Dine Brands Global Inc (DIN) 2022 Q2 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Dine Brands Global, Inc. Second Quarter 2022 Earnings Conference Call. (Operator Instructions). I would now like to hand the conference over to your speaker for today, Brett Levy, Vice President of Investor Relations and Treasury of Dine Brands Global. Brett, please go ahead.

Good morning, and welcome to Dine Brands' Second Quarter Conference Call. I am Brett Levy, Vice President of Investor Relations and Treasury for Dine Brands Global, and I am joined this morning by John Peyton, CEO; Vance Chang, CFO; Jay Johns, President of IHOP; and John Cywinski, President of Applebee's.

Before we turn the call over to John, please remember our safe harbor regarding forward-looking information. During the call, management may discuss information that is forward-looking and involves known and unknown risks, uncertainties and other factors, which may cause the actual results to be different than those expressed or implied. Please evaluate the forward-looking information in the context of these factors, which are detailed in today's press release and 10-Q filing. The forward-looking statements are as of today and assume 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. Beginning with this release, we have returned to our prior quarterly same-store or comparable store sales schedule rather than the more recent practice of sharing monthly results, which we believe became temporarily necessary during the peak of the pandemic, given significant month-to-month volatility and uncertainty during the time. With that, I'll turn the call over to John.

Thanks, Brett. Welcome to the team, and good morning, everyone. Brett brings to Dine more than 25 years of advisory and investment experience in the restaurant and retail sectors, both on the sell side and on the buy side, and prior to joining us, Brett was a publishing analyst for Deutsche Bank, UBS, and MKM Partners covering the restaurant industry. He received his degree in economics from Rectors and I know he is going to be a great asset as Dine continues to grow, and we are looking forward to Brett driving our shareholder engagement and outreach. Welcome, Brett, to the team.

So, now shifting to the quarter. Thanks to the hard work of our team members and our franchisees, we sustained strong momentum and achieved another quarter of solid performance in Q2. Our competitive position today remains strong because of what makes us uniquely Dime, and that's our delicious food, our 2 world-class brands, our asset-light business model, and our committed teams and franchisees around the globe. The last few years have showed us how important restaurants are and how more than ever, guests crave connection and community with one another. So, in Q2, both brands sustained and built on last year's momentum.

Here are the highlights: Applebee's and IHOP achieved positive comp sales of 1.8% and 3.6%, respectively. Off-premise sales remained strong, in particular relative to pre-pandemic levels and dine-in continues to recover. In Q2, Dine delivered strong EBITDA despite higher costs, and we remain comfortable that we will deliver results within our fiscal '22 guidance range. During the quarter, we returned USD $61 million in cash to our shareholders, which resulted in the repurchase of over 900,000 shares or about 5% of our shares outstanding. We raised our dividend 11% to USD $0.51, and we are on plan to meet our development guidance for the year in spite of lending supply chain and permitting difficulties across the country. That said, economic conditions absolutely remain challenging. This morning, I will address the operating environment, including cost of goods, consumer sentiment, labor and pricing, and I will provide an update on our outlook.

First, I will begin with the acute cost inflation we are experiencing across all inputs to our restaurants. Our brands experienced a 22% rise in commodity costs during the second quarter, but Dine's P&L was not materially impacted because of our asset-light model. We are forecasting commodity cost inflation to ease in the low-teens for Applebee's and mid-teens for IHOP during the back half of the year. Second, we experienced some weakening consumer sentiment to varying degrees in each brand, consistent with the economy's overall slowing momentum.

We understand the economic pressures that our guests are facing, including gas prices. In fact, if the declining gas costs during the last 50 days are sustained, it could serve as an indicator that suggests the potential for improvements for the back half of the year. Third, the labor market also continued to be tight last quarter, especially in the service sector, as has been widely reported. And while it varies by brand and by geography, we remain at about 90% of pre-pandemic staffing levels, and it is important to emphasize that team members are truly the heart and soul of every restaurant. Our franchisees are investing in their people. They are providing flexibility, better work-life balance, and community support to help them retain and attract talent.

At the brand level, Applebee's and IHOP are enhancing back of house and front of house training and technology to help our team members become more productive. So, while the conditions we are operating in are difficult, we do believe that Dine is positioned well for challenging times, and that is because during past economic downturns, Applebee's and IHOP both demonstrated resilience. For example, as leaders in the casual and family dining categories, Applebee's and IHOP benefit from consumers trading down from higher-priced formats.

And as value leaders, both brands have expertise and a proven track record of creating and executing enhanced value and marketing propositions that meet our guests where they are. On past calls, I have talked about playing both offense and defense during uncertain times, and that absolutely remains our approach. At the start of this year, we committed to a long-term strategic plan that includes investments in tech, development and new sources of revenue, and we are making tangible progress against those goals.

