Dine Brands Global Inc (DIN) 2022 Q3 法說會逐字稿

Good day. Thank you for standing by. Welcome to the Dine Brands Global Third Quarter 2022 Conference Call. (Operator Instructions) I would like to call -- hand the call over now to Brett Levy, and we apologize for all technical difficulties. Thank you.

Good morning, and welcome to Dine Brands Third Quarter Conference Call. I'm 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; John Cywinski, President of Applebee's; and Jay Johns, President of IHOP.

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 assumes no obligation to update or supplement these statements. We may also refer to certain non-GAAP financial measures, which are described in our press release and also available on Dine Brands' Investor Relations website. While we may provide color on intra-quarter trends related to volatility and uncertainty, we have returned to our traditional quarterly reporting schedule. Please note, our third quarter's results are inclusive of the company-operated Applebee's units as the transaction had not closed during the quarter. With that, I'll turn the call over to John.

Thanks, Brett, and good morning, everyone. Thanks for joining us today. We delivered another solid quarter. Thanks to the strength of our brands, our operational and marketing agility and, most importantly, our seasoned team of franchisees, our Applebee's IHOP and Dine leaders and our team members. As you know, and as you've heard from others, economic headwinds persist, particularly inflation and consumer sentiment. Despite this macro environment, our brands remained resilient.

Applebee's and IHOP achieved positive comp sales of 3.8% and 1.9%, respectively. Q3 was Applebee's seventh consecutive quarter of comp sales growth and the sixth for IHOP. In addition, our dine-in results continue to improve as Applebee's is ahead of 2019 and IHOP is continuing to gain ground. And our off-premise sales remained more than 2x pre-pandemic levels.

In Q3, Dine delivered adjusted EBITDA of over $63 million by focusing on what's in our control. Notably, G&A was $46 million, reflecting our prudent approach to spending. Through the first 3 quarters of 2022, we returned $145 million to our shareholders via dividends and buybacks. And importantly, during the quarter, we saw an easing in the inflation rate in the cost of food and supplies to the restaurants.

Applebee's cost of goods inflation fell from 23% during the first 6 months of 2022 to a run rate that looks like 13% for the back half of the year. IHOP is experiencing a more modest decline from 21% to 19%. IHOP's costs remain inflated due to the stubborn cost of eggs and the impact of the Ukraine war on grain crisis and ultimately, pancake mix. I've talked before about the importance of strong brands during uncertain times. During moments like these, consumers stick with brands they know and trust and love. The value proposition at both our brands is well known. So right now, we're amplifying our value message to reflect our guest mindset and financial situation.

Now I'll walk you through the progress we made across our strategic priorities. This includes investments in technology, development and new sources of revenue. Our world-class tech team is delivering products on time, and we've more than doubled our annual tech spend since 2019. We're enhancing both the in-restaurant and out-of-restaurant guest experience as well as new back of house and front of house technology.

Some examples of recently completed tech include our new learning management system, new IHOP websites and app with Applebee's scheduled for next year, FlyBuy and Pay 'N Go technology that streamlines the guest interaction, and we continue the rollout of IHOP's new point of sale.

Next is development. Our IHOP portfolio continues to expand. The combination of traditional and new restaurant formats is driving our confidence in our long-term unit growth and Applebee's continues its path toward net openings. Our third priority is new sources of revenue. IHOP now offers its virtual brands in over 1,100 locations, and we have 55 of those kitchens across Applebee's and International.

IHOP's virtual brands are incremental to sales and target dinner and late night hours, both are opportunities for the brand. We're building our virtual brand pipeline and believe there's an attractive long-term opportunity for virtual brands within our portfolio. While we expect challenges over the next few quarters, Dine is positioned well for challenging times. We're confident in our ability to navigate the near-term headwinds and deliver on our longer-term goals. We're confident in the resilience of our iconic brands. We're confident that our scale allows us to mitigate, to some degree, supply and price disruptions, and we're confident because Dine is financially sound as are our franchisees.

With that, I'll turn the call over to Vance to review our financial performance and outlook in more detail. Good morning, Vance.

Thank you, John. As you mentioned, the third quarter continued the momentum that we built over the last 1.5 years, and our plan is moving us in the right direction. Our third quarter total revenues were $233.2 million, as franchise revenues grew 2% year-over-year due to positive comp sales growth at both brands. Company restaurant sales increased over 8% to $38.2 million compared to the same period of last year. We completed the refranchising of our company restaurants last week.

Rental segment margins for the third quarter of 2022 improved by 6% to $7.2 million over last year. The favorable variance was mostly the result of franchisees higher retail sales, which drove higher percent rental income for the quarter. G&A for the third quarter of 2022 was $46.3 million compared to $43.7 million for the same quarter of last year as we continue our strategic growth investments in support of our brands. We generated consolidated adjusted EBITDA of $63.6 million in this quarter, slightly ahead of last year's $63.3 million quarterly results.

