Dine Brands Global Inc (DIN) 2022 Q4 法說會逐字稿

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

Good morning, and welcome to Dine Brands Fourth Quarter and Fiscal 2022 conference call. I'm Brett Levy, Vice President of Investor Relations and Treasury for Dine Brands Global, and I am joined this morning by John Peyton, CEO, Vance Chang, CFO and Tony Moralejo, President of Applebee's and Jay Johns, President of IHOP. Please remember our safe harbor regarding forward-looking information. During the call, management may discuss information that is forward-looking and involves known and unknown risks, uncertainties and other factors, which may cause the actual results to be different than those expressed or implied. Please evaluate the forward-looking information in the context of these factors, which are detailed in today's press release and 10-K filing. The forward-looking statements are as of today and assumes no obligation to update or supplement these statements. We may also refer to certain non-GAAP financial measures, which are described in our press release and also available on Dine Brands' Investor Relations website.

As it relates to this morning's release and our filed 10-K, our fourth quarter and full year 2022 results include the company-operated Applebee?s restaurants, which were sold to one of our existing franchisees in October and our December acquisition of the Fuzzy's Taco Shop brand. For calendar planning purposes, we are tentatively scheduling the release of our first quarter 2023 earnings call, Wednesday, May 3, 2023, before the market opens.

With that, it is my pleasure to turn the call over to our CEO, John Peyton.

Hello, everyone, and thank you for joining us this morning. On today's call, we will discuss our investment initiatives, including the recent acquisition of Fuzzy's Taco Shop, we'll share our fourth quarter and full year 2022 results. Vance will offer our initial 2023 guidance and thoughts on our capital structure. And to wrap up, Tony and Jay will provide updates on Applebee's and IHOP. Before we get into those details, let me first welcome Tony, our new President of Applebee's. Tony started in this role in January and brings decades of operations, development and franchising expertise to Applebee's. Tony is a veteran of Burger King and Church's Chicken. He joined Dine in early 2021 as President of our International business, just in time to masterfully lead our international franchisees through the pandemic. And as a result of his stewardship, our international business achieved record openings last year. I'm thrilled for Tony and for Applebee's, and I appreciate the warm welcome and support that Tony is receiving from our franchisees.

While Tony is the new face of our Applebee's brand, we also have a new brand, Fuzzy's Taco Shop, which fulfills our long-stated goal of adding a brand to our portfolio. I was enamored with Fuzzy?s from the moment I walked into the vibrant and colorful dining room and convinced after I sampled the fresh Baja inspired tacos and delicious Instagramable beverages. Specifically, we chose Fuzzy's because it's nearly 100% franchised. And like Applebee's and IHOP, it's the value leader in its category. Second, in addition to its 137 restaurants, it's nurtured a strong pipeline of 125 additional units expected to open over the next several years. We love the Mexican category because it's vibrant and growing. And we're attracted to the strong business model that includes a compelling lunch and dinner business, 40% off-premise sales and 20% alcohol sales. And finally, we love what Fuzzy's describes as its bold and bad ass attitude that creates strong emotional connections with its guests.

Fuzzy's is led by Paul Damico, a veteran of FOCUS Brands, Moe?s Southwest Grill and HMS Host. During Paul's two years with Fuzzy's, he and his management team strengthened operations, marketing effectiveness and menu innovation while building an impressive pipeline for future growth. We're extremely pleased to have Paul and his entire team as part of the Dine family.

Our focus now is to ensure that Fuzzy's benefits from the economies of scale that we offer from our technology, our shared services and our supplier platforms and to accelerate Fuzzy's already robust momentum. The Fuzzy's acquisition ended the year on a high note for us, but it didn't distract us from the continued impact 2022 caused across the industry; inflation, hiring and retention challenges, supply chain delays and, of course, uncertainty regarding the strength of the consumer. Yet against this tough operating environment, Dine delivered solid results for the fourth quarter and for the full year 2022. I attribute our positive performance to the strength of our value-oriented brands, our operational and marketing agility and the commitment and hard work of our franchisees and seasoned brand teams.