For example, we have launched the International Bank of pancakes, and by year-end, we will have delivered on our plan to provide a simpler, faster, more agile tech stack across the Dine system. We continue to introduce new restaurant formats, and our teams are working with our franchisees to evolve our restaurants to meet changes in consumer behavior, while also optimizing economics. And third, we are investing in disruptive new growth channels like virtual brands and Ghost kitchens.

Finally, Dine’s long-term health depends on the health of our franchisees and our franchisees remain healthy. Year-to-date, they are current in their financial obligations to dine and we have an experienced an increase in workouts or distressed situations. This signals to us that our franchisees emerge stronger from COVID, they are leaner, they are more productive, and they are benefiting from off-prem and other new sources of revenue. However, the cost pressure on 4-wall profitability is a priority focus, and we will continue to closely monitor the health of our franchisees.

Across both brands, franchisees raised prices about 7% to 10% in Q2 on average. This prudent, balanced approach protects 4-wall margin while creating opportunity to take share, and in response to cost and traffic headwinds during the past 2 quarters, we leaned into advising our franchisees on menu pricing on cost mitigation and productivity strategies. So, to wrap up, we remain cautiously optimistic on both our near-term and our long-term outlook. Based on our solid first half of '22, we expect to achieve full year results within the guidance ranges provided on our Q4 call and reaffirmed after Q1, and our reiterated outlook incorporates the weakening consumer sentiment we've seen over the past 3 months. Of course, we do not know exactly what lies ahead.

But what we do know is that we have the focus, the energy, and the commitment of our franchisees and our team members that gives me great confidence and optimism for the future. I will now turn the call over to Vance to review our financial performance and outlook in more detail, and then John and Jay will join us to talk about each of the individual brands performance, momentum and outlook as well.

Thanks, John. Despite the economic uncertainty, we are cautiously optimistic in the near term and remain confident in our plan over the long term. We continue to execute well in a challenging environment and delivered solid results in Q2. Consolidated revenues rose 2% in Q2 versus the prior year, driven by rental revenues, franchise revenues, and our company restaurant operations. Franchise revenues grew 1% to USD $168 million, primarily due to positive comp sales growth at both brands.

Company restaurant sales increased approximately 3% to USD $39.5 million for the second quarter for the same period of last year. Rental segment margins for the same quarter of 2022 improved by approximately 7% to USD $7.2 million compared to the same quarter of 2021. The favorable variance was mostly the results of franchisees higher retail sales, which drove higher percent rental income for the quarter. G&A for the second quarter of 2022 was USD $44.1 million compared to USD $39.3 million for the same quarter of last year.

Higher G&A reflects our strategic growth investments, as well as higher personnel-related costs and travel related to supporting franchisees as we return to normal operations. For the second quarter of 2022, consolidated adjusted EBITDA was USD $66.1 million compared to USD $71.7 million for the same quarter of 2021, primarily due to greater G&A investments as well as the impact of inflation on our company restaurant operations. Finally, adjusted EPS for the second quarter was USD $1.65 compared to adjusted EPS of USD $1.94 for the same period of 2021.

The variance was primarily due to an increase in G&A and a decrease in gross profit, partially offset by lower income tax expense. Cash flow from operations for the first 6 months of 2022 was USD $29.9 million and adjusted free cash flow for the first 6 months of 2022 was USD $23.1 million. This compares to cash flow from operations for the first 6 months of 2021 of USD $106 million and adjusted free cash flow for the first 6 months of 2021 of USD $107.3 million. The variance in year-to-date adjusted free cash flow was primarily due to the change in working capital that we saw in Q1 as discussed last quarter as well as an increase in CapEx related to our strategic investments.

We finished the second quarter with total unrestricted cash of USD $263.5 million. This compares to unrestricted cash of USD $294.7 million at the end of the first quarter. Even after returning USD $61 million back to shareholders during the quarter, our leverage ratio continues to stay healthy. As of Q2, it was 4.27x, which is within our targeted net leverage range of 4 to 4.5x. with our current levels of unrestricted cash on the balance sheet and the borrowing capacity available under our current credit facility, we feel very comfortable with our current liquidity and the strength of the balance sheet, both to continue to invest in long-term growth as well as weathering any near-term uncertainty in the macroeconomic environment.

Closing now on our balance sheet, I would like to provide a quick update on our capital structure. We are currently in the process of refinancing our USD $225 million credit facility, which will provide us with more flexibility. Additionally, when our par call window opened on our Series 2019 Class A-1 notes earlier this summer, we evaluated whether to pursue a near-term refinancing of this maturity. Given the volatile and certain market environment, we have decided to hold off for the time being.

Now, I will provide a summary of our capital allocation for the second quarter. Dine remains committed to returning cash to shareholders as evidenced by an 11% increase in our second quarter cash dividend to USD $0.51 per share, which was paid on July 8. Additionally, we repurchased 912,992 shares, which is over 5% of our shares outstanding in the second quarter of 2022. We will continue to be opportunistic with share buybacks, which are a key part of our overall long-term strategy to deploy excess cash and increase total shareholder return over time.