Finally, adjusted EPS for the third quarter was $1.66 outpacing last year's $1.55. The variance was primarily due to lower weighted shares outstanding. Turning to our cash flow statement and balance sheet. Over the first 9 months of 2022, we generated cash flow from operations of $63.5 million. This compares to cash flow from operations of $145.6 million over the comparable period last year. The variance in year-to-date cash flow from operations was due to the change in working capital that we saw in Q1 and discussed in the prior 2 quarters. This quarter also marked a continued improvement from our midyear results as we saw our working capital position and cash conversion rates gradually returning to normalized levels. We also ended the third quarter with total unrestricted cash of $355.3 million. This compares to unrestricted cash of $263.5 million at the end of the second quarter.

In mid-August, we announced the upsizing of our borrowing capacity available under our VFN, and we subsequently drew down $100 million, which provides us with greater financial flexibility. Our leverage ratio moved to 3.9x, which was below the 4.27x last quarter. As we discussed previously, we have the option to advance our Class A-2-I bonds right now, but our anticipated repayment date for the bonds isn't until June of 2024.

In the meantime, we will continue to evaluate our best course of action and take advantage of the refinancing window, if it makes sense for our shareholders in the long term. Dine remains committed to returning cash to shareholders. During the third quarter, we paid a cash dividend of $0.51 per share on September 30. We repurchased over $1.6 million shares as of Q3 year-to-date or approximately 9% of our share count has been retired since the start of the year. The combination of paying dividends and repurchase of our shares remain a key component of our long-term capital allocation plan and support our focus on driving total shareholder value.

Next, I would like to update our financial guidance for the year. First, let me touch on development. Our IHOP development plans are now between 35 to 45 net openings for 2022 compared to our prior guidance of 50 to 65 net openings. The change is primarily due to some of our planned openings moving to 2023, given current permitting and construction delays. Applebee's development plans remain unchanged at 5 to 15 net closures for the year.

Second, we're lowering our expected G&A range for the year based on our latest investment progress. Our new 2022 G&A forecast guidance is $185 million to $190 million compared to our prior guidance of $188 million to $198 million. Some of our planned G&A investments this year will be extended into 2023, given the disruptions caused by the pandemic. We will provide more guidance around 2023 on our next earnings call.

Third, we're narrowing our expected adjusted EBITDA guidance range to between $243 million to $248 million compared to our prior guidance range of $235 million to $250 million. This new guidance reflects our Q3 performance, our continued strategic G&A investments in Q4, along with impact from refranchising our company-owned restaurants.

Lastly, we're maintaining our CapEx spending range of $33 million to $38 million. In summary, we're pleased with the consistent performance across our operations. Our value-focused approach began yielded solid results at both brands. We remain confident in our ability to generate significant cash flows, invest in growth and return capital to shareholders over the long term.

Next, we'll hear from John Cywinski with color on the Applebee's brand. John?

Thanks, Vance, and good morning, everyone. 2021 and 2022 have been terrific years for the Applebee's brand. In Q3, continued this momentum with a 3.8% comp sales increase on top of last year's 12.5% increase versus Q3 of 2019. On a post-COVID basis, I believe visibility to a 3-year sales comp provides an important gauge as to the true health of the brand.

Our 3-year comp sales calculation for Q3 2022 versus Q3 2019 reflects a remarkable 16.9% growth, illustrating Applebee's vibrant and sustained performance. This also marks the best 3-year sales performance throughout the history of Dine Brands. I attribute the success to a combination of drivers. First, with the tactical marketing decisions we made in response to this inflationary environment; second is the restaurant excellence we continue to see from our outstanding franchise partners. And finally, Applebee's performance reflects the benefits associated with the completion of our multiyear portfolio rationalization.

Now as I break down the quarter, Q3 average weekly sales remained quite strong at $53,000 per restaurant, 76% of this volume was on-premise, while 24% was off-premise, equally split between car side to go and delivery. From an absolute dollar perspective, weekly off-premise sales were $12,800 in Q3. This off-premise business is essential to our success and continues to flourish with more than $1 billion in annual system sales.

In addition, we just opened our 10th drive-through pickup window as we began a comprehensive cost benefit analysis of this very promising new initiative. From a brand attribute perspective, Applebee's continues to lead the casual dining category and key metrics, such as convenience, affordability, variety, family-friendly and brand awareness. In fact, Applebee's unaided brand awareness attained an all-time high in Q3 as we introduced compelling value propositions under our iconic Eatin' Good in the Neighborhood umbrella.

On the development front, we'll open approximately 9 new restaurants this year, featuring a combination of traditional and [Ghost Kitchen] locations. We also expect to close 15 restaurants this year, representing the fewest Applebee's closures in a decade. We then plan to return to net new unit growth in either 2023 or 2024, again, a combination of traditional restaurants and ghost kitchens.

