Dine Brands Global, Inc. (DIN) Q4 2022 Earnings Report, Transcript and Summary

Good day. And thank you for standing by. Welcome to the Dine Brands Global Fourth Quarter and Fiscal 2022 Conference Call. At this time all participants are in a listen-only mode. After the speakers presentation there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. I would like to hand the call over now to Brett Levy, Vice President of Investor Relations and Treasury. Please go ahead.

Good morning, and welcome to Dine Brands' fourth quarter and fiscal 2022 conference call. I'm Brett Levy, Vice President of Investor Relations and Treasury for Dine Brands Global, and I’m joined this morning by John Peyton, CEO; Vance Chang, CFO; Tony Moralejo, President of Applebee's; and Jay Johns, President of IHOP. Please remember our Safe Harbor regarding forward-looking information. During the call, management may discuss information that is forward-looking and involves known and unknown risks, uncertainties, and other factors, which may cause the actual results to be different than those expressed or implied. Please evaluate the forward-looking information in the context of these factors, which are detailed in today's press release and 10-K filing. The forward-looking statements are as of today, and assumes no obligation to update or supplement these statements. We may also refer to certain non-GAAP financial measures, which are described in our press release and also available on Dine Brands' Investor Relations website. As it relates to this morning’s release and our filed 10-K, our fourth quarter and full year 2022 results include the company operated Applebee’s restaurants, which was sold to one our existing franchises in October and our December acquisition of the Fuzzy’s Taco Shop brand. For calendar planning purposes, we are tentatively scheduling the release of our first quarter 2023 earnings call, Wednesday, May 3 2023. Before the market opens. With that it is my pleasure to turn the call over to our CEO John Peyton.

Hello, everyone. And thank you for joining us this morning. On today's call, we will discuss our investment initiatives including the recent acquisition of Fuzzy’s Taco Shop. We'll share our fourth quarter and full year 2022 results. Vance will offer our initial 2023 guidance and thoughts on our capital structure. And to wrap up, Tony and Jay will provide updates on Applebee's and IHOP. Before we get into those details, let me first welcome Tony, our new President of Applebee's. Tony started in this role in January and brings decades of operations development and franchising expertise to Applebee's. Tony is a veteran of Burger King and Church's Chicken. He joined Dine in early 2021, as President of our International business, just in time to masterfully lead our international franchisees through the pandemic. And as a result of his stewardship, our international business achieved record openings last year. I'm thrilled for Tony and for Applebee's, and I appreciate the warm welcome and support that Tony is receiving from our franchisees. While Tony is the new face of our Applebee's brand. We also have a new brand, Fuzzy’s Taco Shop, which fulfils our long stated goal of adding a brand to our portfolio. I was enamoured with Fuzzy’s from the moment I walked into the vibrant and colourful dining room and convinced after I sampled the fresh Baja inspired tacos and delicious Instagrammable beverages. Specifically, we chose Fuzzy’s because it's nearly 100% franchised. And like Applebee's and IHOP, it's the value leader in its category. Second, in addition to its 137 restaurants, it's nurtured a strong pipeline of 125 additional units expected to open over the next several years. We love the Mexican category because it's vibrant and growing. And we're attracted to the strong business model that includes a compelling lunch and dinner business 40% off premise sales and 20% alcohol sales. And finally, we love what Fuzzy’s describes as its bold and badass attitude that creates strong emotional connections with its guests. Fuzzy’s has led by Paul D'Amico, a veteran of Focus Brands, Moe's Southwest Grill, and HMS host. During Paul's two years with Fuzzy’s, he and his management team strengthened operations, marketing effectiveness, and menu innovation. While building an impressive pipeline for future growth. We're extremely pleased to have Paul and his entire team as part of the Dine family. Our focus now is to ensure that Fuzzy’s benefits from the economies of scale that we offer from our technology, our shared services and our supplier platforms and to accelerate Fuzzy’s already robust momentum. The Fuzzy’s acquisition end of the year on a high note for us, but it didn't distract us from the continued impact 2022 cause across the industry, inflation, hiring and retention challenges, supply chain delays, and of course uncertainty regarding the strength of the consumer. Yet against this tough operating environment Dine delivered solid results for the fourth quarter, and for the full year 2022. I attribute our positive performance to the strength of our value oriented brands, our operational and marketing agility, and the commitment and hard work of our franchisees and seasoned brand teams. Vance will provide more detail on our results. But key highlights are that Applebee's posted its eighth consecutive quarter of positive comp sales. With a Q4 increase of 1.7% and full year comp sales growth of 5.1%. IHOP had its seventh consecutive positive quarterly gain at 2% and full year comp sales of 5.8%. In 2022, we returned over $150 million to our shareholders via dividends and buybacks. And we retired $40 million of our outstanding debt last quarter. Despite economic pressures across the industry, the strength of our value oriented brands was apparent as we were able to meet guests where they are because our franchisees excel at providing delicious food, great experiences, and fun welcoming restaurants. Meanwhile, our brand teams excel at delivering innovative marketing menu and operational programs. In addition to those core competencies, our 2023 innovation and growth agenda includes continued investment in the technology, marketing and training needed to enhance and accelerate our IHOP and Fuzzy’s loyalty programs. A robust technology agenda that includes new POS for IHOP and Applebee's, adding artificial intelligence that drives the recommendation engine on our digital channels, and technology that improves the guest experience like fly by, server handhelds, functionality for our apps that includes dining ordered in advance and joining waitlist for seating, payment options and the ability to review the restaurant. Third, we're focused on building our portfolio of virtual brands that currently includes grilled cheese and super mega dia. And we're now testing a chicken and a cheesesteak concept. We're also leveraging IHOPs brand equity into national CPG partnerships, watching IHOP branded coffee with Kraft Heinz and cereal with General Mills. And finally, we're testing new brick and mortar concepts, like dual branded restaurants, kitchen of the future pickup windows as well as offering compelling and targeted incentives to franchisees to accelerate the construction of new restaurants. The past few years have reminded us to expect the unexpected, we've learned to react quickly and decisively to new challenges and opportunities. And as a result, our teams are better equipped and more prepared to meet the changing needs of our guests. In 2023, we anticipate that Dine will deliver steady results against a still difficult macro environment. We'll continue to invest in innovation and technology that strengthens us for the long term, and will diligently focus on managing our balance sheet, optimizing our debt structure and returning cash to shareholders. We're confident that our team our strategy and our momentum will serve us well and 2023 and beyond. And with that we'll turn to Vance who will offer more details on our financial performance.

