Dine Brands Global, Inc. (DIN) Q3 2023 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to Dine Brands Global's Third Quarter Earnings 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 now like to hand the conference over to your speaker today. Please go ahead.

Good morning, and welcome to Dine Brands Global's third quarter 2023 conference Call. I'm Brett Levy, Dine’s Vice President of Investor Relations and Treasury. This morning's call will include prepared remarks from John Peyton, CEO; and Vance Chang, CFO. Following those prepared remarks, Tony Moralejo, President of Applebee's; and Jay Johns, President of IHOP, will also be available to address questions from the investment community during the Q&A portion of the call. Please remember our safe harbor regarding forward-looking information. During the call, management will 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 filing. The forward-looking statements are as of today and we assume no obligation to update or supplement these statements. We will also refer to certain non-GAAP financial measures, which are described in our press release and also available on Dine Brand's Investor Relations website. For calendar planning purposes, we are tentatively scheduled to release our Q4 2023 earnings before the market open on February 28, 2024. And to host a conference call that morning to discuss the results. With that, it is my pleasure to turn the call over to Dine Brands CEO, John Peyton.

Thanks, Brett, and good morning, everyone. Thanks for joining us. Today, we'll provide updates on Dine's Q3 results, and how we're advancing our strategic growth agenda or as we call it, our recipe for growth. Vance will then provide a detailed financial update, including an update to our full year guidance metrics. And following those comments, Tony and Jay will join us for Q&A. To start, I'll share some thoughts on what we're seeing with respect to guest behavior and the consumer mindset. During the quarter, we noticed that guests are limiting their discretionary spending and have become more selective with where they choose to spend their money. Despite this, we believe that eating out continues to be an occasion our guest value across our brands. We're seeing our guests maintain spend in family and casual dining brands while tightening their wallets on quick service brands. We're also seeing guest traffic on weekends and key holidays outperform the competition, further indicating that guests prioritize a full-service experience even if it means they'll have to skip out on their next quick service dining occasion. At the same time, we believe the decreased personal budgets are leading guests to ask, where should we go to eat less and should we just cook at home more. This means we're not only competing with other restaurant brands, but also with home-cooked meals. In general, we see guests prioritizing dining in and enjoying a full restaurant experience, which aligns with Dine's core strengths of providing abundant value and exceptional experiences, quality is deeply ingrained in the DNA of each of our brands. This is particularly important during the upcoming holiday season, when restaurant visits increase. So now turning to our results. Our third quarter results highlight the resilience of Dine's franchise model. Despite lapping strong comps and an increasingly competitive landscape, we posted solid EBITDA results. First, Q3 revenue of approximately $203 million versus $230 million in the prior year, the difference is largely a result of the refranchising of 69 company-owned restaurants in October of last year to a franchisee. While company-owned revenues are now zero, because of the refranchising, we benefit from the consistency of royalty income combined with reduced operations-related expenses. Second, adjusted EBITDA of $60.6 million compared to $63.6 million in Q3 of 2022. Thee difference, again, is due to the refranchising of the company-owned restaurants. IHOP posted its 10th consecutive quarter of comp sales growth, up 2% year-over-year and outperformed the family dining segment on sales for eight out of the 13 weeks of the quarter. Average Q3 weekly sales for IHOP were $37,800 exceeding pre-pandemic highs. And Applebee's same-store sales declined 2.4%. However, average Q3 weekly sales for Applebee's were over $52,000, which also surpassed pre-pandemic highs. Throughout the quarter, we continue to focus on initiatives to drive growth and efficiency. First, we leverage investments in technology, marketing and training to improve both guest experiences and loyalty programs. Second, we introduced menu innovations and supported marketing initiatives to further engage our guests and better understand what they're looking for in our brands. This has been a huge area of focus with activity across both IHOP and Applebee's, as we advance culinary innovation and the opportunities to lean into abundant value. And third, we remain highly focused on new development initiatives. And we're driving ahead with plans in this area to support unit growth overtime. These three areas make up our recipe for growth. Now, let's review the quarter highlights for each brand, starting with Applebee's. As I mentioned at the start of the call, Applebee's comp sales were down 2.4%. However, Applebee's continued to maintain sales volumes by executing promotional tactics such as All-You-Can-Eat Wings, to increased demand throughout the quarter, while still looking to advance its plans to drive traffic over the long-term. Applebee's guests want compelling value and a great dining experience at an affordable price. Our strategy leverages fan favorite menu items, new culinary options and promotional offerings that appeal to both new and existing guests. Although there's been a decline in guest traffic, our check levels have shown an increase, compared to 2022. In Q3, Applebee's offered several promotions to drive profitable traffic. For example, during our seven-week, All-You-Can-Eat Wings program, we sold £7.1 million of bonus wings, that's