Looking forward, we anticipate eventually returning to an annual closure rate of approximately 1% for the Applebee's brand. I'm also pleased to report that existing franchisee Thrive Restaurant Group has acquired our 69 company-owned restaurants in the Carolinas. Thrive is led by [John Ralf] a deeply respected second-generation franchise partner and Chairman of our Franchise Business Council. John is now our second largest franchise partner with 148 restaurants and second to only Greg Flynn with 439 Applebee's.

With this transaction, Applebee's returns to a 100% franchised business model with 31 partners owning all 1,571 restaurants in the U.S. Now as we do annually, we recently gathered the entire Applebee's system to align around our 2023 business plan and to recognize our best performers. I was honored to celebrate [Mark Schowstack] as Applebee's Franchisee of the Year at this event. Mark is a role model operator and partner with 62 restaurants in the state of Michigan.

In closing, perhaps nothing speaks more to the health and relevance of the Applebee's brand than the escalation of our average unit volume from $2.2 million when this team was first assembled in 2017 to where we are today in Q3 at $2,750,000. Per Black Box, this 25% increase is more than double the casual dining category's 10% increase, excluding Applebee's over the same 5-year time frame. Even in this challenged environment, we remain aligned with our franchise partners as to how extraordinarily well positioned the Applebee's brand is for sustained growth as we look forward to 2023.

I'd now like to turn the call over to Jay for an overview of the IHOP business.

Thanks, John, and good morning. Our brand continues to become more relevant for more occasions with our menu and marketing as well as on the innovation and technology fronts. We posted a 1.9% comparable store sales gain in Q3, marking our sixth consecutive positive quarterly results. Our restaurants generated average weekly sales of $36,800 compared with last year's 36,200. Off-premise per restaurant weekly sales of approximately $7,700 were modestly below the $8,300 and $8,900 over the prior 2 quarters. And our to-go business is still over 20% of sales with delivery accounting for nearly 13% and traditional takeout generating approximately 8% of sales. The off-premise business is also supported by our 2 virtual brands with over 1,100 restaurants offering grilled cheese and Super Mega Dilla. We opened 9 new restaurants in the quarter, and our franchisees continue to work toward getting all of their restaurants back to full standard operating hours as the portfolio increased restaurants operating either 24/7 or 24/2.

In Q3, an additional 4% of our restaurants having to offering overnight hours. Our marketing and menu initiatives are resonating with guests. Last quarter, we successfully partnered with [Dominion] on a well-received promotion that drove results. We offered a value proposition through a widely accepted $5 2x2x2 platform. And most recently, we're excited about the launch of our new Thick 'N Fluffy French Toast offerings. We're also enthusiastic about our strategic and technological efforts. We've introduced our Pay ‘N Go options for our guests to close out checks through their own devices.

Our point-of-sale platform rollout continues to expand, now in approximately 240 restaurants. And the growth of our International Bank of Pancakes loyalty program has exceeded our full year target already. We ended the quarter in its first 6 months with 3.3 million sign-ups.

Touching briefly on development. We remain bullish on the brand's long-term prospects despite having to deal with near-term supply chain and permit approval timing challenges. We expect to add 50-plus gross new restaurants in 2022. That represents one of the strongest years in our brand's history. The change in our current year outlook is more of a timing issue, which weighs under development prospects. We expect to see several of our franchisees playing Q4 openings move into 2023.

To wrap up, IHOP brings joy to people's lives, which is fundamental to who we are and what we do. We remain excited about the progress we've made and the foundation we've laid for our continued growth and future prospects. I'll now turn the call back over to John Peyton.

Thanks, Jay, and thanks to those of you on the line for your patience with our late start this morning. And thanks to Vance, John and Jay and their teams for all their hard work and great results in Q3. And a big thank you to our franchisees, their restaurant teams for their tremendous efforts and focus on our guests. We know that there is uncertainty right now, and that's why we're working hard to be there for our guests, providing great food and experiences when they want and need us most.

And with that, Lisa, please open up the call for questions.

(Operator Instructions) Our first question will be coming from Eric Gonzalez with KeyBanc.

My question is about the balance sheet. You have a big chunk of your securitization coming due in about 18 months or so. So can you talk about your ability to refinance that maturity and where you think you might be able to get a deal done today in terms of the current industry? And then given the potential increase in interest expense, can you still continue to buy back stock? And more importantly, do you think it's the right move for the shareholders to continue the current level of buybacks versus perhaps paying down the debt such that you might limit the amount that you have to borrow?

Eric, [Vance] will take that.

Eric. So we actually don't have any current maturities due, and there's no need to finance right now. I mean the (inaudible) window that we have was opened up earlier this summer, but we really only need to take advantage of it if it makes sense. So we're monitoring the market. And currently, the market is pretty volatile, right? So we're taking into account interest rate movements and capital market environment. But the goal is always to maintain that financial flexibility and the liquidity that our current capital structure provides. So we will -- we may refinance, and the market conditions improve. Right now, it's pretty choppy.