Thank you John, as you mentioned, Dine is well positioned to leverage our cash flow generation ability to drive long term growth. We accomplished quite a bit in 2022, despite the volatile operating environment. During the year, we posted EBITDA above our four-year target. Return capital to shareholders beyond pre pandemic levels, and completed our first acquisition, since the combination of IHOP and Applebee's. Our fourth quarter total revenues were $208 million, reflecting positive comp sales growth at both brands, and offset by the refranchising of our company operated Applebee's units, resulting in a decline of 9% on a year-over-year basis. For the full year we generated $909 million in total revenues, which was 1% higher than the prior year, despite the refranchising of the 69 restaurants. G&A for the fourth quarter of 2022 was $59 million, compared to $49 million for the same quarter of last year. We ended the year with $191 million of G&A expenses, up from $172 million last year due to strategic growth investments resulting in increased professional services, including one-time items such as Fuzzy’s acquisition costs. These higher costs also were related to our return to normalize operations to support franchisees, including higher occupancy costs and travel conference expenses and software maintenance costs. Excluding the various one-time items our 2022 G&A would have been approximately $182 million just below our expectations for the year. We generated consolidated adjusted EBITDA of $57 million in this quarter compared with last year $60 million quarterly results. Our consolidated adjusted 2022 EBITDA of $252 million was ahead of our guidance and modestly below last year's $253 million. Finally, adjusted earnings per diluted share for the fourth quarter and full year were $1.34 per share, and $6.20 per share, respectively, outpacing last fourth quarters $1.32 per share, but below 2020 ones $6.54 per share. Inflation on restaurants, food costs and supplies remain elevated. Although more pronounced, IHOP given continued cost pressure on eggs and wheat. Applebee's and IHOP experienced 18% and 21% inflation for the year respectively. Without the impact of eggs and wheat, IHOPs 2022 inflation would have been around 17%. Applebee's Q4 inflation was 11% and improvement from 23% during the first half of 2022. IHOPs Q4 inflation remained at about 20% consistent with a 21% during the first half of 2022. Our menu pricing, our Applebee's franchisees continue to focus on their value positioning, with an approximate seven and a half percent average menu pricing adjustment in Q4 year over year. IHOPs franchisees have taken approximately 10% year-over-year pricing in Q4 as they continue to deal with more elevated inflationary pressures. Turning to our cash flow statement, balance sheet and strategic uses of capital. Our full year 2022 cash flow from operations came in at $89 million compare with $196 million in the prior year. The variance was primarily due to the change in working capital we saw in Q1 of this year, and discussed in the prior three quarters. Our capital structure including undrawn capacity of the upsides variable funding note, and our asset light model continued to provide the business with ample liquidity and operational cushion related to our covenants. We ended the year with total unrestricted cash of $270 million versus $355 million at the end of the third quarter, as we utilize our liquidity to fund Fuzzy’s acquisition and to retire $40 million of bonds in Q4. The bomb buybacks were done at a discount to face value, averaging below 97% of par with a net impact of $1.2 million of principal savings, and over $1.5 million of annualized interest expense savings. As we prepare for the upcoming anticipated repayment date of our class A-2-1 bonds in June of 2024. We're currently encouraged by the improvements in the securitization markets, and we'll look for the best window over the next several months to refinance our notes. On capital allocation. In addition to organic investment to drive growth, our capital allocation focus going forward will include both debt and equity buybacks. We returned over $151 million of capital to shareholders in 2022. Through dividends and stock buybacks, outpacing our pre pandemic average. We also have $100 million authorization from the Board for bond buybacks to optimize our capital structure opportunistically. Before I turn to our 2023 guidance, I wanted to share additional colour on our recent Fuzzy’s Taco Shop acquisition, which closed in December of 2022. This 137 units fast casual Taco concept generated over $220 million in 2022 system sales. Its efficient square footage units generated $1.6 million in average unit volumes, with the newer cohorts achieving sales well in excess of that average. We're encouraged by the integration process thus far and optimistic about the value creation opportunities as part of our investment thesis. Finally, I would like to share our financial guidance for 2023, first limit touch on development. Our Applebee's development plans call for 10 to 20 net fewer restaurants in 2023. Are IHOPs development plans are targeting the opening of 45 to 60, net new restaurants for the year, with 10 restaurants already opened in Q1 of 2023. Second, we're forecasting an expected G&A range of $200 million to $210 million, including non-cash stock based compensation expense and depreciation of approximately $30 million. Third, our 2023 adjusted EBITDA guidance is targeted to be in the range of between $243 million to $255 million. Lastly, we anticipate 2023 gross CapEx spending to be in the range of $33 million to $38 million. Although the effective CapEx levels will be about $10 million lower due to TI reimbursements related to certain projects, which will flow through our operating cash flows for GAAP accounting purposes. Overall, this guidance reflects our current view of the headwinds and tailwinds in 2023. And the cost structure required to navigate through the different scenarios. Our operating philosophy is to focus on how we can protect the downside, while investing for the upside to create long term risk adjusted returns for shareholders. Next, please allow me to introduce Tony Moralejo, for his perspective on the business as our new President of Applebee's. Tony?