Vance will provide more detail on our results, but key highlights are that Applebee's posted its eighth consecutive quarter of positive comp sales with a Q4 increase of 1.7% and full year comp sales growth of 5.1%. IHOP had its seventh consecutive positive quarterly gain at 2% and full year comp sales of 5.8%.

In 2022, we returned over $150 million to our shareholders via dividends and buybacks, and we retired $40 million of our outstanding debt last quarter. Despite economic pressures across the industry, the strength of our value-oriented brands was apparent as we were able to meet guests where they are because our franchisees excel at providing delicious food, great experiences and fun welcoming restaurants. Meanwhile, our brand teams excel at delivering innovative marketing, menu and operational programs.

In addition to those core competencies, our 2023 innovation and growth agenda includes continued investment in the technology, marketing and training needed to enhance and accelerate our IHOP and Fuzzy's loyalty programs, a robust technology agenda that includes new POS for IHOP and Applebee's adding artificial intelligence that drives the recommendation engine on our digital channels and technology that improves the guest experience like FlyBuy, server handhelds, functionality for our apps that includes dine-in, order in advance and joining waitlists for seating, payment options and the ability to review the restaurant.

Third, we're focused on building on our portfolio of virtual brands that currently includes Thrilled Cheese and Super Mega Dilla and we're now testing a chicken and a cheesesteak concept. We're also leveraging IHOP's brand equity into national CPG partnerships, launching IHOP branded coffee with Kraft Heinz and cereal with General Mills. And finally, we're testing new brick-and-mortar concepts like dual-branded restaurants, kitchen of the future, pickup windows as well as offering compelling and targeted incentives to franchisees to accelerate the construction of new restaurants. The past few years have reminded us to expect the unexpected. We've learned to react quickly and decisively to new challenges and opportunities. And as a result, our teams are better equipped and more prepared to meet the changing needs of our guests.

In 2023, we anticipate that Dine will deliver steady results against a still difficult macro environment. We'll continue to invest in innovation and technology that strengthens us for the long term, and we'll diligently focus on managing our balance sheet, optimizing our debt structure and returning cash to shareholders. We're confident that our team, our strategy and our momentum will serve us well in 2023 and beyond.

And with that, we'll turn to Vance, who will offer more details on our financial performance.

Thank you, John. As you mentioned, Dine is well positioned to leverage our cash flow generation ability to drive long-term growth. We accomplished quite a bit in 2022 despite the volatile operating environment. During the year, we posted EBITDA above our full year targets, return capital to shareholders beyond pre-pandemic levels and completed our first acquisition since the combination of IHOP and Applebee's. Our fourth quarter total revenues were $208 million, reflecting positive comp sales growth at both brands and offset by the refranchising of our company-operated Applebee's units, resulting in a decline of 9% on a year-over-year basis.

For the full year, we generated $909 million in total revenues, which was 1% higher than the prior year despite the refranchising of the 69 restaurants. G&A for the fourth quarter of 2022 was $59 million compared to $49 million for the same quarter of last year. We ended the year with $191 million of G&A expenses, up from $172 million last year due to strategic growth investments, resulting in increased professional services, including onetime items such as Fuzzy's acquisition costs.

These higher costs also were related to our return to normalized operations to support franchisees, including higher occupancy costs and travel, conference expenses and software and maintenance costs. Excluding the various onetime items, our 2022 G&A would have been approximately $182 million, just below our expectations for the year. We generated consolidated adjusted EBITDA of $57 million in this quarter compared with last year's $60 million quarterly results. Our consolidated adjusted 2022 EBITDA of $252 million was ahead of our guidance and modestly below last year's $253 million.

Finally, adjusted earnings per diluted share for the fourth quarter and full year were $1.34 per share and $6.20 per share, respectively, outpacing last fourth quarter's $1.32 per share but below 2021's $6.54 per share. Inflation on restaurants' food costs and supplies remain elevated, although more pronounced at IHOP, given continued cost pressure on eggs and wheat. Applebee's and IHOP experienced 18% and 21% inflation for the year, respectively. Without the impact of eggs and wheat, IHOP's 2022 inflation would have been around 17%. Applebee?s Q4 inflation was 11%, an improvement from 23% during the first half of 2022. IHOP's Q4 inflation remain at about 20%, consistent with the 21% during the first half of 2022.