Lastly, given the uncertain macroeconomic backdrop that we are facing, we are maintaining our current guidance range. I want to highlight that we are still tracking to achieve our 2022 financial performance guidance in G&A, CapEx, development and EBITDA. We enter into a prolonged recession, we have multiple levers within G&A and CapEx to protect our margins and cash flow, and we have ample liquidity to weather a potential storm.

We feel very confident in our long-term plan and will not make short-term decisions for short-term gains.

Dine is stronger than ever because we played both the offense and defense during the past 2 years and will continue to do so going forward. To close, Q2 was a solid quarter, continuing our momentum from a very strong Q1. While there are headwinds out there, we believe our asset-light business model, strategic growth investments, and balance sheet position us well to navigate this challenging environment in the near term and deliver compelling growth and shareholder value over the long term. With that, I'll turn it over to John, who will share more on the Applebee's business.

Thanks, Vance, and good morning, everyone. Q2 was an outstanding quarter for the Applebee's brand as we posted a 1.8% comp increase on top of last year's record-setting 10.5% increase over Q2 of 2019. This 12.3% combined growth reflects our powerful 3-year comp performance and reinforces the health and stability of the Applebee's brand. On a year-to-date basis through June 30 of our 31 franchise partners are in positive territory with 0 bad debt for the second consecutive year.

I always find it helpful to frame average weekly restaurant sales as a key performance indicator and Applebee's sales remained quite strong at USD $54,500 in Q2 compared with USD $53,400 in Q1. And from a sales mix perspective, Q2 consisted of 74% on-premise and 26% off-premise with our off-premise business equally split between Carside to go and delivery. From an absolute dollar perspective, weekly off-premise sales were USD $13,900 in Q2. In one subject, I have not discussed much over the past 2 years is Applebee's beverage business.

In Q2, total beverage, including alcohol and nonalcohol was 18.5% of sales, a reflection of our dine-in business continuing to grow, providing an important profit contribution to restaurant P&Ls. And given the current P&L pressures, our cross-functional profit optimization work is once again underway, which is great news. You will recall this is the work Applebee's initiated with PwC in 2017 that ultimately delivered 200 basis points of restaurant-level cost reduction throughout 2018 and 2019, which we then suspended out of necessity during the pandemic. In my view, this process is a distinct competitive advantage, which I expect to provide meaningful financial benefit to our franchise partners beginning in 2023.

Now, on the virtual brands front, we recently made a strategic decision to expand Cosmic Wings menu items from their delivery-only virtual presence to Applebee's core menu beginning here in August, broadening the availability of popular products like Cheetos Wings, Cheetos bites and waffle fries to 100% of our guests will allow us to fully leverage this opportunity in terms of product awareness and velocity. I would also like to reinforce that our Cosmic Wings virtual brand remains in place and available in the majority of Applebee's markets.

Simultaneously, we are actively exploring other uniquely positioned virtual brands and will share learnings should these ultimately prove viable through our disciplined test process. Looking forward, we continue to pay close attention to brand attributes, which have proven over time to be reliable leading indicators of Applebee's performance, and not surprisingly at the top of this list is affordability, where Applebee's continues to lead the casual dining category as it has for the past 5 years.

We also lead the category on convenience to go in delivery awareness and overall brand awareness, while other important attributes remain very strong, such as menu variety, friendly service, and of course, visit intent. One of the benefits of Applebee's tightly aligned franchise partnership is our ability to activate relevant value propositions as needed on short notice with national media muscle, and this was certainly the case in Q2 with the combination of Irresistibles, Top Gun, and Late Night, and I am very pleased with the innovative content available to us for the balance of this year.

Finally, I would like to share a few thoughts on pricing. On a national basis, Applebee's franchisee prices were about 7% higher in Q2 than they were in Q2 of last year. This reflects the aggregate of 4 different menu print cycles where franchisees could choose to modify prices. Of course, pricing does not occur in a vacuum in the restaurant industry and our franchisees remain fully aware of the market share opportunity this current environment represents.

Remember, there are approximately 210,000 casual dining restaurants in America and about 85% of these are low-volume, independently-owned restaurants with a challenged business model because of their very small scale. It often surprises folks that the top 10 casual dining brands only account for about 4% of total CDR restaurants, and Applebee's is far and away the largest with 1,570 units.

When it comes to pricing strategy, our savvy and sophisticated franchisees understand this very delicate balance between restaurant profitability and guest affordability. As I have stated previously, brands and franchisees with scale and strong culture, who have earned the trust of their guests throughout COVID and have demonstrated the ability to be both innovative and nimble will win big over the long haul. I genuinely believe this remains an increasingly leverageable point of difference for the Applebee's brand moving forward.

In summary, the state of the Applebee's business remains healthy. Our fundamentals remain strong, and we continue to be extraordinarily well positioned in this environment. With that, I will turn it to my partner, Jay, for an overview of the IHOP business.