Thanks, Vance. Yes, I'm absolutely proud and excited to be leading Applebee's, a brand that I personally and professionally admire so much. Having worked in restaurant franchising across multiple categories for nearly 30 years. I know a franchisor wins when franchisees succeed. Based on my experience and involvement with the Applebee's leadership team over the last few years, I can confirm that we have an incredibly talented and stable team committed to a successful strategy that doesn't waver and produces winning results. We would not be in this position it’s not for the intelligent and passionate base of Applebee's franchisees that were closely and collaboratively with the Applebee's leadership team. Together we remain committed to driving business results. 2022 is the second consecutive year of strong sales performance. Applebee's closed out 2022 with a Q4 comp sales increase of 1.7% on top of last year's 9.1% increase versus the same period in 2019. And a full year comp gains of 5.1%. Q4, mark Appleby's eighth consecutive quarter of positive comp sales growth. Our solid momentum resulted in q4 average weekly sales of $52,500 per restaurant. Volume across our sales channels was split with 76% generated by on premise sales and 24% from off premise sales, with 13% coming from to go and 11% from delivery. Applebee's continues to be recognized as a leader in the sector. From a brand attribute perspective, Applebee's leads the casual dining category in key metrics such as convenience, affordability, variety, family friendly, and brand awareness. Applebee's also leaves on team engagement and great place to work rankings. At the same time, the brand and franchisees remain dedicated to positively impacting the communities we serve, and recognizing local here heroes who are doing good in the neighbourhood platform. Applebee's category leadership position and overall success is driven by our relentless focus on the guest experience. While we aim to exceed expectations of service and quality. Our marketing efforts continue to bring innovation fun and value for our guests, as evidenced by our aided and unaided brand awareness, which hit all-time highs. Beyond our traditional brand approach, we partnered with Paramount and Tom Cruise on Maverick Top Gun. We also leveraged our guest strong relationship with Live Sports. Thanks to our partnership with Football Night in America and Sunday night football on NBC. America's number one primetime show. Most importantly, we launched campaigns focused on affordability and value, which remain top of mind for our guests during these inflationary times. Our marketing, culinary and operations plans in 2023, we're continue to build emotional connections with our guests by listening to what they want, while keeping a pulse on emerging trends to deliver the products, services and interactions they crave. Touching briefly on development, in 2022 the brand open 16 restaurants globally, with four of those openings occurring domestically, while effectively managing restaurant closures to minimize the impact on the portfolio. We ended 2022 with just 13 restaurant closures. Over the last two years now, the restaurant industry experienced rising land acquisition costs and construction cost inflation, while franchisees experienced downward pressure on operating margins, while our franchisees remain on solid financial footing, thanks to an all-time high AUV. These factors resulted in low new build ROI, hampering our ability to ignite new unit growth. My top priority is to ensure our franchisees are successful. So I'm going to leverage my development background and work closely with franchisees to create new, financially attractive development opportunities for the entire Applebee's system. To wrap up, I see continued momentum for Applebee's because the brand, our strategies and our talented brand and franchisee teams represent the necessary ingredients for future success. And with that, let me hand it over to Jay.