And on buybacks, capital return has always been one of our top priorities in terms of capital allocation. I mean, it's evidenced by the fact that we've done over $100 million of buybacks this year. And we'll continue to be opportunistic with repurchases. But we need to balance it with net leverage levels, right, especially given today's environment.

Okay. Fair enough. And maybe if I can ask one about unit growth. You have some targets out there with regard to growth over the next 4 to 5 years. which if I remember correctly, it stacks up to about 15 or 150 to 200 units per year. So my question is, are you still confident in this outlook given the higher rate environment? And how are your franchisees, particularly the IHOP system reacting to the higher rates, they're still dealing with the high teens inflation. And then related to that, you lowered the unit growth outlook for IHOP this year due to permitting delays, does that mean in '23, you'll see outsized growth as project time lines normalize. Do you think this pushes out the pipeline such that we see the typical 50 or so IHOP next year?

Yes. This is Jay. I'll probably take that one since most of is an IHOP related question. Yes, our growth this year has been strong. I mean we're going to open over 50 new restaurants this year, which is very good growth for us. We did have quite a few issues, especially a lot of our pipeline was back-loaded this year, and we started getting into some permitting issues that seem to be persisting post-COVID and different municipalities, equipment issues. So that caused some of our pipeline that was going to open in Q4 to slide into next year. So that will help that as we move forward. The environment obviously is a little bit difficult, but so far the franchisees, we've got a lot of excitements. We just had our global conference and had a tremendous amount of [franchise, he's] talking to us about new restaurant openings. And I think they're still bullish on opening a lot of restaurants at the IHOP brand, but the economics have changed. So we're seeing a tremendous amount of our openings now being conversions. There's other restaurants that are closed down, and it's actually providing an opportunity for people to be able to go out and take advantage of that at this particular time. So I think the pipeline is still looking very good. And like I said, a lot of those will move into next year, which will help us out in future years.

And John, why don't you address Applebee's?

Eric, we're confident in our strategic plan for Applebee's. As you know, we're rebuilding our pipeline, anticipate and this is great news, returning to net new unit growth, a combination of traditional and ghost in either '23 or '24 and very optimistic and not concerned about any of the kind of near-term challenges that may be delaying that time line a little bit.

And our next question is coming from Jake Bartlett of Truist.

Great. My first one was on the guidance for -- on the implied guidance in the fourth quarter for EBITDA. It's lowering a step down versus the other quarters of the year. And I just want to kind of understand better the reasons for the drivers for that. I see that G&A is guided to be up in the quarter. So that's one aspect. But you mentioned in the release a impact from the refranchising. So maybe as part of that, the answer, if you could talk about what the near-term impact of refranchising the stores and maybe what the impact would be in '23, whether it's accretive, including some reductions in G&A related to those stores.

Vance, will you take that?

Of course. So we guided on a full year for 2022. But for this quarter, effectively, we're guiding on Q4. And it does reflect our current performance, our G&A spending trends and along with the impact from refranchising of our company-owned restaurants, as you said. Most of the trend that you're seeing in Q4 is driven by G&A. And a reminder is that our Q4 G&A is usually a little higher than other quarters, but this Q4, particularly also includes catch-up investments from earlier in the year that we just couldn't do with open positions, projects, et cetera.

And so having said that, though, I think Q4 G&A does not represent run rate, right? So -- and we will continue to make certain investments, people, research, technology, product development in 2023, but we'll have more details on '23 guidance on the next -- in the next quarter. But our investments, as we said in the past, they're really defined to drive and support long-term growth, and we're really pleased with the progress that we're seeing so far.

And the impact of the refranchising. It was mentioned in the release that, that could be impacting EBITDA. So I look at your company margins, I would think that there would be almost a 1 for 1 to a royalty rate but if you could just help us understand the impact of -- on the financials in the fourth quarter [in '23] from selling those stores. And then also, what kind of G&A is related? I think in the past, maybe you've talked about $5 million or $6 million related to company-owned stores. Is that right? Should we expect G&A to go down by that amount? Any help there would be helpful.

So our 2022 G&A and EBITDA guidance reflects the refranchising transaction that was disclosed. That was closed last week. On 2023, we'll provide more color on '23 next year. But I'm just reminding everyone that the 69 restaurants represent roughly 2% of our portfolio, we don't really anticipate a material change to our business fundamentals. And historically, we haven't really discussed company owned restaurant-specific EBITDA or G&A.

Okay. So -- but is there a G&A?

Yes, yes.

Okay. So can you say whether it's accretive or dilutive to refranchise those stores?