Our menu pricing, our Applebee's franchisees continue to focus on their value positioning with an approximate 7.5% average menu pricing adjustment in Q4 year-over-year. IHOP?s franchisees have taken approximately 10% year-over-year pricing in Q4 as they continue to deal with more elevated inflationary pressures.

Turning to our cash flow statement, balance sheet and strategic uses of capital. Our full year 2022 cash flow from operations came in at $89 million compared with $196 million in the prior year. The variance was primarily due to the change in working capital we saw in Q1 of this year and discussed in the prior three quarters. Our capital structure, including the undrawn capacity of the upsized variable funding note and our asset-light model continue to provide the business with ample liquidity and operational cushion related to our covenants.

We ended the year with total unrestricted cash of $270 million versus $355 million at the end of the third quarter as we utilized our liquidity to fund Fuzzy's acquisition and to retire $40 million of bonds in Q4. The bond buybacks were done at a discount to face value, averaging below 97% of par with a net impact of $1.2 million of principal savings and over $1.5 million of annualized interest expense savings as we prepare for the upcoming anticipated repayment date of our Class A21 bonds in June of 2024. We're currently encouraged by the improvements in the securitization market, and we'll look for the best window over the next several months to refinance our notes.

On capital allocation, in addition to organic investment to drive growth, our capital allocation focus going forward will include both debt and equity buybacks. We returned over $151 million of capital to shareholders in 2022 through dividends and stock buybacks, outpacing our pre-pandemic average. We also have a $100 million authorization from the Board for bond buybacks to optimize our capital structure opportunistically.

Before I turn to our 2023 guidance, I wanted to share additional color on our recent Fuzzy's Taco Shop acquisition, which closed in December of 2022. This 137-unit fast casual taco concept generated over $220 million in 2022 system sales. Its efficient square footage units generated $1.6 million in average unit volumes with the newer cohorts achieving sales well in excess of that average. We're encouraged by the integration process thus far and optimistic about the value creation opportunities as part of our investment thesis.

Finally, I would like to share our financial guidance for 2023. First, let me touch on development. Our Applebee's development plans call for 10 to 20 net fewer restaurants in 2023. Our IHOP development plans are targeting the opening of 45 to 60 net new restaurants for the year, with 10 restaurants already opened in Q1 of 2023. Second, we're forecasting an expected G&A range of $200 million to $210 million, including noncash stock-based compensation expense and depreciation of approximately $30 million. Third, our 2023 adjusted EBITDA guidance is targeted to be in the range of between $243 million to $255 million. Lastly, we anticipate 2023 gross CapEx spending to be in the range of $33 million to $38 million, although the effective CapEx levels will be about $10 million lower due to TI reimbursements related to certain projects which will flow through our operating cash flows for GAAP accounting purposes.

Overall, this guidance reflects our current view of the headwinds and tailwinds in 2023 and the cost structure required to navigate through the different scenarios. Our operating philosophy is to focus on how we can protect the downside while investing for the upside to create long-term risk-adjusted returns for shareholders.

Next, please allow me to introduce Tony Moralejo, for his perspective on the business as our new President of Applebee's. Tony?

Thanks, Vance. Yes, I'm absolutely proud and excited to be leading Applebee's, a brand that I personally and professionally admire so much. Having worked in restaurant franchising across multiple categories for nearly 30 years, I know a franchisor wins when franchisees succeed. Based on my experience and involvement with the Applebee's leadership team over the last few years, I can confirm that we have an incredibly talented and stable team committed to a successful strategy that doesn't waiver and produces winning results. We would not be in this position, if not for the intelligent and passionate base of Applebee's franchisees that work closely and collaboratively with the Applebee's leadership team. Together, we remain committed to driving business results.