Thank you, Tony. As you've already heard, IHOP delivered seventh consecutive quarter of positive comp sales, illustrating our progress and resilience despite continued volatility. While the operating environment may be challenging, it isn't detracting from our strong consumer connection and purpose to serve more joy to more people. IHOP posted positive 2% comparable store sales growth in the fourth quarter, and it represented the brand seven consecutive positive quarterly gain. Average weekly sales of 38,200 were modestly ahead of the prior years 37,500. Our to-go business was 22% of sales and continue to be led by the 14% mix for delivery and traditional takeout generated the remaining 8% of sales. The off premise business is also supported by our two virtual brands, with over 1200 restaurants offering thrilled cheese and Super Mega Dilla. We're excited to celebrate our 65th anniversary in 2023 throughout the year. Our brands food and restaurant experience remain as relevant today, as it ever has been. We continue to leverage our marketing strength not only through our brands legacy and value proposition, both of which were on display as we kicked off the year by bringing back our iconic Rooty Tooty Fresh 'N Fruity at a value price of $6, but also by leveraging our relationships. One example is our recent partnering with Marvel Studios for an exclusive value movie tie-in to Ant-Man and the Wasp: Quantumania, spend $30 and get a movie ticket with Fandango. Our current quality and value campaign focuses on our new sweet and savory crates Bogo, which is running through March. We're also driving innovation across all aspects of our business. Our international bank of pancakes loyalty program has been well received as interest in the program far exceeded our expectations. Not only have we seen our IHOP app downloads triple year over a year and lead our category. But we added 4.4 million members in its first nine months, nearly 2 million more members than expected. And this accounted for 5% of sales by year end. We're excited with our loyalty programs initial progress, I look forward to greater engagement with our guests and its potential. While still early. We're receiving excellent data and developing more KPIs, as the data set becomes richer and deeper, which we hope to share at this time next year. Additional evidence of our standing with consumers can be seen through our retail collaborations. We partnered with General Mills and recently introduced an IHOP mini pancake cereal, which debuted in restaurants stores in January. And today we're excited to announce a new multi-year partnership with Kraft Heinz as part of our coffee business. In April, IHOP branded coffee will be on retail store shelves nationwide. These are great examples of how we're taking new and unexpected approaches across product categories. Turning into virtual brands, which are now in more than 1200 restaurants. We're about to launch our third virtual brand TenderFix, a chicken tender concept which serves to complement our two existing offerings Thrilled Cheese and Super Mega Dilla. These partnerships speak to IHOPs brand strength and relevance enable us to expand our reach, allowing us to be top of mind to more customers. Our 2022 development activities were below our expectations as we highlighted on our last call, as macro issues have affected the timing of our pipeline. We opened 37 new restaurants in 2022 with more originally planned in Q4 slipping into Q1 of this year. 10 of which have already opened in 2023. The pipeline remains robust, although macro factors continue to impact the timing of openings. We’re targeting 45 to 60 net new unit openings in 2023, which represents a more normalized and solid development year. Understanding macro factors could still influence our activity. I'm confident the momentum we have at IHOP going into 2023. And I proudly speak for the IHOP system where we collectively look forward to all we'll do together to spread more joy this year. Let me now turn the call back over to John.