about 114 million individual wings. The campaign performed better than our internal expectations, driving incremental sales, tickets and franchisee margin dollars and introducing new guests, particularly Gen Z to our brand. In October, we brought back the iconic Dollarita, for the first time since 2020. And while we'll wait to speak to the full results of this month-long promotion on our Q4 earnings call, we're pleased with the preliminary results. On the technology side, Applebee's is far along in its effort to redesign and re-launch its website and app, details of which will be revealed in the coming weeks. Two months ago, we launched Applebee's guest experience program, using Qualtrics Experience Management Platform to gather valuable feedback from our guests. We're pleased guest participation surpassed industry benchmarks and our own expectations, and this positive engagement highlights our guests' strong connection with the brand and provides us with valuable insights to meet and exceed their expectations. During the last five months, Applebee's culinary team has tested more than 200 new menu concepts ranging from different cuisines to innovation of current menu items. We also have new beverage concepts rolling out in 2024, which are also generating positive anticipation throughout the franchise system. During the quarter, Tony strengthened his leadership team by hiring two industry veterans, a new Vice President of Culinary who brings a contemporary and innovative mindset to our menu, and a new leader of development focused on conversions, developing our new prototype and our remodel program. Menu innovation and development are key focus areas for the brand, and we look forward to providing progress on these initiatives soon. Now on to IHOP. The quarter's comp sales growth was fueled by the introduction of the brand's new menu combined with compelling offers. The data we're gathering from our loyalty program enables us to methodically plan promotions and menu offers that are most likely to appeal to our guests. As a result, we continue to see the brand gaining traction amongst the younger demographic. During the quarter, we focused on breakfast equities that span dayparts, balancing both suite and savory options to meet all cravings. First, in early July, we introduced Pancake Tacos, which came in sweet and savory flavors for a limited time with three Pancake Tacos for $6. We sold nearly two million Pancake Tacos in just four weeks, and they were hit in the restaurants and on social media. Overall, the campaign had over one billion media impressions. At the end of August, we introduced biscuits with flavors like fresh strawberries and cream and bacon egg and cheese. Our biscuits premiered with a special introductory offer of breakfast biscuits with a side for $7 before becoming part of our core menu in September. During the quarter, we also expanded our waffle category, our original chicken and waffles is one of our top-selling menu items for dine-in and to-go. And after receiving guest feedback asking for more variety, we expanded to add new flavors, including our new Nashville Hot Chicken & Waffles. And finally, as we discussed on our Q2 call, we launched one of our most comprehensive menu updates in Q2 and the new and expanded categories of Benedict and Crepes are performing well. HOP has always been known for its family-oriented menu and guest experience. So to celebrate the brand's 65th anniversary, IHOP brought back its kids eat free promotion during the month of August, and it's all-you-can-eat pancakes for $5, both helping IHOP outperform the Black Box family dining index in comp sales, check and traffic during the promotion. The brand continues to build its consumer packaged goods program. In partnership with Kraft Heinz, we're selling our 100% Arabica coffee in approximately 25,000 retail stores. Additionally, in July, we introduced a new IHOP Iced Late with Cold Foam at Walmart with planned expansion to other retailers in Q1. Shifting to technology. We're on track for the new point-of-sale system to be completed by early 2024, and the tablet rollout is progressing accordingly. Our loyalty program, International Bank of Pancakes is steadily growing now with seven million members. More information will be provided next quarter. Quickly touching on Fuzzy’s. We added Fuzzy’s to our existing portfolio because it's a young, compelling brand with the potential for substantial growth over the next decade by capitalizing on the scale and resources of Dine. In September, I attended the Fuzzy's Annual Franchisee Conference called Family Reunion. I was blown away by the terrific energy from the franchisees who all seemed energized by the brand and its plan for new menu offerings, future restaurant designs and marketing innovation. One of the biggest moments from the franchisee conference was the unveiling of Fuzzy's new Baha strategy, a comprehensive plan and state of mind that takes the brand back to its roots, embracing the Baha lifestyle and cuisine, it includes new restaurant design elements, a menu refresh and enhancements to the overall guest experience. Testing will begin in Q4 with a full national rollout planned in Q1 of 2024. On the international side of the business, we opened 16 units so far this year. Our main focus remains on opportunities in our core international markets of Puerto Rico and the Caribbean, Latin America, Middle East and Canada. International division delivered strong comp sales growth and is the incubator for our dual-branded IHOP, Applebee's restaurants, of which there are now six open in the Middle East and Canada. Before I turn it over to Vance, I want to emphasize that our brand teams and franchisees are expertly navigating a still challenging economic environment through smart, compelling marketing, engaging promotions and best-in-class service. Their commitment to upholding the highest standards is central to our recipe for growth, and it will continue to steer us forward. And with that, I'll turn it over to Vance.