2022 was the second consecutive year of strong sales performance. Applebee's closed out 2022 with a Q4 comp sales increase of 1.7% on top of last year's 9.1% increase versus the same period in 2019 and a full year comp gain of 5.1%. Q4 marked Applebee's eighth consecutive quarter of positive comp sales growth. Our solid momentum resulted in Q4 average weekly sales of $52,500 per restaurant. Volume across our sales channels was split with 76% generated by on-premise sales and 24% from off-premise sales with 13% coming from to go and 11% from delivery. Applebee?s continues to be recognized as a leader in the sector. From a brand attribute perspective, Applebee's leads the casual dining category in key metrics such as convenience, affordability, variety, family-friendly and brand awareness. Applebee's also leads on team engagement and great place to work rankings. At the same time, the brand and franchisees remain dedicated to positively impacting the communities we serve and recognizing local heroes through our doing good in the neighborhood platform.

Applebee's category leadership position and overall success is driven by our relentless focus on the guest experience, while we aim to exceed expectations of service and quality. Our marketing efforts continue to bring innovation, fun and value for our guests, as evidenced by our aided and unaided brand awareness, which hit all-time highs. Beyond our traditional brand approach, we partnered with Paramount and Tom Cruise on Maverick Top Gun. We also leveraged our guests' strong relationship with live sports, thanks to our partnership with football night in America and Sunday Night Football on NBC, America's #1 primetime show. Most importantly, we launched campaigns focused on affordability and value, which remain top of mind for our guests during these inflationary times. Our marketing, culinary and operations plans in 2023 will continue to build emotional connections with our guests by listening to what they want while keeping a pulse on emerging trends to deliver the products, services and interactions they create.

Touching briefly on development. In 2022, the brand opened 16 restaurants globally, with four of those openings occurring domestically, while effectively managing restaurant closures to minimize the impact on the portfolio. We ended 2022 with just 13 restaurant closures. Over the last two years now, the restaurant industry experienced rising land acquisition costs and construction cost inflation, while franchisees experienced downward pressure on operating margins. While our franchisees remain on solid financial footing, thanks to an all-time high AUV, these factors resulted in low new build ROIs, hampering our ability to ignite new unit growth. My top priority is to ensure our franchisees are successful. So, I'm going to leverage my development background and work closely with franchisees to create new financially attractive development opportunities for the entire Applebee's system.

To wrap up, I see continued momentum for Applebee's because the brand, our strategies and our talented brand and franchisee teams represent the necessary ingredients for future success. And with that, let me hand it over to Jay.

Thank you, Tony. As you've already heard, IHOP delivered its seventh consecutive quarter of positive comp sales, illustrating our progress and resilience despite continued volatility. While the operating environment may be challenging, it isn't detracting from our strong consumer connection and purpose to serve more joy to more people. IHOP posted positive 2% comparable store sales growth in the fourth quarter and represented the brand's seventh consecutive positive quarterly gain. Average weekly sales of $38,200 were modestly ahead of the prior year's $37,500. Our to-go business was 22% of sales and continue to be led by the 14% mix for delivery and traditional takeout generated the remaining 8% of sales.

The off-premise business is also supported by our two virtual brands with over 1,200 restaurants offering Thrilled Cheese and Super Mega Dilla. We're excited to celebrate our 65th anniversary in 2023 throughout the year. Our brand's food and restaurant experience remain as relevant today as it ever has been. We continue to leverage our marketing strength not only through our brand's legacy and value proposition, both of which were on display as we kicked off the year by bringing back our iconic Rooty Tooty Fresh ?N Fruity at a value price of $6, but also by leveraging our relationships.

One example is our recent partnering with Marvel Studios for an exclusive value movie tie-in to Ant-Man and the Wasp: Quantumania. Spend $30 and get a movie ticket with Fandango. Our current quality and value campaign focuses on our new sweet and savory crapes BOGO, which is running through March. We're also driving innovation across all aspects of our business. Our International Bank of Pancakes loyalty program has been well received as interest in the program far exceeded our expectations. Not only have we seen our IHOP app downloads triple year-over-year and lead our category, but we added 4.4 million members in its first nine months, nearly two million more members than expected, and this accounted for 5% of sales by year-end. We're excited with our loyalty program's initial progress and look forward to greater engagement with our guests and its potential.