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

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

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

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

Eric. So, as we talked about in Q3, we lowered our expected '22 G&A target, because as we said, right, some of our investments are falling into '23, given the disruptions that we saw earlier in the year. So this, the increase reflects open positions that have yet to be filled analyzation of new positions that we did fill during 2022. Of course, there's some inflationary cost increases and innovation projects are pushed in 2023. So overall, we expect our 2023 G&A level to be about the infrastructure that we need to support the growth going forward. As long as we continue to see progress with franchisee support guest behaviour and profitable growth in sort of a more normalized operating environment so and to answer more specifically on returns, it'll first of all, like, I think we're for 2023 we know it's a complicated operating environment. But despite the complication, we are starting to see progress with the initiatives that we've made last year in the context of comps development and new restaurants for new revenue sources. So our guidance effectively implies that our continued investment G&A will be funded by the early innings of growth that we're seeing in 2023. And with of course, with longer term upside to EBITDA growth in '24 and beyond.

And Eric, it's John just wanted to give a specific example of the way it's something like that flows out, Jay mentioned the loyalty program for IHOP, so its '21 was about designing it and beginning to build it. 2022, we spent on the technology to enable the app, et cetera. By the end of '22 where we had about 5 million members enrolled. And those members accounted for 5% of IHOP sales. And so as we head into '23, it's about now using our marketing capability and the investment we made in the tech to start to market directly to those people with promotions, we're adding artificial intelligence and predictive analytics to help recommend to them, what their next purchase should be? And so you know, that's a way to think about the cycle of how one initiative will impact '23.

That makes sense. And if I can ask about development here, Tony, your comments sort of suggested that the ROIs are maybe not quite, where you'd like them to be due to borrowing costs, the construction inflation delays, and maybe the store level margin. So I think this begs the question where we are in terms of store level EBITDA, and how much that declined at '22. And, I think, if I go back to, again, that discussion we had a year ago, the idea was that unit growth would go to that would sort of be a five or so this year, I guess I'm wondering, is this a function of closing more stores? Or are you just opening fewer to offset the closures on a net basis? And then Jay on the IHOP side, you missed the bottom end of the guidance, even that you've updated a quarter ago, I think you've finished -- did 30 for the year. And so that presumably means that some of those units would filter into '23. But yet the guidance that you gave today is maybe below with what you would thought initially from a normal year development perspective. So just wondering what that means about the ability to accelerate unit growth, I think and reach that 2100 unit, target by 2026 that you laid out not too long ago?

Yes, it’s up for Tony.

I’ll tackle that question first. So, look, we're going to open more new restaurants this year than we did last year, which is a significant improvement. But it's not where we want to be in the future. Based on my experience across multiple global restaurant brands, the rate or the pace of development, it comes down to franchisees believing there’s an attractive value proposition. The brand leadership team, I think, is delivered all time high AUVs. How are those gains had been offset by inflationary pressures on operating margins, but really rising real estate costs, higher construction costs, higher cost of capital? So I'm going to use my experience, as I said in my opening remarks in my expertise, and we're going to make sure that the brand leadership team focuses on those factors that are within our control. We'll continue to drive AUVs, we're going to continue to improve franchisee profitability, and we're going to reassess our prototype to help with the -- to help Applebee's return to positive net unit growth.

Yes, this is Jay. From the IHOP side. Look, we did not hit the target we wanted to hit last year, we had, as we talked about on the last call, we had macroeconomic factors of supply chain, and the supply chain kept moving to different items, we actually took positions to try to help ourselves get these restaurants open later in the year. But new pieces of equipment, new things started coming into play, that you couldn't open a restaurant without it. So they started pushing into the next year. And I think as we developed our guidance this year, while it sounds like we're not on target, long term, we still feel confident over the five years of where we can get the openings to. But we're trying to be responsible here also, the macroeconomic factors have not completely gone away. Supply chain has not proven to move at the same rate that it was before timelines are getting extended, compared to pre pandemic. And one of the big things that keeps happening is that local municipalities are just taking longer and longer to approve plans, et cetera. So one of the things that we've done is, since the pandemic, we have started to get our franchisees to pivot toward doing retrofits of previously other restaurants. We’re very successful doing this, we've got about 600 of them in our system. We've done this for years and years. And that's how we're combating the kind of the economic factors of cost so much to build a building with inflation right now is, if you just retrofit an existing space, it's actually much more beneficial. It's usually much faster to get the permitting approved. But we're trying to be responsible doesn't mean we don't potentially have upside on this. But we also have not gotten the proof yet, that the issues we had last year have resolved themselves. So we've already opened 10 of the restaurants that we expected last year, in the first couple of months this year. So we're feeling very confident with all the work we're doing and building the pipeline, developing the pipeline, that we're still long term going to hit the goals that we were looking for, but it may get stretched out a little differently than what we originally anticipated.

