closure rates. And again, my growth rate looks like 40 to 50 for the year is what we're looking at. So hopefully you can kind of use that to think about what that looks like.

And I'm not showing any further questions this time. I’d like to turn the call back to John Peyton for closing comments.

Okay, thanks guys. We appreciate your questions, as always, great conversations. Thanks also to Ken and Jay and John and Vance for a great quarter and take care everybody. Have a great day.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.