While still early, we're receiving excellent data and developing more KPIs as the data set becomes richer and deeper, which we hope to share at this time next year. Additional evidence of our standing with consumers can be seen through our retail collaborations. We partnered with General Mills and recently introduced an IHOP mini pancake cereal, which debuted in restaurant stores in January. And today, we're excited to announce a new multiyear partnership with Kraft Heinz as part of our coffee business. In April, IHOP branded coffee will be on retail store shelves nationwide. These are great examples of how we're taking new and unexpected approaches across product categories.

Turning to virtual brands, which are now in more than 1,200 restaurants. We're about to launch our third virtual brand, Tender Fix, a chicken tinder concept, which serves to complement our two existing offerings, Thrilled Cheese and Super Mega Dilla. These partnerships speak to IHOP's brand strength and relevance and enable us to expand our reach, allowing us to be top of mind to more customers.

Our 2022 development activities were below our expectations as we highlighted on our last call as macro issues have affected the timing of our pipeline. We opened 37 new restaurants in 2022 with more originally planned in Q4, slipping into Q1 of this year, 10 of which have already opened in 2023. The pipeline remains robust, although macro factors continue to impact the timing of openings. We're targeting 45 to 60 net new unit openings in 2023, which represents a more normalized and solid development year, understanding macro factors could still influence our activity. I'm confident in the momentum we have at IHOP going into 2023, and I proudly speak for the IHOP system where we collectively look forward to all we'll do together to spread more joy this year.

Let me now turn the call back over to John.

Thank you, Tony and Jay and Vance. If the last few years have taught us anything, it's to expect the unexpected. Our philosophy is to focus our time and resources on the aspects of the business that we can control while ensuring that we remain agile and decisive when confronting immediate challenges. This approach will guide us in 2023 as we invest in our business, deliver exceptional value and experiences to our guests and drive returns for our shareholders.

One final note. With the addition of Fuzzy's and our refreshed focus on international, going forward, we're going to modify our approach to this call. Beginning next quarter, our scripted remarks will be limited to Vance and me, and then Jay and Tony will join us for Q&A. We're making this change to ensure that we effectively manage the time of our remarks to leave as much time as possible for your questions. Thanks again for joining us this morning and have a great day.

Thank you. We will begin our Q&A session. (Operator Instructions.] Please stand by while we compile your Q&A roster. One moment. Your first question comes from the line of Eric Gonzalez with KeyBanc.

My first question is maybe on the G&A outlook. You called out having some investments, I think, in the guidance in the release. Some of these investments, they're going to roll into 2023, so maybe you're looking at a little bit higher G&A next year. If I were to go back to the Analyst Day a year ago, the idea was that G&A would step up in 2022, and these investments to start to generate returns by the end of the year. So, I'm just kind of wondering where we are in that cycle? I know some of the investments have happened, some have been delayed. So are we starting to see the tangible investments yet offset those costs? Or have the delays sort of delayed impacted the timing of that cycle?

Eric, it's John. We'll have Vance tackle that question.

Eric. So, as we talked about in Q3, we lowered our expected 2022 G&A target because, as you said, right, some of our investments are falling into 2023, given the disruptions that we saw earlier in the year. So, this increase reflects open positions that have yet to be filled, annualization of new positions that we did build during 2022. Of course, there?s some inflationary cost increases and innovation projects are pushed in 2023. So overall, we expect our 2023 G&A level to be about the infrastructure that we need to support the growth going forward. As long as we continue to see progress with franchisee support, guest behavior and profitable growth in sort of a more normalized operating environment.

So, and to answer more specifically on returns, first of all, like I think for 2023, we know it's a complicated operating environment, right? But despite the complication, we are starting to see progress with the initiatives that we made last year in the context of comps, development and new restaurant source, new revenue sources. So our guidance effectively implies that our continued investment in G&A will be funded by the early innings of growth that we're seeing in 2023 and with, of course, longer-term upside to EBITDA growth in 2024 and beyond.