Okay, just the last one for me, can you maybe comment on the P&L impact of Fuzzy’s Taco’s in fourth quarter and maybe expectations for that contribution EBITDA next year?

Yes, Vance will walk us through that.

So, Fuzzy, we closed in late of Q4. So there's really not material impact Q4 financials. But going forward for '23 it's obviously built into our guidance. But the way I would think about it, for modeling purposes is in terms of G&A and EBITDA contribution. Fuzzy’s roughly replaces the company owned restaurant, of course, with a lot more growth potential in future years.

Perfect, I'll get back in the queue. Thank you.

Our next question comes from the line of Todd Brooks, with Benchmark Company, your line is now open.

Hey, good morning, everybody. Thanks for taking my question. Just I'll try to limited to two here. One is, as you look at the Fuzzy’s opportunity, can you talk about your long term vision for how big you think that concepts can be? And are you having an early discussion with Applebee's or IHOP franchisees about potential cross sell opportunities that could really ignite the unit growth there? Especially if we get to a more normalized construction environment?

Hey, Todd, it's John. Thanks, we're interested in Fuzzy’s, because we thought it was a great brand, we love the Mexican category, and the fast casual category. And, we do that we do that as a combination as a, you know, fast growth and high potential. So, in terms of how big you know, I can't put a number on it. But we certainly intend it to become a material part of our business. And that was the vision behind it. As we mentioned, there's 125 additional restaurants in the pipeline for the next several years. And we're just now beginning to work with our development team and the Fuzzy’s team to see we can do to expand that. We did a lot of research before we made this choice on several companies and landed on Fuzzy’s, including, pretty elaborate national tests and confirmed that we believe that the cuisine and the tacos and the design of the restaurants are applicable literally across the country, and that we can achieve a national footprint. When it comes to thinking about with any of our existing franchisees at Applebee's, or IHOP be interested in a Fuzzy’s. We have thought about that. And we've had a conversation with a few of them, I mean our point of view there is, investing in a Fuzzy’s would be great, but that is over and above their current commitments to, IHOP and Applebee's based upon their development agreements with us.

Fair again. And then just a quick one for Vance. And I know Eric was touching on franchisee level returns. But as you're looking out at kind of the cost picture in '23, what's your thoughts on the basket for the franchisees and maybe what you like to see from some inflation relief that could help drive their returns higher, and such a battenkill?

So, based on the current trends, we're expecting sort of mid-single digit inflation for our two brands a little bit higher for IHOP, a little bit lower for Applebee's, but roughly in that range, on top of sort of the 18% 20% inflation that we experienced in 2022. Now, the disclaimer is that, macro pressures from Ukraine, China, opening up the Fed rate hikes, et cetera. But they're all playing to us. So it's hard to be definitive, what we're seeing is, is a softening of the inflation for 2023.

And just a follow up to that, I guess, where do franchisees seem to feel as far as the value that both brands are still delivering with the price increases have been taken? And do you sense any, maybe catch up on incremental pricing? As you guys have been pricing behind the inflation that both brands have experienced? Thanks.

Yes, Todd, its John, I'll take that. And I'll ask Tony and Jay to comment if they want to if they want to add on but. As you said, about on average, our franchisee have raised prices, about half of the cost of inflation of cost of goods into the restaurants. And we like where they are, because I think they're aligned with us strategically about the being a value oriented brand. They understand where their guests are right now, and the effect of the economy on them. And I think they've taken you know, prudent and responsible pricing that is balancing both their own margins as well as, remaining attainable to our guests. When you look at our performance of the quarter in our comp sales, we think we hit that sweet spot of the franchisees protecting as much margin as they can, but also not driving their customers away with prices that are too steep. Tony, do you want to add anything?

Yes, thanks, John. Pricing is just part of the value equation. And the way our franchisees approach it, the way the brand approaches that is value is more important than ever, because of inflation and rising consumer credit card debt, lower savings, et cetera. Our guests are prioritizing how they're spending money and determining at the end of the day, what's most important to them, offering a reasonable price. That's table stakes when it comes to value for our guests. To win on value, we believe you have to deliver more than just an attractive price, you need to deliver what we call a value experience, which triggers a feel good element with your guests. This can come from indulgence or sharing a meal with family and close friends. And so for those reasons Applebee's and the Applebee's franchisees were focused on elevating the total guest experience in addition to offering compelling value offerings.