Thank you, John. As you just heard, we had a mixed quarter in terms of comp sales, but we continue to see the strength of our business model, reflected in our ability to generate steady cash flow and EBITDA. On the top line, consolidated total revenues excluding the refranchise Applebee's restaurants, increased to over $200 million in Q3 versus $195 million in the prior year. Our total revenues decreased 13% to $202.6 million compared to $233.2 million for the same quarter of 2022. The change was primarily due to the refranchising of the Applebee's restaurants in October of 2022. If we exclude advertising revenues, franchise revenues increased 6.4%. Rental segment revenues for the third quarter of 2023 remained flat at $29 million compared to the same quarter of 2022. The rental segment margin increased 3%. Our company restaurant operations sales were approximately $0.3 million for the third quarter compared to $38.2 million for the same period of last year as we only had one company-operated restaurant in Q3. G&A expenses increased nearly 5% to $48.6 million in Q3 of 2023, up from $46.3 million in the same period of last year, mostly due to an increase in compensation-related costs, offset by a decrease in occupancy costs. Adjusted EBITDA for Q3 of 2023 decreased to $60.6 million from $63.6 million in Q3 of 2022. Adjusted diluted EPS for the third quarter of 2023 was $1.46 compared to adjusted diluted EPS of $1.66 for the same period of last year. Now let's turn to the statement of cash flows. We had adjusted free cash flow of $54 million for the first nine months of 2023 compared to $52.4 million for the same period of last year. Cash provided by operations at the end of the third quarter of 2023 was $79.3 million compared to cash provided from operations of roughly $63.5 million for the same period of 2022. CapEx through Q3 of 2023 was $32 million compared to $19.5 million for the same period of 2022.We finished the third quarter with total unrestricted cash of $98.2 million compared with unrestricted cash of $98 million at the end of the second quarter. Additionally, we continued to return capital to investors. Through Q3 2023, year-to-date, we've returned approximately $203 million of capital back to equity and bond investors, including debt reduction as part of our refinance, demonstrating our prudent capital allocation strategy. Next, let me discuss Applebee's performance. Q3 same-store sales were negative 2.4%, as we lapped strong comps from the year prior, and we continue to face a price-sensitive consumer environment. However, as John mentioned earlier, Applebee's sales results have remained fairly steady, as average weekly sales were over $52,000, including over $11,000 from off-premise, we're close to 22% of total sales, of which 11% is from to-go and 11% is from delivery. IHOP sales continued their positive momentum throughout the quarter with Q3 same-store sales growth of 2%. Average weekly sales were over $37,000, including over $7,000 from off-premise or close to 20% of total sales, of which 7% is from to-go and 12% is from delivery. On the labor front, our franchisees are reporting that restaurant staffing continues to steadily improve, as more and more people return to the workforce, labor shortages are reduced, helping alleviate operational challenges in our restaurants. On the commodities front, our outlook for the full year for our franchisees remains consistent with what we previously provided. Both brands in the flat to low single-digits range through the remainder of the year as costs turn deflationary. Applebee's commodity costs improved by over 2% versus a year ago and over 80% of Applebee's purchase prices are protected through the end of the year. IHOP's commodity costs have improved 3% versus last year and is basket needs are locked at a similar level to Applebee's. While our data indicates that overall consumer inflation continues to ease, we do expect inflation levels to remain moderately elevated in 2024. Now I would like to provide an update on our financial guidance for the year. Starting with our G&A. We're reducing the top end of our expected G&A range for the year, as we take proactive measures in managing our G&A spending. Our new 2023 G&A forecast guidance is $200 million to $205 million compared to our prior guidance of $200 million to $210 million. With EBITDA, we're raising the lower end of our adjusted EBITDA range. Our expected adjusted EBITDA range is now $245 million to $255 million compared to our prior guidance of $243 million to $255 million. We're also maintaining our CapEx range of $33 million to $38 million. Finally, moving on to development. Development is an important growth driver, and we have strategies in place across both brands to sustainably expand our footprint, both domestically and internationally. Through year-to-date, IHOP has opened 29 domestic restaurants, and many of those were conversions. However, as we enter the fourth quarter, our franchisees are still experiencing some near-term development headwinds including permitting and construction delays, which could cause some of the openings to slip to 2024. As a result, we now expect IHOP development to be between 20 to 30 net openings for 2023, compared to 45 to 60 net openings, we previously stated. Again, I want to emphasize that this change to guidance is the result of ongoing construction delays that have made it more challenging to accurately forecast the timing of these openings. IHOP still has a strong development pipeline as franchisees are excited to expand the brand, and we remain bullish on IHOP's long-term growth. On the Applebee's side, our development guidance remains unchanged, and the brand continues to execute the three-part plan we outlined last quarter, which includes the creation of a new restaurant design that matches the modern needs of our guests. Despite the mixed quarter in terms of comp sales, we continue to see the strength of our business model highlighted by our steady cash flow generation and EBITDA and we remain focused on executing on our strategic priorities to drive long-term shareholder value. So now I hand the call back to John, and we'll open it up for Q&A.

Thanks so much, Vance. And as a reminder, Jay and Tony are both on the line along with me and Vance, and they're here to answer your questions. So Kathy, please open up the queue and we'll take the first question now.