And Eric, it's John. Just to give a specific example of the way something like that flows out, Jay mentioned the loyalty program for IHOP. So, 2021 was about designing it and beginning to build it. 2022, we spent on the technology to enable the app, etc. By the end of 2022, we had about five million members enrolled, and those members accounted for 5% of IHOP sales. And so as we head into 2023, it's about now using our marketing capability and the investment we made in the tech to start to market directly to those people with promotions. We're adding artificial intelligence and predictive analytics to help recommend to them what their next purchase should be. And so that's the way to think about the cycle of how one initiative will impact 2023.

That makes sense. And if I could ask about development here. Tony, your comments sort of suggested that the ROIs are maybe not quite where you'd like them to be due to the borrowing cost, the construction inflation delays and maybe the store level margin. So, I think this begs the question of where we are in terms of store level EBITDA and how much that declined in 2022. And I think if I go back to, again, that discussion we had a year ago, the idea was that unit growth would go to that would sort of be 5% or so this year. I guess I'm wondering, is this a function of closing more stores? Or are you just opening fewer to offset the closures on a net basis? And then, Jay, on the IHOP side, you missed the bottom end of the guidance even that you've updated a quarter ago. I think you finished the year -- you did 30 for the year. And so that presumably means that some of those units would filter into 2023, but yet the guidance that you gave today is maybe below what you had thought initially from a normal year development perspective. So, I was just wondering what that means about the ability to accelerate unit growth, I think, and reach that 2,100 unit target by 2026 that you laid out not too long ago.

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

Yes, Eric, this is Jay. From the IHOP side, look, we did not hit the target we wanted to hit last year. We had, as we talked about on the last call, we had macroeconomic factors of supply chain and the supply chain kept moving to different items. We actually took positions to try to help ourselves get these restaurants open later in the year, but new pieces of equipment, new things started coming into play, but you couldn't open a restaurant without it. So, they started pushing into the next year. And I think as we developed our guidance this year, while it sounds like we're not on target, long term, we still feel confident over the five years of where we can get the openings to. But we're trying to be responsible here also. The macroeconomic factors have not completely gone away. Supply chain is not proven to move at the same rate that it was before. Our time lines are getting extended compared to pre-pandemic. And one of the big things that keep happening is that local municipalities are just taking longer and longer to approve plans, etc.

So, one of the things that we've done is, since the pandemic, we have started to get our franchisees to pivot toward doing retrofits of previously other restaurants. We're very successful in doing this. We've got about 600 of them in our system. We've done this for years and years, and that's how we're combating the kind of the economic factors of it cost so much to build a building with inflation right now. If you just retrofit an existing space, it's actually much more beneficial. It's usually much faster to get the permitting approved. But we're trying to be responsible. It doesn't mean we don't potentially have upside on this, but we also have not gotten the proof yet that the issues we had last year have resolved themselves. So, we've already opened 10 of the restaurants that we expected last year in the first couple of months this year. So we're feeling very confident with all the work we're doing in building the pipeline, developing the pipeline that we're still long term going to hit the goals that we were looking for, but it may get stretched out a little differently than what we originally anticipated.

Okay. And just a last one for me. Can you maybe comment on the P&L impact of Fuzzy?s Tacos in the fourth quarter and maybe expectations for that from a contribution to EBITDA next year?

Yes. Vance will walk us through that.

So Fuzzy, we closed in late of Q4. So, there's really not a material impact to Q4 financials. But going forward, for 2023, it?s obviously built into our guidance. But the way I would think about it for modeling purposes is in terms of G&A and EBITDA contribution, Fuzzy?s roughly replaces the company-owned restaurants, of course, with a lot more growth potential in future years.

One moment for our next question. The next question comes from the line of Todd Brooks with the Benchmark Company.

I'll try to limit it to two here. One is as you look at the Fuzzy's opportunity, can you talk about your long-term vision for how big you think that concept can be? And are you having an early discussion with Applebee's or IHOP franchisees about potential cross-sell opportunities that could really ignite the unit growth there, especially if we get to a more normalized construction environment?