Yes, this Jay. From an IHOP standpoint, I think the franchisees, as John said, are being very prudent about this. But we some people refer to it as a barbell strategy. We have places where guests can get value at our restaurant, even though they've needed to take some price. They've been very smart and continue to support value initiatives. We have everyday value with our high Hoppy Hour program, we do limited time offers, like the BOGO on our crates we're doing right now or the Rudy 2d We did for $6 in the first year, we can even offer exclusive value now because we're a loyalty program we can send offers directly to people that are in our program, that unique value just for them and a reason for them to sign up for the program. So I think they're doing a good job of balancing that and as prices come down, I'm sure their costs come down. I'm sure that their prices to their guests are going to moderate as well and go back to more reasonable levels. And there may be a catch up opportunity at some point but they're not going to they're not going to do anything to hurt the guest experience and run off their guests because of it.

Next question comes from the line of Nick Setyan with Wedbush, your line is open.

Thank you, just given the outside performance poured a day in Q1, would it be possible for you to maybe make an exception just one time and just talk about your current correlating Q1 at least in general terms?

Nice try, Nick, I'll see what I can I can see what I can do, its John, we're not we're not going to give specific numbers about Q1. But what I can tell you is that the trend and the pace and the momentum that we see that we see ending last year is certainly baked into our, our guidance for this year.?

Got it. One of the big worry that there is that we're going to see incremental competition, particularly in the Applebee's peer set with one of your biggest competitors being more on television and advertising some aggressive price points on an ongoing basis. I guess, what's your response to that? How are you positioned in terms of your marketing cadence, how you feel about sort of incremental competition as this year progresses?

Sure, I'll talk about that broadly. And then ask Tony to comment. A little bit more specifically for Applebee's. As a former, CMO at Starwood Hotels for a long time, and I like the position that Applebee's is in, Applebee's is, is in a position of strength right now. It is in its fourth or fifth year of an extraordinarily successful and consistent marketing campaign, particularly television where I think it actually does the best TV in the category. And so, heading into '23, which again, is an uncertain year in terms of consumer behaviour. I'd much rather be where Applebee's is, the brand that has a clear position, has off the charts awareness scores from its, and has a consistent winning message on television Then having to rather be there than spending a lot of money to create a new point of view about a brand from scratch. Tony, you want to add on to that?

Yes. Thanks, John. And, well said, Look, I'll start, Nick, great question. I'll start by saying, we're very confident with the Applebee's brand position. We're very confident with our value proposition. And we're very confident with the marketing calendar sits for the entire year. More importantly, the entire Applebee's system is nimble and agile. And we're prepared to pivot if necessary, we'll make changes should any competitor or market force want such action. But while others are trying to figure out the new campaigns, we've got a five-year track record. We've got a proven sustainable playbook. And it's producing winning results. So we're going to remain focused on our playbook. We're going to continue to use our strategy to drive business results. And we're going to continue to connect with our guests through great marketing and restaurant experience. Q – Nick Setyan: Thank you very much.

[Operator Instructions] And our next question comes from Brian Vaccaro with Raymond James. Your line is now open.

Thanks and Good morning. Just piggybacking on Nick's question on Applebee's and, Tony, you mentioned the strength across various brand attributes. I was hoping you could hone in maybe a little more specifically on brand awareness. Is there any quantification you can provide on how much Applebee's awareness metrics have increased versus category peers? Or perhaps to what degree you think Applebee's trends over the last couple of years as a pandemic have benefited from that awareness?

Thanks, Brian. I don't have specific metrics results to share with you today. But let me say this when it comes to indicators, what gives us confidence it first starts with sales. And we've had a nice three year run with sales. And in addition to stringing together three strong years, we've had, as part of that eight consecutive quarters strong sales performance. But from a brand attribute perspective, specifically, we lead the casual dining category in metrics such as affordability, which is incredibly important in this environment, unaided brand awareness, unaided ad awareness, aided to go awareness and delivery awareness. And also, I'll add that our advertising under the leadership of Joe [indiscernible], our Chief Marketing Officer, it continues to deliver award winning campaigns that really resonate with our guests, and will continue to you'll continue to see amazing value added partnerships throughout the year that I referenced examples of in my opening comments. So all of these factors are very, very encouraging and our brand health today remains robust.