Thanks, John. Good morning, everyone. Last quarter, the IHOP team and franchisees made great progress against our plans, reinforcing the strength and resiliency of the IHOP brand. After all this time on Zoom, people are venturing out more and are meeting in person to eat together with family and friends. Q2 comp sales were up 3.6%, driven by positive comps across all dayparts. Average weekly sales for the second quarter were approximately 37,900, an increase of 4% compared to the same period of 2021.

This was the fifth consecutive quarter of positive comp sales as IHOP steadily recovers from COVID and overcomes the current economic headwinds. Today, more of our restaurants are open for guests to enjoy us. We now have 91% of our restaurants that standard operating hours are greater. That is an increase of 140 more restaurants that are back to pre-pandemic hours of operations. On the off-premise front, sales remained strong.

Off-premise sales volumes were approximately USD $8,300 compared to last quarter, which was USD $8,900. For Q2, our to-go business accounted for 21.3% of sales, broken down into 12.9% delivery and 8.4% takeout. The team is continuing to work on ways to evolve and innovate what we offer on the to-go menu, how we market it, and improving profit dollars in that segment as well, all of which will pay long-term dividends for the brand and our franchisees. Speaking of franchisees, I want to touch on something John also referenced.

The IA brand and our franchisees also work with PwC, which delivered nearly 100 basis points of restaurant-level cost reductions throughout 2018 and 2019, until we also paused the work due to the pandemic. We restarted this process earlier this year, working with our franchisees and CSCS our purchasing co-op. The goal is to optimize franchisee profitability, while still providing a great guest experience. In regard to virtual brands, they are delivering incremental sales and profits in the more than 1,000 restaurants offering one of our brands, grilled cheese or Super Mega Dilla. Our strategy is to continue the growth of these virtual brand partnerships as we see incremental revenue and profits at participating restaurants.

Let me shift gears to some other key levers of our strategic plan that are designed to drive incremental traffic and sales growth. Starting with marketing, we launched the International Bank of Pancakes on April 4. We expect one of the biggest drivers of our long-term growth will be our loyalty program. Enrollment and participation are exceeding our expectations. After just 4 months, we have more than 2 million loyalty members earning pan coins, 30% of whom are new to our brand. We also introduced our new core menu last quarter. We know food is at the heart of our guest relationship with our brand.

In fact, our core menu accounts for the large majority of our business and our growth. This offers a great foundation for innovation on our classics. The core menu featured omelet, new protein pancakes, and IHOP splashes, each of which outperformed our expectations. In addition, we launched a new brand ad campaign that will guarantee to put a smile on your plate. For over 60 years, IHOP has been serving up Smiles and this new distinctive advertising is reconnecting guests with remarkable cultural moments and our core menu.

This summer, we also executed a fantastic promotion with Universal Studios and Illumination, Minions, the rise of Gru, which premiered on June 20. Given Minions is a movie franchise that Gen Z grew up with, we are spending more media dollars on platforms like TikTok, which is driving viral content supporting the new menu. To enable our long-term growth and enhance the experience for both our guests and team members, we are also doubling down on technology. We have taken pay and go nationally, providing our guests with the ability to use our mobile app to scan the receipt, and pay the bill from their phones.

This offers guests convenience and automatically give them pan-coins for the new loyalty program. We also relaunched a brand-new version of our website and mobile app, and we are currently in the national launch of our new point-of-sale platform. We selected Tray POS, a cloud-based POS system. We are currently in over 100 locations and will be transitioning restaurants for the remainder of this year into the next. Development is another key focus on our long-term growth strategy.

We have opened 16 new restaurants domestically this year and have a pipeline that is moving through the various development stages to help support our 2022 plan for new restaurant openings. Despite the continued supply chain challenges and increasing commodity costs, we are still within our guidance of 50 to 65 net new restaurants and on track to grow our nontraditional footprint by 80% this year as part of that plan.

Our international team is also having great success growing the brand. We have opened 7 new restaurants through Q2, and last month, we announced a very exciting new partnership in Saudi Arabia to open 5 new IHOPs there over the next 5 years. To wrap up, I will say this. At IHOP, we know that we have a great opportunity to provide people across America with a sense of togetherness and belonging, something folks have been missing these past few years and will always need. We are excited by the progress we have made and understand the work we have ahead of us for driving growth regardless of the macro backdrop. I'll now turn the call back over to John Peyton.

Thanks, Vance, and John and Jay for the work that you, your franchisees and your teams did this quarter to deliver solid results and for continuing to focus on our long-term strategic plan and the initiatives to make sure that we achieve our goals. Operator, we are now ready to open the call for questions.

(Operator Instructions) Our first question comes from the line of Jeffrey Bernstein with Barclays.