There is G&A that will be cut. And we will have more discussion on 2023 guidance when we're done with our budgeting process for next year, and we'll provide more color in the next quarter -- but there is G&A that will be taken [now].

Okay. And then there was no comment, I believe, about the kind of your -- the current trends. We've seen on same-store sales in the fourth quarter. And we've seen an improvement on a 3-year basis throughout the year here. Is there any reason to think that, that wouldn't continue just in terms of the underlying momentum of the business? Any comments there would be helpful.

Yes. Why don't we have Jay and John comment on that?

Yes, Jake, this is John. We love our plan with our franchisees. We're very confident in not only the plan that we've aligned upon, but our flexibility to change as needed. We have very strong momentum as a brand. And our confidence quite candidly couldn't be any higher than it's been over the past 5 years.

And I think on the IHOP side also, we feel very good about our progress we've made coming back after the pandemic. We at 6 straight quarters now being up in sales, and we seem to be hitting our stride right now. We have a great pipeline that's of initiatives that we have planned out all the way through next year. So we're feeling very good about where we're at and what we're doing with our menu, our marketing, our loyalty program. We've got a lot of things going for us right now that we don't see any reason why that would change.

One moment, while we prepare for our next question. We have our next question is coming from Jeffrey Bernstein of Barclays.

Great. Two questions. The first one, just following up on the consumer environment. It doesn't sound like you've seen any slowdown in trend either through the third quarter or into the fourth quarter. I just want to make sure that that's accurate. And just wondering what initiatives you might implement if trends were to slow on your end or whether perhaps you're already seeing increased marketing or promotion or any competitors getting more aggressive just trying to size up the landscape in terms of your potential response as well as the competition. And then I had one follow-up.

Sure. both questions for John and Jay again.

Jeff, this is John. On the Applebee's front, we're very thoughtful in this environment. It's a challenging environment. We're thankful for the momentum that we have. One of the things that's happened here over the past year or so, post Cove is we returned to having at least 12, perhaps even 18 months lead time in our marketing plans and our tactical initiatives with contingencies and flexibility built in. So we have a portfolio of propositions that we can market and deploy as needed should the environment become tougher. We've got those programs sitting on the shelf. So and again, we only have 31 franchise partners. We meet frequently in our ability to change course on short notice in reaction or response to the marketplace is pretty easy for us. So great momentum. We're very thoughtful on a challenged environment as well.

Jeff, this is Jay. We feel really good about our ability to make adjustments as we need to the restaurant business historically is when things get tough, your competitors start to do more discounting, et cetera. We try really hard not to react to what everybody else does. We have a plan we're trying to follow, and we try to make value part of our strategy all the time. There's always a need for value for some of your guests, and we need to have the ability for guests to access that. We've got our IHOPPY Hour program. We'll use limited time offers. We just did a $5 2x2x2 promotion. We also just rolled out our new Thick 'N Fluffy French Toast, which is a full price proposition that is a much better improved quality compared to what we had previously on even. We truly believe there's 2 sides to what people credit, right? There's the indulgent sweet side. There's also the more safety side. We rolled out new [dinner on TRAY]. We rolled out new [better-for-you] items. We're really executing on our plan, and we're confident that we're doing that plan, we're going to be in great shape and there's value incorporated in that plan as well.

Understood. And my follow-up, just because it's amazing we've gone halfway through this call without much talk about menu pricing or inflation. So I was hoping to just touch on -- well, you mentioned the commodity basket seemingly easing a little bit in the back half of the year. I'm wondering if you could maybe talk directionally where you think commodities and labor are headed. I know you're not giving formal guidance for next year, but how you think about it from a franchisee perspective and maybe counter that with menu pricing kind of how much pricing was in the menu for each of the brands in the third quarter? And what are your suggestions to the franchisees in coming quarters if sales really hold up and inflation were to ease? Just trying to get a sense for the potential margin outlook on the franchisee side.

Jay and John, do you want to take that again?

Sure, Jeff. This is John. On the Applebee's front, I continue to be impressed with our franchisees. They are thoughtful, strategic, savvy. They're quite a sophisticated group. They understand this delicate balance between covering the margins to the extent possible and maintaining affordability leadership. And Applebee's does lead the category and affordability. So it's important to us. They've been conservative, relatively speaking and strategic in their pricing and they've been from our discussions with them, taking a long-term view as to market share opportunity in a tough environment. And I applaud them with that. With that said, they will do what's necessary to protect their margins in a tough environment. They've been conservative to date, and I expect that to continue.