Okay, and then I also wanted to just circle back on franchisee profitability. Could you provide any more color just kind of exiting 2022? Just ballpark where average store level EBITDA margins might be for each brand? And just how you expect that to trend through 2023? I think Vance had said mid-single digit food inflation, but how about -- what are you what are the expectations on wage inflation and any specific savings initiatives that are worth highlighting?

So a couple of questions to peel back here. So first, overall franchisee profitability without getting into the specifics of our franchisees P&L, let me say that our portfolio is very strong overall, thanks in part to finishing 2022 with all time high annual average unit restaurant volume of 2.8 million per restaurant, as our average unit volumes improve, the health of the system continues to get better and better. With respect to the cost side of the equation, franchisee margins, especially food costs, they were impacted, but they remain healthy. And the good news here is that we're now seeing some moderation anticipate more relief later this year. In terms of specifically of food costs for this past year, we saw our basket increased by 18%. As Vance mentioned,

The food cost for Applebee's system. It's roughly 25% of sales. So the math there is, you apply the inflation percent to our food causes sort of the P&L impact, right, but you asked about specific cost saving initiatives. So each one of our brands, we have cross functional teams between the purchasing Co Op operations, the franchisees to come up with cost saving ideas to lower production costs, reduce waste, or usage, or improve restaurant labor, while just obviously not impact negatively impacting the guests experience. So, some of these ideas include like packaging, distribution, shrink reduction initiatives, server tablets to help save labor, energy fixing equipment, reviewing product specific indications, all these things are, are in conjunction to help offset sort of inflation that the franchisees are saying.

Okay, thank you for that. And then and then just one last one, if I could on the development guidance, how many openings and closures does your net unit guidance embed at each brand? And then how many Fuzzy’s? Do you expect to open in 2023? Thank you.

We haven't guided on gross versus closure. Wheat we guided was the net number. And Fuzzy is also you know, I think, right now, it's -- think of it like, like our international businesses, this is not significant enough just yet on a consolidated level for us to break it out. So we're not providing separate guidance, but obviously, we will report accordingly, as the system grows over time.

All right, I'll pass it along. Thanks very much.

Thank you, one moment for our next question. Our next question comes from the line of Jeffrey Bernstein, with Barclays, your line is now open.

Great, thank you very much. Just following up on the Fuzzy’s. I know you mentioned that, I guess it's already built into guidance. And I think you just mentioned that it's not material enough. But is there any qualification in terms of sales or EBITDA da or any specifics you can provide? As we try and build out by this as an incremental layer to the 2023 guidance?

In terms of sales, we talked about Fuzzy’s system sales about is roughly 220 plus million dollars in system sales. And then in terms of G&A and EBITDA, for this year, roughly equates to what the company owned restaurant, the 69 restaurants used to contribute to our P&L. So as I said, before, going forward, there's a lot of growth potential, but for now, sort of roughly equivalent to what the 16 restaurants would do.

Understood. And I think you mentioned from a cost standpoint, obviously, things easing in '23 versus '22. I think you said mid-single digit food basket. Should we provide the detail in terms of one what's contracted for the franchisees and two, how much pricing may be cooperated suggesting or how those pricing conversations have gone with franchisees?

Right now, I think we're, we're at sort of 40% to 60% of our fee cost pricing is locked in for the next 12 months. I think this is still we're still at lower fixed pricing level than we normally would because, the current spot markets are still pretty high and for risk premiums are pretty high. So that's what we're seeing And could you remind me your second question again,

Yes, just how that pricing conversation is going with franchisees, whether it's alright and making their own pricing decisions, but how they're thinking about that going into '23, relative to maybe what you're suggesting or talking about?

Yes, it's completely up to the franchisees to determine menu pricing, but the conversation we're having is obviously focusing on the longer term grab market share and focus on traffic that's what's going to drive enterprise value for themselves and for us.

Understood. And lastly, just based on the assumption for positive traffic as we move through '23, just trying to compare what you're thinking for your brands, and maybe how you think that compares to the relative industry for 2023 on traffic?

We haven't guided on traffic before. And so, I think that the reason being different industry players have different definitions of traffic. So, but it's a key focus, as you could imagine, for us and all the campaign's all the investments our aim to improve our guest experience and drive traffic. But we haven't guided on that point specifically, before.

Okay, thank you.

[Operator Instructions] At this time, I would like to turn the conference back over to Dines's Chief Executive Officer Mr. John Peyton for closing comments.

Thanks very much. We appreciate everybody's questions this morning. And always appreciate the time you take to talk with us and I know we'll be speaking with some of you throughout the day, and have a great day and take care.

This concludes today's conference call. Thank you for your participation. You may now disconnect everyone have a wonderful day.