Two questions. One, just on the broader macro-commentary. I know you stopped giving monthly same-store sales, but I think you noted that you have been seeing signs of an economic slowdown over the past quarter. So, I am wondering maybe what in particular, whether you can share just directional trends per month and into July, or maybe changes you have seen in terms of traffic or mix? Like how do you assess the fact that you think you are seeing it in your business over the past number of months. And then I have one follow-up.

Good morning and thanks for the question. What I can say at the macro level is both brands performed similarly, which was a very strong performance in April and May, and we saw what we would describe as a slight to modest decline in traffic just in June. And as we mentioned, we are not giving specifics on July at this point, but I can tell you a couple of things. One is that we are reconfirming our guidance for the year based upon the trends that we are seeing. And the second thing is we are encouraged by things like the recent 50-day trend in the decline of gas prices, right? And the emerging opinion that inflation seems to have peaked in June. And so, we think that those are tailwinds for our guests that will be favorable for traffic in the back half of the year.

Understood. And then from a unit growth perspective, I know you reiterated '22 guidance for both brands, which is encouraging. I am just wondering any early thoughts? I know the plan was to accelerate in '23. I think Applebee's is going to be doing net 20 new and IHOP may be up to 80 a year. Just wondering whether that early line of sight is still there or maybe there are some challenges with permitting, construction equipment, things like that, that we have heard across the broader industry? Any color in terms of that acceleration of unit growth into 2022 would be great.

Yes, it's John again. The premise of your question is exactly, right? Supply chain issues, increasing cost to build restaurants are real. That said, we are on track for our development plans this year, and our pipeline for the next year remains encouraging. I think, Jay, if you can give some detail and then John on each of your brands, that would be great.

Yes, John, this is Jay. Everything you said is true, there are challenges. It's time to bring out a new restaurant to market has expanded a little bit, you got a plan for that, but we are very encouraged that our pipeline is still robust, and we are taking great advantage during this kind of set of doing more retrofits and turning the restaurants that were preteen some other brands. Him and I have a lot of experience doing this. We have hundreds of tons of these in our system already that we have done over our 55 years. So, we are very good at it. We know how to do it. We have done a lot of them and it's a lot on our pipeline.

Jeff, this is John C from the Applebee’s firm. I think John framed it well. We are particularly (inaudible) to reduce the number of restaurant closures within the Applebee's brand. And again, guidance for this year is reiterated with respect to our expectations.

Our next question comes from the line of Eric Gonzalez with KeyBanc.

A question for John C in Applebee's. You're coming up against some really tough comparisons in the third quarter as you (inaudible), which I believe took off around this time around this time last year. So, I was wondering if you could tell us about your confidence level in saying positive this quarter, if you have any tricks up your sleeves and you have seen a positive trend. And then I have a quick follow-up.

So Eric, I think broadly speaking, and reiterating the guidance balance of the year should be a pretty strong indicator as to our level of confidence. I am confident on the Applebee’s side. You bring up a very good point. We are rolling over double-digit comps virtually every month with the exception of December, but we have clear visibility in our plans. We are finalizing with franchisees, and we also have the ability to flex and be humble and course correct as necessary. , but I'm looking right now at my balance of the year’s tactical plan and it's lined up very well in this environment. So, confidence is higher.

Just on that flexibility comment, we're hearing from a number of chains, both in full service and quick service, that are beginning to lean more heavily into value. So, perhaps you could talk a little bit more about what that means and how you're thinking about doing value on a broader scale? And then maybe we could tie in the 2 brands here and how that strategy might differ at IHOP in terms of what we saw in the past versus what you are thinking about today?

Eric, it's John P. I am with a quick general comment, and Jay and John will give you examples, which is both of our brands, right, as you guys all know, are brands that position themselves as value-oriented brands. They are known for it, and they both anchor their segments. In normal times, they're known as value-oriented brands, which we define as delicious food, generous portions, in a wonderful environment at an affordable and approachable price. And at times like these, when economics are tough for our guests, our brands have particular expertise in knowing what additional value adds that they do that move traffic, and they both had success with that in the last quarter, and it would be great again, if Jay and then John can give you examples of that.

So Eric, thank you, John. This is John C. We are very much a value-oriented branded Applebee's, and as we think about tactical execution around value, and again, we are the affordability leader within the category, there are a number of ways to do that. And I personally, along with the franchisees do not believe in straight on discounting. What we prefer to execute are innovation plans that can be value-added.

They can be value-added in terms of the current proposition and markets. This does not shrink per dollar with any straight purchase, which is terrific for margins and a great value for the guests. It could be a film time like Top Gun. It could be a new product introduction. It could be a service-oriented initiative, perhaps around off-premise. So, there are a number of ways tactically to execute against value, and we have got a portfolio of propositions that are proven, and we will deploy them as we did, moving forward.