Yes. Thank you. [Operator Instructions] Our first question comes from the line of Eric Gonzalez with KeyBanc Capital Markets. Please proceed with your questions.

Hi, thanks. Good morning. My question is about Applebee's. I'm wondering, if you could talk a little bit more about how the quarter progressed from a traffic perspective. You're on airiness wings for a good part of the quarter. So can you talk about how the promotion went? What you saw is that promotion roll off? And also I'm curious about the return to DOLLARITA, maybe if you could talk about what drove that decision to bring it back after the multiyear? And anything you can share about your expectations for that promotion in terms of traffic improvement in the fourth quarter. Thanks.

Sure. So Tony, why don't you take both of those questions about Wings and DOLLARITA?

Yes, happy to, Eric. We don't traditionally talk in detail about traffic, but it's obviously something we monitor closely. What I'll say about the quarter is that we were pleased with the performance of All You Can Eat Boneless Wings. We experienced quarter-over-quarter traffic improvement, profitable sales, and we brought younger guests into Applebee's. As for DOLLARITA, I'll say the specifics on DOLLARITA’s performance for next quarter, but we're really excited about what we've experienced so far. And I'm happy to share that 93% of all the transactions involving DOLLARITA included the purchase of a food menu item. As for why, guests want two things from Applebee's, every time they visit us. They want great value and they want a great experience and DOLLARITA delivers on both. So you'll continue to see Applebee's innovate with best-in-class marketing campaigns that will continue to surprise and delight our guests.

Got it. And then if I can maybe just ask about the overall operating environment, specifically on value. From an industry perspective, are you seeing an uptick in promotional offerings from the competitors and how is the brand reacted to one of your largest competitors coming back on air with value? Have you seen any sort of impact when they're back on air?

Yes. Happy to take that one as well. We're a brand that's built on value, Eric. And I guess now they can counter on us when the economy is struggling or they face financial uncertainty. Again, with the All-You-Can-Eat Boneless Wings promotion, we had strong results. It's an excellent example of abundant value and it ignited a Tik-Tok challenge that again introduced our brand at younger guests. It's compelling and provides the value that our guests increasingly seek in this environment.

Eric, it's John. I would just add in that both brands think about value in three buckets. There's the everyday value, which is on their menu every day. There's special moment in time LTO offerings, and then there's exclusive value via the loyalty program. And what both these brands do well since they've been positioned as a value brand in the category for a decade is they know how to read the market, they have great data about their customers, particularly IHOP, most recently with its new 7 million members in the loyalty program. And so they lean into one of those three categories, everyday value LTOs or loyalty as they see the need and as they read the market and as they all do what the competitors are doing. So, they've got a sophisticated levers that they can pull when they need to.

Thanks. I'll hop back in the queue.

Thank you. This question comes from the line of Jake Bartlett with Truist Securities. Your line is now open.

Great. Thanks for taking the question. Mine was really about the sales drivers ahead that you see specifically at Applebee's. You talked about a lot of test menu, new menu innovation and that 2024, I think, is going to be more of a catalyst there. What is the cadence that you expect? Should we expect kind of a more meaningful innovation really kind of out of the gate in 2024? Or is that something that you think is going to just build throughout the year?

Yes. Tony, you're on center stage today.

Yes. Look, we're focused on innovation in multiple areas. So, with respect to our value offerings, we're looking to create new, compelling value offerings and to complement those with our true and tried favorites like DOLLARITA, like an All-You-Can-Eat Boneless Wings. We're focused on innovation on the culinary side with our menu. We know that we need new menu options that appeal to a younger guest. We're focused on innovation with respect to our prototype, which Vance mentioned in his opening remarks. So, really, you're going to see innovation throughout different parts of our business. And on top of all that, you'll see a renewed focus on our assets. A lot of our restaurants are over 20 years old. And so they need to evolve and they need to be renovated. So, we've got a reimage program that we're launching later this year. So, you'll see it through different stages. These are all work streams that currently are being addressed in parallel, but you'll see them come to fruition over time over the course of the next year.

Okay. And I want to build on Eric's question about really the trend throughout the quarter. And I know you typically don't provide too much detail there. But you did mention that you stressed that IHOP was very consistent throughout the quarter. So, I guess that leads me to wonder how Applebee's trended throughout the quarter. If you can help us just with the trajectory, that would be helpful as we look forward to the fourth quarter.

Yes. So, I'm happy to take that one as well. We don't typically talk about intra-quarter trends. We're just a few weeks into Q4. So there isn't much I can share with you for Q4 otherwise as well.

Okay. But I think you mentioned that Applebee's was consistent in the third quarter, month-to-month, but you can't say the same for Applebee's, I assume?

So -- sorry. So for Applebee's in the third quarter, obviously, the -- all you can eat promotion, I think, met or exceeded our expectations. So it was probably a stronger period within the quarter.