I think on the IHOP side, no difference really. They're dealing with the same kind of pressures. Inflation has been a little stubborn this year. We do think that as we get into next year potentially that the inflation rates are going to start to decline. It doesn't mean prices are going to drop. But I think the deceleration of inflation is going to take place at some point here. And you see that a little bit this year. But the back half of the year is still pretty high. Now our menus are already priced for the rest of the year. We don't have another menu trend until next year. So I don't see them changing anything right at the moment. And until we get into the spring, I think they've done whatever they're going to do as far as their decisions on price. But food costs will probably normalize like [we probably] never comes back down to the levels it was previously, but they have incorporated price to help overcome some of that. And that's a little bit more of a regional issue. There are certain areas where the softening of the economy has actually opened up shaping possibilities and the inflation rate on labor has slowed down as well. There's other markets where it's still tough out there. If you've got an unemployment rate of 2% in your city, it gets tempered, but that becomes a little more localized. The prices is very smart about how to take price as needed but do it in such a way where you don't run off your guest base because they can't afford to come anymore. So they're being very careful about it and trying to be as strategic as possible on how they take price, where they take price. And I think as inflation rates come down, price increases will probably decelerate as well. So I think that when inflation goes back to a more normalized rate, I think your price taking the franchisees will do [unless].

Is there any clarification on that price for the third or fourth quarter for the brand?

Jeff, on the Applebee's front, think of it as 7% quarter-over-quarter, '22 over '21. And I think we've shared kind of color in previous quarters as well. So I look at that as conservative in this environment. And to Jay's point, I do expect should the commodity cost inflationary environment improve, which we do expect it to do a time that our franchisees will revert back to at some point to more normalized 2% to 3% annual price increase. That's what historically has proven to be the case.

Yes. I think IHOP, it's more like -- it's close to 11%, it's the price they've taken year-over-year Q3 to Q3. Now again, some of those roll off a few pretty menus, your quarters change. But when we just look at Q3 versus Q3, it's a little over 11%.

Jeff, it's John Peyton. Just some context there, the 7% and 11% in price increases for the 2 brands is less than half of the increase in cost of goods into the restaurants. So it does reflect the franchisees really balancing their margins with what they think their guests can tolerate. And what's also interesting is that guest pushback on price increasing, increases has been surprisingly limited. While they're managing the total cost of their check, you can see from our same-store sales growth that consumers are tolerating the price increases and have come really to expect it given the economy overall.

One moment, while we prepare for our next question. Our next question is coming from Nerses Setyan of Wedbush.

I just wanted to ask about value in this environment. Do you really feel like an aggressive value stance is necessary, particularly as gas prices have come down from early Q3 peaks. And then in general, I guess, how has the perception of value evolved just given the inflationary headwinds out there?

Jay and John, you want to take that?

Yes, John. This is John C, Nick. Good to chat with you. Your question is, do I think value is necessary? Applebee's is fundamentally a value brand. We lead on affordability. We'll obviously see our franchisees protecting their margins. But I do think value remains important. We're at the lower end of the average check spectrum in casual dining, that's important. Our guests are challenged. Quite obviously, in this environment in terms of discretionary income. And there are lots of ways to convey value. We're big believers in restaurant excellence and our franchisees have truly been exceptional at earning the trust of not only their guests, but their team members throughout COVID. I think that's evident in our results, and there are lots of ways to deliver value. There's added value, there's co-branding, there's the use of borrowed equity. We like conveying through our advertising emotional connection with our guests. I believe even good in the neighborhood is perhaps more relevant than it's ever been in this environment. So yes, I believe value is important, but there are a multitude of ways tactically to deliver upon that value proposition.

Nick, this is Jay. I think that to an extent, value is always necessary. It's a little bit part of our overall strategy that there are certain guests you'd have to get more occasions from them, value is always important. And you want to have value on your menu. Some people call the barbell strategy, you have more expensive items, you have items that are more approachable and affordable for guests. But not all guests are the same. We have guests that are higher income scale that they're less price sensitive, they just come in and order their favorite item. They don't care what it costs. There are other people though that they can't do that. They have to manage their pocket book and when gas prices go up and things get more expensive, they watch their dollars a little closely. And so I think there's a need for value all the time. And as John said very well, there's different kinds of value. there's a bonded value. That doesn't necessarily mean it the cheap price. You can get a lot of food for your money. There's price point value. There's limited time on for values. Our loyalty program opens up the possibility for one-to-one personal value on what they care about and how to motivate extra visits from those individuals. So yes, the economy makes it front and center, but I think value is always there. It's just how you pull the levers when and where and how to keep the flow of (inaudible) company.

Nick, this is John C. My final point on this one, and I firmly believe this, as we think about in the past couple of years, brands with meaningful scale, which we have in brands that have strong culture within their franchise communities and entities and brands that have earned the trust of their guests are going to thrive and perhaps navigate this inflationary environment better than others who don't have scale and don't have strong culture. We love our position.

Is there a way to maybe quantify like value mix as a percentage of the overall menu or sales now versus, say, pre-COVID for both brands?