Eric, this is Jay Johns. I think the thing that we always do is we make sure that we have the ability to pivot any time we need to. There are always circumstances the change in competitive forces that are in place. So, the way we look at it is there are different ways to value. You have a bonded value where you get a lot for that money, and sometimes those are from a price point of things to a point where it is cheap. When you think about a price pointed value, then you have other things to do at a price point. They are starting at price from entry-level price or base price.

There are different ways to do value, and we do a little bit of all that, depending on circumstances. If we think about it right now, we have IHOPPY hour, which is kind of our everyday value that is over 85% of our restaurants across the system, and that is there all the time for people that need to save a little money or maybe they are pressed because of gas prices, et cetera. They know that we always have that. And then right now, for example, we are doing a kids free promotions, part of our minions rollout that we did, and that is more of an LTO where there is time offered during the maintenance campaign, but we will pulse in and out over the course of time. All the value is always a part of our strategy at some level just to help get more cash in.

Our next question comes from the line of Nerses Setyan with Wedbush.

One of the things post-COVID that we have seen is a decline in marketing spend from some of your bigger competitors. As the environment evolves, are you seeing them become a little bit more aggressive now in terms of that marketing spend versus what you are spending? And just to follow up on the value question. We have heard a lot of commentary from the competitor set that there is some incremental value coming. Have you already seen that incremental value? And I guess there was a comment about pivoting when you need to. Do you feel like you do not need to as of yet?

Those are both great questions for John and Jay to take directly.

John here, Nick, I do expect the level of aggression from a marketing perspective and specifically marketing spend, national and local, to accelerate this year and next post-COVID environment. We have seen some of that from our competitors. I expect to see significantly more of that as we approach '23.

Nick, this is Jay at IHOP. I have not seen a tremendous amount more marketing or different levels of marketing than what we have seen in the past. I think there may be a few more messages that focus more on value as the gas prices have gone up and the economy may have softened a little bit, but I do not see a change so much in the quantity of what the marketing is, at least not at this point, and I think a lot of companies do the same thing we do. They kind of look at their business. They make personal decisions about what they think they need to do to try to maintain market share or steal market share in this kind of economy. We are no different. We do the same thing.

Just from the operating cash flow, there was a lot of use of cash in the first half. Is that just a timing thing? Do we expect that to come back in the second half?

Yes... It is openly a timing thing. If you are comparing our cash flow last year because of the growth in the business in comparison to 2020, last year, we had a onetime working capital benefit from the collection of (inaudible). So, we don't have the same positive working capital impact that we saw last year. Additionally, as you recall, we did have a one-time working hit from just our larger performance compensation expense I would say in 2022, but it was part of 2021. So, that sort of explains the change that we are compatible, but overall, we do expect this year to have a normal cash flow conversion.

Our next question comes from the line of Todd Brooks with Benchmark Company.

I have a question and then a follow-up, if I may. Jay, on the IHOP side of the house, you talked about staffing improving nicely over the course of the quarter. Can you update us, I think I have used to have about 50% of the units that ran in the 24/7 operating model, and I think we have been sitting in the mid-20s, last we had talked about it. With the improvement in staffing and your commentary that we are returning to full operating hours in a lot of locations, where does that imply that we have improved the 24/7 operations back through over the course of the quarter?

Yes. Todd, thanks for the question. As far as the—I mentioned we got 140 additional restaurants that are now returned to the pre-pandemic hours. Many of those are either the 24/7 or what we call 24/2 restaurants. So usually, they are way into doing 24/7. They start off doing it on the weekends first. It is just an easier way to work your way up to the level that you need to do 24/7. So, most of those 140 are those have expanded their overnight hours either 24/2 or 24/7. We are still staffed at about 90%, but if you think about it, we're adding on a lot of extra dayparts and hours in see restaurants.

So, they are getting better staff. They are hiring more people. They are just needing more people also at the same time. So, if you think about the percentage, they still need more people to keep expanding, keep expanding those hours. But things are getting a little better out there as far as how the staffing goes. We still have 200 or 300 more restaurants we need to get to, to be back to pre-pandemic. As I said, we're at 91% of our restaurants are pre-pandemic hours. There is still quite a more to go to get back all the way to that level, but we're working on it a (inaudible).

Okay, great. And then my follow-up for John C. Can we just explore Cosmic a little bit more? I know you potentially talked about a little more detail with the platforms broadening out on and what you thought that business could be, but now you are also rolling it on to the Applebee's menu. So, a little bit more time on maybe what the performance was through the aggregator channels as you broadened it out but then also the thinking behind bringing the Cosmic brand on to the Applebee's menu.

That's a good question. The products are popular, in particular, Cheetos wings and cheese bites and our waffle fries. One of the challenges from my perspective with that particular virtual brand is the fact that it is only available to about 13% of our guests via delivery, and we do have some geographic variability, we work across the country. Some markets performed really, really well and some less well.