Okay. And then my last question is on G&A. And you lowered the guidance a little bit for the year. I'm wondering how much of that was kind of tightening the belt there, maybe pulling back on some of the initiatives a little bit in the near term versus your incentive comp and things like that, which would be temporary. The basis of the question is trying to figure out what the impact of the lower outlook this year, what the implication is for 2024?

So Vance, why don't you take that question

Hey, good morning, Jake. So, it's a mix of both. So we are constantly evaluating sort of what to pull back, what to slow down, what to accelerate within our G&A with all the initiatives we're working on. So the short answer to your question, it's a little bit of both. But our G&A reflects sort of the existing commitment to improve franchisee support and to improve get guest experience. And they take time, these projects. But they're building blocks to any successful franchisor, right? So we have and will continue to apply this disciplined approach to G&A as evidenced by this quarter, when we achieve spending level below street expectation.

Great. I appreciate it. Thank you.

Thank you. One moment for our next question. Next question comes from Jeffrey Bernstein with Barclays. Please proceed.

Great. Thank you very much. Two questions. The first one is just on the unit growth, and I know you mentioned it's an important part of the story. The temperate IHOP guidance, but it seems like it's due to permitting and construction delays, I should say, not a lack of franchisee demand. I know you maintain the guidance for declines at Applebee's on a net basis. But all that said, as we look out to next year, I'm just wondering how you think about franchisee sentiment. Whether there's any perhaps more cautious tone from franchisees, whether due to a more challenging macro or higher interest rates. Whether there's any reason to believe that the growth outlook might be challenged going into 2024 because of those issues or whether perhaps you're not hearing anything about that at all from the franchisee conversations? And then I had 1 follow-up.

Sure, Jeffrey, it's John. I'll make a general comment, confirming what you said that the IHOP push from fourth quarter into the first quarter, consisting of what happened last year, is about timing related to the new construction environment that seems to be the new normal and that our franchisees are meeting their commitments and building as they were. And for Applebee's, we adjusted that guidance, reflecting in part the work we're doing on our prototype and franchisees working with us to be ready to do that. I don't know if Jay, you have anything to add about IHOP specifically?

Yeah, John. Hey, thanks, Jeffrey, for the question. I think the thing that's consistent about IHOP is we've been a steady developer for many, many years now. We've got a pretty steady pipeline. We've got a good pipeline. And the thing that's just been tough in this environment is predicting when they're going to open. So that's been a little bit of a challenge for us. But the ones that roll into next year, actually, just to give you a little bit of a jump start on next year's numbers. We've already opened 29 this year. The fourth quarter should be busy for us as well. So we're going to end up not quite as well as we thought we would this year based on timing, but we'll end up with a good year, and we'll start the year off strong and having the year next year vision.

Okay. So it doesn't sound like in terms of conversations with franchisees that there's tempering of enthusiasm for either brand because of the broader macro environment at this point, I guess, looking to 2024, it seems like you're on track for a return to perhaps net openings at the Applebee's brand?

Yes. So I'm happy to take that one. We're not going to provide guidance beyond 2023 on net openings, but we still remain optimistic about Applebee's return to net unit growth. 3 of our last four restaurant openings are conversions, and they generate, on average, AUVs that exceed the system average. So we've shifted our short-term focus to conversion opportunities. Our franchisees recognize the benefits of conversions, right, including shorter construction time lines for openings, as we leverage the benefit of conversions, we'll work on new, efficient and economical prototype for the system. Collectively, these strategies, they should drive net unit growth. That's still the goal. And we'll keep you posted as we work through these challenges.

Jonathan, conversion is a key focus for both brands, 70% of IHOP's openings this year for conversions and we anticipate that, that will be a focus for both brands next year as well.

Understood. And then just to follow-up. I think you made reference to 2024, briefly at least that you still see moderating but still elevated inflation. Just wondering if you can offer any specifics in terms of your outlook or franchisees' outlook perhaps for commodities and labor, whether you can share what the baskets were in the current quarter or whether you're talk about directionally what you're thinking for 2024 as we think about the pricing environment going into next year? Thank you.

Sure. Vance, will look at that.

Sure. Hey, Jeff. So -- we talked about the fact that we're seeing deflationary commodity pricing for our franchisees for the rest of this year, which is a positive now. And our franchisees, we're working with our franchisees closely to encourage everyone to take that into consideration in setting menu pricing, right? But for -- and most of that, the improvement that we're seeing is really driven by probably not a surprise to you by coffee, by eggs, by poultry, but wheat and beef sort of remain elevated in -- for our baskets. But next year, look, what we're seeing in stores, we'll have more color next year. But for now, we are expecting sort of moderately inflation for next year, but not a ton of details just yet. And that's pretty fast-moving environment that we're managing through. But for now, it does seem like things have meaningfully moderated.

Do you guys share the component of the comp maybe in the current quarter, how much of that is price versus the other components just so we can gauge the pricing contribution?

You mean in terms of our menu pricing as part of the comp? That was – was that the question?

That would be great. Yes. Please.