Todd, it's John. Thanks. We're interested in Fuzzy's because we thought it was a great brand. We love the Mexican category and the fast casual category and we view that as a combination as a fast growth and high potential. So, in terms of how big, I can't put a number on it, but we certainly intend it to become a material part of our business, and that is the -- that was the vision behind it. As we mentioned, there's 125 additional restaurants in the pipeline for the next several years. And we're just now beginning to work with our development team and the Fuzzy's team to see what we can due to expand that. We did a lot of research before we made this choice on several companies and landed on Fuzzy?s including pretty elaborate national tests and confirm that we believe that the cuisine and the tacos and the design of the restaurants are applicable literally across the country and that we can achieve a national footprint.

When it comes to thinking about what any of our existing franchisees at Applebee's or IHOP be interested in the Fuzzy?s. We have thought about that. And we've had a conversation with a few of them. But our point of view there is investing in a Fuzzy?s would be great, but that is over and above their current commitments to IHOP and Applebee's based upon their development agreements with us.

Fair enough. And then just a quick one for Vance. And I know Eric was touching on franchisee level returns. But as you're looking out at kind of the cost picture in 2023, what's your thoughts on the basket for the franchisees and maybe what you might see from some inflation relief that could help drive the returns higher.

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

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

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

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

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

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

Just given the outsized performance quarter-to-date in Q1, would it be possible for you to maybe make an exception this one time and just talk about your trends quarter-to-date in Q1, at least in general terms?

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

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

Sure. I'll talk about that broadly and then ask Tony to comment a little bit more specifically for Applebee's. As a former CMO at Starwood Hotels for a long time, and I like the position that Applebee's is in. Applebee's is in a position of strength right now. It is in its fourth or fifth year of an extraordinarily successful and consistent marketing campaign, particularly television, where I think it actually does the best TV in the category. And so heading into 2023, which, again, is an uncertain year in terms of consumer behavior, I'd much rather be where Applebee's is. The brand that has a clear position, has off-the-charts awareness scores from its guests and has a consistent winning message on television than having to -- I'd rather be there than spending a lot of money to create a new point of view about a brand from scratch. Tony, you want to add on to that?

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

Thank you. (Operator Instructions.] And our next question comes from Brian Vaccaro with Raymond James.

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

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

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

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

Hey, Brian. And the new cost per Applebee's system it's roughly 25% of sales. So, the math there is you apply the inflation percent to our food cost is sort of the P&L impact, right? But you asked about specific cost-saving initiatives. So, each one of our brands, we have cross-functional teams between the purchasing co-op, operations, the franchisees to come up with cost-saving ideas through lower production costs, reduced waste or usage or improve restaurant labor, while just obviously not negatively impacting the guest experience. So, some of these ideas include like packaging, distribution, shrink reduction initiatives, server tablets to help save labor, energy efficient equipment, reviewing product specifications. All these things are in conjunction to help offset sort of the inflation that the franchisees you're seeing.

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

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

One moment for your next question. Our next question comes from the line of Jeffrey Bernstein with Barclays.

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

In terms of sales, we talked about Fuzzy?s system sales about its roughly $220-million plus of system sales. And then in terms of G&A and EBITDA for this year, roughly equates to what the company owned restaurants, the 169 restaurants, used to contribute to our P&L. So as I said before, going forward, there's a lot of growth potential. But for now, sort of roughly equivalent to what the 16 restaurants would do.

Understood. And then I think you mentioned from a cost standpoint, obviously, things easing in 2023 versus 2022. I think you said mid-single-digit food basket. Should we -- can you provide the detail in terms of, one, what's contracted for the franchisees? And two, how much pricing maybe corporate is suggesting or how those pricing conversations have gone with franchisees?

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

Just how that pricing conversation is going with franchisees, whether it's they're making their own pricing decisions, but how they're thinking about that going into 2023 relative to maybe what you're suggesting or talking about?

Yes. It's completely up to the franchisees to determine menu pricing. But the conversations we're having is obviously focusing on the longer term grab market share and focus on traffic. That's what's going to drive enterprise value for themselves and for us.

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

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

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

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

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