We wanted to expose those products to 100% of our guests, not just delivery but also to go and certainly our value in guests. That is the reason for the move. Our franchisees have embraced it, and that's going to happen here shortly in August. And then I should mention that we continue to--we have some irons on fire on the virtual brand front, and we continue to explore and validate other virtual branded opportunities that we think have cross and certainly should those be validated through our process. I will share information on future calls with respect to some of those initiatives.

Our next question comes from the line of Brian Mullan with Deutsche Bank.

Just a question on Applebee's, specifically the drive-through pickup windows you first brought up at the Investor Day, I think you were planning to have 15 done by year-end. I am wondering if you are still on track for that. And then, John, are these working in all cases? Or is there a lot of variability in the early results here. Any early learnings? If you could provide any thoughts on how big this could be in your optimism and how you think this migrates out across the system.

Hey Brian, so we have approximately 5 at the moment, anticipate having at least 10 by the year-end, as to whether we obtain 15, I do not know, quite honestly, because those are driven by local municipality approvals and they could be complex to carve out a drive for lane and they allow have pickup window on an existing lot. Too early to draw any significant conclusions other than our guests look once you experience that once or twice, it becomes your expectation from a guest perspective. So, the early feedback there is very favorable. Team members and general managers love it as well for all the obvious reasons. It allows us perhaps to stay open a little later at night and instead of team members running food out to a car in a parking lot, the transaction takes place through a window.

So, it not only helps with our to-go businesses, but think about delivery drivers, we are queuing up to pick up the orders instead of coming in, all of that can be facilitated through the window. So, that investment cost can range from USD $75,000 to USD $150,000 plus depending upon the market and certain stance. Once we have a good healthy 10 in market will assess the business case and certainly share our view from not only a guest and team member perspective, but a financial perspective in the future. Just a little too early right now, Brian, to driving meaningful conclusions.

Okay, thank you for that color, appreciate that. And then just a question over on the IHOP side. It seems like the dine-in sales per week, and they made a lot of sequential progress in the quarter, but they are still decently below 2019 levels, I think. So, Jay, I'm just wondering if you could speak to the factors here. Can this be explained away -- is this entirely just the missing operating hours? Or are there certain dayparts during the day where maybe broadly across the system, the dining room is just not fully recovered yet. Just any color or any thoughts on the likelihood of fully recapturing that one day would be great.

Thanks, Brian. This is Jay. The total business overall, we're back to about 97% of our total business sales compared to pre-pandemic. So, we made great progress in recovering that business and it keeps growing every quarter. Obviously, I think it is a little bit of everything. Obviously, the staffing was an issue with the weekends for a long period of time, that is when you are absolutely your peak. And on the weekend breakfast, it was difficult to really turn tables at the speed that you need to turn tables to generate those sales.

And then obviously, dinner and our overnight business change because the hours operation, and as I said, we're cutting back across all dayparts this past quarter and making progress, some a little faster than others. Obviously, overnight probably leads the way as a percentage just because of the hours coming back. But overall, we're very comfortable with the recovery we're doing across the entire business and maintaining our off-premise sales, a pretty steady clip as well, even as guidance coming back.

Our next question comes from the line of Brian Vaccaro with Raymond James.

I wanted to circle back on the health of the US consumer, and you obviously have a pretty unique perspective operating 2 of the largest full-service brands in the industry. So, I guess I am curious if you are seeing changes in frequency in any particular cohorts or income bands or any changes in behavior once the customer is in the restaurant? Any changes in order patterns, attach rates, et cetera, that might be worth highlighting?

Brian, it is John P. I'll take that because what we are seeing is very similar in terms of consumer behavior at both of our brands. And I will frame it by saying that we look at household income below USD $50,000, between USD $50,000 and USD $100,000 and then USD $50,000 and USD $75,000 and then USD $75,000 plus. And so, what we are seeing in the USD $50,000 and below household income cohort is a slight decline of a couple of percentage points of those guests in our mix in the last quarter, right?

So, we assume that they have left us to look for lower cost options. The middle cohort is flat to up a couple of points, and the USD $75,000-plus is up significantly, 6 to 8 points, which suggests to us that guests that often dine at more expensive restaurants are finding Applebee's and IHOP because of their well-known value position, right, which is why we perform well during tough times like this. And we actually performed well during the '08, '09 recession as well relative to our peers. When it comes to check management, average check has remained steady throughout the 2 quarters, and so we are not seeing evidence yet of major check management once they're at the restaurant.

All right. Great. That is a very helpful color. I also -- I guess, switching gears. I noticed in the 10-Q that you recently entered an agreement to sell the 69 company stores in the Carolinas. Any incremental color you can provide there? Are you selling to a new or existing franchisee and expected proceeds from the sale?

Vance can address some of your questions but not all of them.

Right. Brian, the transaction is not closed yet. So, we do not have a lot of information to share, but technically, if you think about this, the model from our perspective, should be simpler going forward assuming the transaction closed because we are going to be back to the 100% franchise supply model. So, it takes the complexity in projections. The 69 restaurants will roughly represent 2% of our portfolio. So, we do not really anticipate a material change to our business rentals at present. For Q3, assuming that the transaction closes, we will have a little bit more information to share.