So I think for Applebee’s, let me see -- so Applebee's many pricing increase for Q3 year-over-year is about 4%, for IHOP it's about 8%.

Thank you.

Thank you. One moment for our next question. This question comes from the line of Nick Setyan with Wedbush. Please proceed.

Thank you. Q3 was obviously a pretty nice EBITDA quarter despite the lower cost at Applebee's. You know, as we kind of look at Q4, it sounds like the DOLLARITA has resulted in some kind of an acceleration versus Q3? I know you guys don't want to quantify it. G&A guidance lowered slightly. And so the implied EBITDA would kind of result in a pretty big deceleration from Q3 to Q4 maybe even no growth versus Q4 of last year. And so just given the expectation that DOLLARITA has maybe normalized to even results in a little bit of an uptick in comp in Q4? Why should that be the case? Why should EBITDA be a little bit higher?

Vance?

Yes, I will address that. So part of -- a big part of that, we talked about this in the prior quarters is that Q4 our G&A just for seasonality and accrual purposes, G&A tends to be a little higher than other quarters. So that's primarily the reason that you're going to see this quarter-over-quarter drop in EBITDA. It's more related to that than any of the top-line trends that we're seeing.

Okay. Fair enough. And as we kind of look out to 2024 -- how are you thinking about G&A in this environment versus 2023? I mean, could we actually see G&A be a little bit lower than 2023 and 2024?

No. So as I mentioned earlier, our G&A is sort of -- the increase reflects -- increased improved franchisee support and our efforts in improving the guest experiences. And they do take a little bit of time, right? So what we've said before is that 2023 level is --is probably the run rate that we need to run the business and with these initiatives that we're running, so that we're still looking at sort of that bad level of G&A or for future years.

Okay. And then just last question for me. During Q3, a lot of your peers have cited seasonality as one major driver of some of the comp weakness in Q3. Did you -- when looking at your comp at both IHOP and Applebee's, I mean, do you see any of that seasonality impact? Or do you think your comps were a result of some other factors?

Should I take this?

Yes. Vance, I thought you would take that, too. But..

Yes. So our comps -- there is certainly the sort of typical back-to-school trends that we see within the quarter. But -- but a lot of it is really also driven by what campaigns we ran last year versus what campaigns we run this – we're running – we ran this year. So they don't always match and we mix it up with different campaigns. So there may be some noise with that, but that's probably a bigger driver than traditional seasonality other than back-to-school, I would say.

Nick, we've said in the past that we don't have a particular quarter that is stronger or weaker than the others. So from a seasonality perspective, we're fairly consistent, which we attribute to the size of both brands and their distribution across the country. So we wouldn't mean the seasonality, as Vance said, for this explanation.

Okay. Thank you very much.

Thank you. One moment for our next question. This question is from the line of Brian Vaccaro with Raymond James. Please proceed.

Hi, thanks. Good morning. I just wanted to follow-up on the healthier consumer. And I heard your comments earlier, but could you elaborate on any changes you're seeing as it relates to frequency across different income levels and then understanding, it's likely up, given your promotional strategy. Could you also comment on the percent of sales that are occurring on some sort of discount or value LTO and how that's trended over the last couple of quarters?

Sure. Hey, Brian, it's John. When it comes to the consumer, we didn't see any significant change quarter-over-quarter in terms of income levels. Our core consumer household income for both brands is about $50,000 to $75,000, as we reported in the past. We didn't see a significant change there. What we did see, based upon the multiple sources of data that we get about our consumer at large is we saw that they slightly decreased their spending QSR. And when they came to us, they maintained their average check. And so as we've said also in the past, consistent with the last quarter, since we've raised prices, they're maintaining their average checks, they are finding some of the value items on our menu. But when they come out to dine, they still want a full service experience. They want the expectations that they have from Applebee's and IHOP to come together with family and friends, and they're still spending when they're with us. And your second question, could you just repeat the second question?

Yes. Just the percent of sales mix on some sort of value promotion or discount and how that's trended over the past few quarters?

Brian, my belief is that we don't disclose specifically, the mix of associated with the specific promotions.

Right. And Brian, I think that what you will see is that we talked about our menu pricing increase. And the average check is fairly steady. So the makeup of that is a shift in fee mix [ph]. And the fee mix is what you're referring to in terms of the consumers managing their check and dropping what they're ordering from us, but sticking with a similar check size. So we are seeing that in our business.

Okay. And thank you for that, Vance. So just to clarify that, is that an Applebee's specific comment where pricing is up 4%, but check is flattish and thus traffic is down around 2% year-on-year. Am I interpreting that correctly?

Well, we didn't comment on the traffic part, but traffic is down for both brands, but we didn't quantify it. But directionally, 4% in menu pricing for Applebee's and 8% for IHOP, that's correct.

Okay. And then on the off-premise side, assuming I got my numbers correct and did my quick math correct. It seems like the year-on-year declines in off-premise may have accelerated a little bit, maybe more so at Applebee's than IHOP. Is that accurate? And maybe just comment more broadly on what you're seeing in off-premise, the channels of both brands?