Well, Nick, this is John C. If you're -- I would not equate value with tactical discounting. I think my view on that is sometimes lazy or desperate brands, resort to tactical discounting out of necessity. So we've always had kind of a core value proposition embedded in what we do and how we market and that will continue moving forward

One moment, while we prepare for the next question. Our next question is coming from Brian Mullan of Deutsche Bank.

Just a question I have specific to the loyalty program. I know from the prepared remarks, sign-ups are going well, but can you speak to 1 or 2 elements that maybe have you most encouraged thus far from a consumer response perspective, any early learnings there? And then just kind of related to that, it seems like the dining room traffic at IHOP is still down quite a bit relative to pre-COVID. As you seek to recapture that from here, can you maybe put the loyalty program into context in terms of how important of the tool it is as compared to maybe other items like operating hour restoration or older guests getting more comfortable around dining out? Or just anything you'd want to fight around those dining room traffic trends?

Yes, this is Jay. Look, I think the dining room traffic keeps coming back. We see it improving, increasing, and obviously, that's something we're trying to do. Part of that is hours of operation. So that keeps improving for us as well. As you heard in my prepared remarks, we had about 4% more of our restaurants go to overnight hours. As franchisees see their way to that being a profitable business venture for them, more and more are going to do that. And in some locations, that staffing and have an access to people to be able to staff it overnight. And some it may be the cost of doing business over night, depending on cost of that staff and inflation of food, et cetera.

Our virtual brands are really helping that because a lot of those sales happen in the late night hours. So that gives a little extra incentive to get your IHOP back open again as well. So some of this is hours of operation. Some of this is latent people still maybe not quite as comfortable coming out. It's a little bit of everything. I can't quantify and say exactly what is what. But we see the dining business coming back. It's still a critically important piece of our business. It's the core of the #1 sales driver we have. So obviously, we're working on that. And I think that this relevancy in the food that I've talked about before, it also becomes important to that is how do you have better items for people that want to eat healthier, how do you have items for -- that are more relevant to people for dinner instead of just eating breakfast. So we're addressing all of those things to help our brands become more relevant for more occasions throughout the entire day as we look at that. And then refresh me, what was the very first part of your question before you got there, you asked about one other thing.

Sorry, that was kind of a 2-part. Just loyalty --

Loyalty program, right?

Yes, the sign-ups are going well, but how about early learnings on consumer response?

Yes. The sign-ups are going fantastic, and I think that is the first indicator of people their engagement, they love the brand, they want to join. The sign-ups are going way faster than what we even thought they would do. We thought for the entire year, our goal was 2.5 million people and worth $3.3 million by the end of Q3 with a whole another quarter to go. So that's going really well. We're not going to get into a loyalty discussion on all the different metrics every quarter. We'll probably do something maybe on an annual basis. When we get to the end of the year, we'll give you some more details about some other statistics and data on that. But we'll keep you informed on that as we move forward. But we're very happy with where we're at right now and how it's progressing. It's just too early to start sharing those details yet. We'd like to have a little more history behind us.

I'll prepare for our next question. Our next question is coming from Brian Vaccaro of Raymond James.

John C, I wanted to start on the Applebee's sales strength. And I think I heard you say 7% pricing year-on-year. I think that's pretty similar to Q2, suggesting the sequential improvement you're seeing is traffic related. I guess the first -- can you just confirm that, that's correct. But the question would also be, could you elaborate on what's driving the sequential acceleration? Any data points you could share, suggesting that you're benefiting from trade down or a way to ballpark the benefit of this shift to value, and that's thing worth noting from a daypart or a weekday versus weekend perspective?

Well, sure, Brian. That's a lot embedded in that question. Good to hear from you. Let's tackle kind of the health of the business and what I attribute that to. First and foremost, restaurant excellence. General Manager retention and restaurant-level excellence one guest at the time has been the hallmark of this brand throughout the pandemic and throughout this recessionary environment.

In addition to that, and I mentioned it in my remarks, we concluded a while ago, our portfolio rationalization and ended up closing over 5 years, just about 300 restaurants. That's complete -- our portfolio of both restaurants and franchisees is rock solid right now, and that's evident in the results. Quite frankly, you would have seen that earlier had it not been for the pandemic. And then I take a combination of off-premise execution, great marketing. I referenced Eatin' Good in the Neighborhood. We like to connect emotionally. We'd love music, and we like to make our guests smile and make them hungry. And we're a brand that's not only affordable, we went on 4 attributes. And this is what I would attribute our -- not only our success, but why we're so confident moving forward? We went on affordability. We went on convenience. We went on variety, therefore, no [veto,] (inaudible) and we're absolutely dominating on brand awareness. You add those 4 up, and you have sustained growth for a very relevant brand, a brand that's better positioned than it has been. I would argue, and this is my second stint with Applebee's in its entire history. So I won't quantify or attempt to quantify anything for you other than to say those are the reasons driving the results that you see and that you've seen over the past few years for the brand.