All right. Fair enough. And then last one for me. I just want to ask about G&A. I think you held the guidance for the year, and that guidance implies a meaningful step-up in spend versus the first half. Can you just remind us what some of the specifics are within that second half outlook that is driving that anticipated increase?

Of course. So, first of all, I think that we planned or more projects, we are slated for more projects in the second half of the year than the first half. There are certain things that got pushed out because of Pharmakon. And then there are also certain positions that will take longer to sell. So, those reasons are contributing to the second half G&A being a little higher than the first half. But primarily, we are investing in restaurant technology and marketing and business analytics systems. We are investing in franchising support in terms of headcount. And the development, headcount, support, and systems we are spending more in traveling. So those are the (inaudible) that we are focused on for this year.

Okay. And can you also just confirm Vance, the company units on an annual basis, there was about USD $6 million of costs included in your G&A spend related to those units. Is that right?

I don't know if we disclose that, but I think assuming the transaction closes -- the G&A cost will go down.

Our next question comes from the line of Jake Bartlett with Truist.

Mine is on menu pricing. And John C, I think you mentioned that Applebee's was learning about 7%. Jay, I'm wondering if you could just confirm that the 7% to 10% that was mentioned earlier pertains to IHOP, meaning that IHOP pricing is about 10%. And then for both brands, if you could just comment on your appetite for further price increases in the back half of the year. I assume you would be reticent given the value position, but any comments there would be helpful.

Jake, this is Jay at IHOP. Yes, that's right. There's a range, obviously, that franchisees take based on their own decisions on what they are going to do. But yes, that 10% range is about where we were at. And then as far as future increases, again the franchisees will want to make the open decisions. At IHOP, we actually utilize RMS, which is an (inaudible) help franchisees with how they think about what prices to take by markets, et cetera. So that helps them a little bit. I think the franchisees are pretty smart. They know that they need to cover some of these cost pressures that they have, but they also know they are finding a share or a cafe battle during this time as well. So, I would assume they will be cautious in their moves, but it is going to differ based on the areas of the company.

Jay, this is John on the Applebee's front. Our franchisees tend to be very strategic in their pricing assessment. They have taken kind of year-over-year that you referenced. They understand this is a market share opportunity. It's a fine line. It's a bit of a tighter walking margin protection and guest affordability perceptions, and my level of confidence that they are going to continue to be smart and conservative is very high. They are playing the long game, and they are having to do anything to compromise guest affordability and perceptions of the brand. With that said, they are going to be smart to protect our margins to the extent they can.

Great. And then my second last question is just on franchisee profitability and franchisee health. And I think the question maybe pertains most to the IHOP side. So, Jay, if you can just give us, it feels like we're seeing 10% menu price increases, but as a whole 22% commodity cost inflation, and I would imagine still very high labor inflation. So, what do franchisee margins or profit margins look like here? And if you can share anything that would help us feel confident of the health of the franchise system on the IHOP side, maybe percentage that are also kind of multi-concept franchisees. Any other details that would just give us some confidence that the franchisees are going to get through the near term in one piece here?

Yes, Jay. This is Jay Johns. We are very confident that franchisees health is in pretty good shape right now. If you think about all things, I think as Vance mentioned earlier is that we are not seeing bad debt. We are not seeing the collections that are an issue. We are not seeing workout issues. We actually again, one of the biggest indicators if we think about it is, we reconfirmed our guidance on 50 to 65 net new restaurants right now. We opened 19 restaurants last year during the pandemic. These are people that are signing up for a 20-year commitment, pretty much in most cases, and people have great confidence in the IHOP brand.

And remember, our cost structure is a little bit in a breakfast test, a food cost at several points less than a lot of other casual-dining restaurants, et cetera. So, the business model is a little bit different in breakfast, you can make pretty good margins on that. So, while food comp goes up, you are off a smaller base that is going up, and a lot of the increases this year for us, (inaudible) in particular, was really a problem, and that was driven a lot by the (inaudible) in Florida, which is pretty much behind us now in summer time. So, there are some certain expenses that are continuing to improve, and we are very confident franchisees are in pretty shape.

I'm showing no further questions in the queue. I would now like to turn the conference back to John Peyton for closing remarks.

Okay, thanks. Jeff, Eric, Nick, Todd, Brian, Brian and Jake, we appreciate your questions this morning. Great conversation, and I will just (inaudible) that both Applebee's and IHOP are resilient brands that are really positioned well to perform not only in good times but also in tough times because they really are safe havens for consumers at times like this, and Jay and John and their teams know how to lean into value-added propositions that make a difference to our guests at times like this. So, thanks to Vance, Jay, and John for a great quarter, and welcome one more time to Brett, who I know many of you know well, and we are looking forward to him working with you over the next couple of quarters. So have a great day, everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.