I can address that, John. So yes, that is correct. I think the off-premise volume is dropping a little bit for us. And most of that is really coming from the DSP business. So as consumers are managing their dining budget, the delivery fees are part of the decision factor. So that's -- that is driving some of the decision-making process for our guests.

Okay. Thank you. And then just last one for me. I appreciate the color you gave on menu pricing during the call in the third quarter. And I know it's a franchisee decision. But I guess, to what degree do you expect menu pricing that year-on-year tailwind to moderate in the fourth quarter or even over the next few quarters as the inflation moderate, environment has moderated? Thank you.

Yes. Hey, Brian, it's John. I'll take that. I mean you're correct. Thank you for saying it the franchisees make that decision, we don't. What we've reported is that in the past is that typically franchisees rate their price is 2% to 3% a year. Obviously, the last couple of years has been an exception to that. As we see the cost of goods, in particular, declining as Vance described, we would anticipate the franchisees begin to feel less pressure to raise prices. So if there's some cost of good environment flows into next year, then there is the potential for it.

All right. Thank you very much.

Thank you. Our next question comes from Brian Mullan with Piper Sandler. Please proceed with your question.

Hi. Good morning. This is actually Ashley [ph] on for Brian. My question is just an update on how the late-night daypart is doing at IHOP, if you're seeing any material traffic changes there? And if you're running any promotions to kind of drive traffic back in that daypart? Thanks.

Thanks, Ashley. Jay will take that.

Hey, Ashley. Thanks for the question. Actually, we're not seeing a tremendous amount of change in the late night business. It's been pretty steady. We have added on -- over the last couple of quarters, we've added on about 50 more restaurants that are doing some form of 24 hours, either what we call 24x2 or 24x7, and I think we're back up to almost 800 restaurants. We're still probably 100 or 200 restaurants below where we were pre-pandemic. But it does slowly keep adding back a little bit of restaurants to that time period. As far as the sales themselves, we typically have not done national advertising for overnight hours just because it is so localized on who participates and who doesn't. So they may be doing some individual things to that themselves locally. But that's more independent and less of an organized national promotion than we do for the late night business. But it's pretty steady. It's been running pretty consistent all year for us.

That's great. Thank you for the color. I'll pass it back

Thank you. [Operator Instructions] This question comes from the line of Todd Brooks with The Benchmark Company. Please proceed.

Hey, thanks for taking my question. I have one follow-up and then one other question. The follow-up, you talked about a focus on finding conversions for new units and how that seems to speed some of the construction time if you can go into an existing facility. Can you walk through quickly economics to open via conversion versus a new build? Just trying to think about from something that could be enhancing the return for franchisees in top and higher cost construction environment going forward?

Jay, why don't you take that since 70% of your opening for conversions this year.

Yes. Thanks, Todd. We do a lot of these, and there's no one exact number to tell you. It depends what you're converting. It depends what work needs to be done. Sometimes it has kitchen equipment left inside it. Sometimes you're starting with new equipment depends on the amount of repairs have to be done. But I can tell you this, compared to a new build, you're probably going to save 30%, 40% on the construction cost sometimes can be a little less, a little more than that. But it's significantly cheaper to go in and convert an existing structure than it is to completely start from the ground up. Usually, the permitting goes a little faster. Permitting has been a problem in a lot of places around the country. They -- with people going remote and not everybody works back in an office again it just – things have slowed down in trying to get approvals and trying to move paper across the desk, so to speak. So it's still a little bit of a challenge, but it is still faster doing the conversion to get permitting done than it is to get all the approvals for a ground-up facility. So we've really been advising our franchisees to look at opportunities that are out there, because there's still quite a few and there's more happening all the time. And for ourselves, we've even got a smaller prototype and that opens up even conversions of some quick service locations that have pickup windows, et cetera. So there's a lot of things you can do with the buildings that are out there and the franchisees are becoming more and more excited about those as they see more and more results from others around them.

That's very helpful. Thank you, Jay. And then my other question A lot of talk about value on the call and just the abundant value that both brands are focused on delivering. So there's an offensive element. You've got every day, you've got through your LTOs, you've got through loyalty. How about defensively in an environment where value is becoming more of a focus for both customers and competitors, do you have a reactive value capability to kind of counterpunch when you see promotions from really close competitors that you have for both concepts? Thanks.

Yeah. Todd, its John, I'll take that on behalf of both brands. Both brands plan their marketing calendar. We're planning 2024 now, right, as you can imagine. And that includes the beverage and the food item promotions for the year. So I like your characterization of it is that, we do it offensively, based upon what we believe is necessary at a point in time, based upon our history and based upon what we expect for the future. And the answer about can we react effectively, of course, we can, right? Because we're always looking at what our competitors do. And we're always looking at the current market conditions. And we would and we will if we need to. But our strategy -- the primary strategy for us is to focus on what we do best, tell our story from a marketing perspective and not be overly reactive to what a competitor does in any given quarter.