All right. And on the commodity front, what was at Applebee's, what was year-on-year inflation in the third quarter? Could you level sort of where you see the fourth quarter shaking? I'm just trying to get a sense of -- I know you gave some statistics on the first half versus second half but trying to get a better sharing of the degree to which you're seeing improvement. And then I know things can turn on a dime these days hour-by-hour. But everything you know today, is there a reasonable range that you would expect on food inflation that you could offer into '23, mid-single digits, et cetera, something in the ballpark.

Brian, I could take -- I could let you know. In Q3, for Applebee's inflation that we experienced was about 17% for IHOP is about 21%. And so if you think about first half versus second half inflation, first half was, I think, for both rent, we're in the low 20s. And then in the second half, that inflation for Applebee's despite in the low teens. And for IHOP, it's close to 20% just because they have different commodity baskets. But as John mentioned, as both John mentioned earlier, I think if you index that to July. For the next 18 months, we're seeing that cost starting to go down. And so even though there's still year-over-year growth inflation, it's not as steep as we saw in the first half, and that trend will likely continue in 2023.

All right. And I also had a question on IHOP for Jay. Could you just give some perspective on the cadence you saw through the quarter? I'm trying to get a sense as to what degree the LTO, the 2x2x2 in September might have driven outperformance in the month. And just curious if there's anything worth noting from a daypart weekend versus weekday, et cetera, anything worth noting there?

Brian, it's Jay. No, as far as the quarter, right about that cool time, we get a little bit of softness. And then for the full quarter though, it kind of evens itself out and it's pretty typical for us. We were real pleased with the promotion overall. I think it's just what we want to do. We keep talking about value and value work and value does work. It does drive traffic. It needs to be profitable traffic for our franchisees though. That's always the thing we're looking to do is you don't just want to get traffic coming in, it doesn't help our franchisees. The nice thing is when you do a value promotion like that though, frankly, most people don't buy just that promotion. It gets people in the door. And what they do is they decide when they get there, one person has that promotion item. But the other 3 people they bring with them do not. They do their regular behavior, and it ends up being good for us overall doing that. So overall, we were very pleased with the quarter. And as long as gas prices stay more moderated and things don't get much worse in the economy, I think we're in very good shape.

Okay. And then last one for me. In the third quarter, I noticed there was this other EBITDA add back of around $2.5 million. Could you provide just more color on what that was? I know there's usually add backs that you identified, but there was this other bucket. Any color there would be great.

Yes. It was around professional services for work that we're doing. That's not related to the run rate of the business.

Okay. So that was embedded in G&A then, I would assume?

That's right.

And for our final question, that will be coming from Andrew Wolf of CL King.

Great. I wanted to ask a follow-up on the lower commodity costs that you are expecting and somewhat experiencing now at Applebee's. Just the company's sort of financial and economic model. As I understand it, the direct exposure for the company is only through or mainly through the mixes that are sold out of IHOP. But is there anything else? Is there any exposure through the co-op or any other way that commodity inflation directly impacts the company's P&L?

Andrew, it's John. Thanks for joining the call. We're glad you're with us and Vance can take that.

Andrew, good to talk to you. So it's primarily through the dry mix cost, as you mentioned. Now when we have the company-owned restaurants, the flow through our P&L as well, but now that the refranchising has closed, it won't really impact us directly. And now having said that, John and Jay both talked about how it impacts our franchisees. So it does -- we do care about it, and it's something that we monitor very closely because we care about the health -- financial health of our franchisees.

Great. Just wanted to double check that. And just on the G&A spend, maybe I can ask sort of a basic question. Could you kind of quantify how much of the planned spend kind of slid out of either the first 3 quarters or out of the third quarter into the fourth quarter. Just help us understand the step down in EBITDA and also, I guess, to some extent, the step up in the third quarter.

Yes. It's hard to quantify how much it got slipped because it's kind of a theoretical question. But I think I'll reiterate what I said before, which is, if you look -- go back to our quarterly G&A numbers for the past 4, 5 years, Q4 is traditionally a little higher than other quarters. There was some true-up of accruals that we do just as normal operating procedures. But this quarter, it does include new hires that we wanted to hire earlier in the year that we couldn't do and research projects and development projects that we wanted to do earlier in the year that got pushed back because of omicron and some of those macro impacts. But it's hard to quantify how much of that was pushed back into Q4, but our guidance reflects that thought. Does that help Andrew? Have we lost Andrew? Operator?

Looks like Andrew has gone back -- yes, he has dropped off the call.

Okay. So I think that concludes the queue. Is that right, Lisa?

Yes. There's no more participants in the queue. I would like to turn the call back over to John Peyton for closing remarks.

Great. Well, since we're 12 minutes over, we appreciate you all sticking with us. And I'll just say thank you. We're proud of our results (inaudible).

Thank you all for participating in the call. This concludes today's conference. You may all disconnect.