That's helpful, John. Would you characterize the competitive intensity right now in the market as expected or something that you do think about maybe, okay, we need to react to a little bit.

You would characterize it as expected given the general consensus about the economy and the state of mind of our guests in particular.

Great. Thanks, John.

Thank you. One moment for our next question. This question comes from the line of Jake Bartlett with Truist Securities. Please proceed.

Great. Thanks for taking my follow-ups here. Just real quickly and following up on Brian's question earlier, Brian Vaccaro's. He asked about the value mix. And you guys have shared this is at Applebee's, you've shared in the past and last quarter, it was 19%. In the first quarter its 15%. So that's the number I'm looking for an update on. And that's LTOs and value-oriented menu that section.

Welcome back Jake.

Thanks.

Do we, -- so yeah, so I do recall.

So you did disclose it. Yeah. It was 19% last quarter and 15% in the first quarter.

And do we have that for this quarter, Vance or Tony I don't know that we have any.

I don't have it handy, John.

So we'll think about that as probably.

Got it.

John, I don't -- Jake I don't have it handy either, but I can add a little color to the value question and that is we did see guests trade down into the lower tiers of our value menu or two for 25 value menu as well as trading into it. So there was a little bit of a check management with respect to that. But we can follow up with you directly to get to the exact percentage.

I appreciate it. I appreciate it.

Jake, this would have it from our finance team is helping out 13%

13%, so went down a bunch.

Yes.

Okay. Thanks. And then the other question was on CapEx, and I just want to make sure I understand your guidance versus kind of what's reported on the cash flow statement. I think it's $32 million year-to-date from what's reported for CapEx and then the guidance 33% to 38%. So just want to make sure that those are the same measures. So I wouldn't imagine we'd go down so much in the fourth quarter. So just to clarify there. And then what you expect really kind of big picture for CapEx moving into 2024, whether you think it should be coming down as some of these tech investments are left or just some big picture directional commentary for 2024 and CapEx?

Sure. Hey, Jake, this is Vance again. So for CapEx, we are -- we're pretty much close to most of the initiatives that we've been working on. Now the CapEx spend year-to-date and our guidance for this year, just as a reminder, it's does not reflect about $10 million of TI reimbursement that we've received here today. So comparatively speaking, versus last year, it's already down meaningfully, and then we do expect going forward, the CapEx level will be more in line with historical levels unless we have great return projects and as our business and the restaurant sector evolve over time. But overall, we -- we're at the till end of our CapEx initiatives.

Thank you. One moment for our next question. Our final question comes from Andrew Wolf with CL King. Please proceed.

Hi. Thanks. My question is on -- if I heard it right, I think one of you all talking about Applebee's, mentioned that volumes were flat despite the comps coming in down. So I think that speaks to the level of discounting that, obviously, people who came for the all-you-can-eat promotions enjoyed. And my question is, as you look at the supply chain, given the vendors, whether it's ridge [ph] or whatever is being promoted, their volumes going up. Logistics are getting cheaper on a case basis because of the volume and such. Is this discount something that the vendors participate in, so that your franchisees to some extent, aren't kind of absorbing most of that discounting. Is that one way that the scale of the company is able to kind of -- in an efficient manner for the franchisees, bump up the promotionality.

I will confess, but I don't know the answer to that question, Vance, to you.

Yes. The way we plan the promotions, Andrew, is -- because John talked about this earlier, we planned the year ahead, and we have some visibility in terms of commodity expectations. So we do -- that is part of the decision in terms of what campaigns were running. So if we know pork pricing is favorable, we tend to being heavier with that -- with those promotions. So it's not that we are asking specifically for the vendor to participate, but we factor in the expected inflation into the campaign decisions.

Okay. So there's a planning calendar. All right. Thanks. Okay. Great. Is it always a year? Or can you, on an ad hoc basis change these kind of large-scale promotional type of promotions.

We can definitely do it on an ad hoc basis. And it depends on the situation. John talked about this earlier. We can -- we play offense [ph] we can be reactive if we need to. And I can't think of any recent examples that we've done that because things have been sort of going on as we expected. So we haven't had to pull any last minute type of things that were on plan. But we have the capability to do so.

Thank you. That's it for me.

Thank you. I would now like to turn the conference back to John Peyton, Dine Brands CEO, for closing remarks.

Thanks, Kathy. I appreciate your facilitation today. Thanks, everybody, for your questions. I'll come back and run a second time for some questions. We're pleased with the quarter, in particular, if you want to just highlight that average weekly sales for both brands has been in excess of 2019 all year for both brands, and we think we're seeing the results of the resilience of our brands, their relevance and our efforts around technology and menu and marketing innovation as well as our focus on store level execution. So thanks, everybody, for the questions. And we will see you again in the next quarter. Take care.

This concludes today's conference call. Thank you for participating, and you may now disconnect.