Dine Brands Global, Inc. (NYSE:DIN) Q4 2023 Earnings Call Transcript
Dine Brands Global, Inc. (NYSE:DIN) Q4 2023 Earnings Call Transcript February 28, 2024
Dine Brands Global, Inc. beats earnings expectations. Reported EPS is $1.4, expectations were $1.12. Dine Brands Global, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by. Welcome to the Dine Brands Global’s Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your host today, Matt Lee, Senior Vice President, Finance and Investor Relations. Please go ahead.
Matthew Lee: Good morning, and welcome to Dine Brands fourth quarter and fiscal 2023 conference call. This morning’s call will include prepared remarks from John Peyton, CEO; and Vance Chang, CFO. Following those prepared remarks, Tony Moralejo, President of Applebee’s; and Jay Johns, President of IHOP, will also be available to address questions from the investment community during the Q&A portion of the call. Please remember our safe harbor regarding forward-looking information. During the call, management will discuss information that is forward-looking and involves known and unknown risks, uncertainties, and other factors, which may cause the actual results to be different than those expressed or implied. Please evaluate the forward-looking information in the context of these factors, which are detailed in today’s press release and 10-K filing.
The forward-looking statements are as of today and we assume no obligation to update or supplement these statements. We will also refer to certain non-GAAP financial measures, which are described in our press release and also available on Dine Brand’s Investor Relations website. For calendar purposes, we are tentatively scheduled to release our Q1 2024 earnings before the market open on May, 08, 2024. And to host a conference call that morning to discuss the results. With that, it is my pleasure to turn the call over to Dine Brands CEO, John Peyton.
John Peyton: Good morning, everyone and thank you for joining us. On today’s call, I will share Dine’s fourth quarter in full-year 2023 results. I will discuss our strategy to increase the pace of restaurant openings, share the current outlook for our brands, and Vance will discuss in detail our financial results, capital allocation plans, and provide guidance for 2024. 2023 was a year of significant work in progress for Dine. First Applebee’s and IHOP both delivered another year of positive comp sales growth for Applebee’s2023 was the third year of consecutive positive comps. Second, we generated year-over-year EBITDA growth. Third, we integrated Fuzzy’s into our system, realizing our long-term objective to add an emerging high growth potential brand to the Dine portfolio.
We opened our eighth IHOP Applebee’s dual branded restaurant internationally gaining experience and knowledge as we contemplate introducing this concept in the U.S. And finally, we refinanced our debt while returning $210 million back to equity and bond investors. Of course, our success in 2023 would not have been possible without the hard work of our franchisees, their commitment to excellence and their relentless focus on delivering a fantastic guest experience. As our franchisees focused on what they do best so did we. We stayed focused on our recipe for growth, which is designed to drive long-term sustainable value creation for our brands, for our franchisees, and for our investors. Throughout 2023, we largely completed investments in technology to drive efficiencies and improved the guest experience.
We leveraged our resources and scale to drive revenue and EBITDA growth, and we introduced menu innovation and marketing campaigns that drove traffic at IHOP and established a pipeline of new menu items and innovative offerings that will roll out this year to Applebee’s. As we advanced our innovation agenda, we did so with the needs of our guests top of mind. During the year, we found that guests limited their discretionary spend in response to economic pressures, and that this value conscious behavior continued in the fourth quarter, while this certainly creates challenging and dynamic market conditions, it also allows us to leverage our expertise in delivering exceptional value. Our brands are known for delivering abundant value, and we are able to meet the guest at the right intersections, even in a price sensitive environment.
We successfully built our limited time offerings and other offers throughout the year to ensure our promotions were highly visible and appealing to our guest. That is why it is no surprise that our 2023 top performing campaigns included Applebee’s, DOLLARITA, and all you can eat Wings and IHOPs kids eat free and all you can eat pancakes. We expect that the consumer will remain cautious in 2024, and we are planning for it with a compelling calendar of LTOs and value driven promotions across our brands. We know our guest and our strategy is grounded in consumer insights that differentiate us in the market and deliver an exceptional experience for our guests. In addition to our focus on driving traffic, we will also place particular emphasis on strengthening our development capabilities.
As we recently announced, Scott Gladstone has stepped into the newly created role of Chief Development Officer and will coordinate our development strategy. We are thrilled to have Scott in this role. He is a dine veteran who knows our business inside and out from his time at Applebee’s, as well as his work in strategy, business analytics, and consumer insights. Scott will continue to serve as the leader of our international business. I will discuss our development strategy and Scott’s work to build out our development capabilities in more detail later on in the call. So with that, I will walk through our key financial highlights. In 2023, we generated $256 million of EBITDA, which was up from 252 million in 2022. In Q4, our EBITDA was $62.2 million compared to 57 million in the same quarter last year, excluding the refranchising of the 69 company owned Applebee’s units in October of 2022.
Our revenues were up 5% for the full-year and up 4% in Q4. IHOP achieved full-year comp sales growth of 3.5% on top of 2022’s comp sale growth of 5.8%, and for the quarter, IHOP posted its 11th consecutive quarter of positive comp sales with a Q4 increase of 1.6%. Applebee’s delivered positive 0.6% comp sales for their full-year maintaining momentum from 2022’s comp sale growth of 5.1%, and in Q4, Applebee’s reported a slight decline of negative 0.5% in comp sales, and adjusted free cash flow was $103.3 million in 2023, which was an improvement from 2022’s adjusted free cash flow of $64.6 million. Turning now to Applebee’s, the highlight for Applebee’s in Q4 was the success of our DOLLARITA promotion, which tapped into the promotional mindset of our guest and drove strong comp sales and positive traffic in October, helping Applebee’s outperform black box and traffic in Q4.
DOLLARITA was supported by strong social media pickup, and more importantly, it was welcomed by our franchisees because it drove profitable sales and traffic. In fact, 93% of DOLLARITA purchases had an additional menu item attached. DOLLARITA also expanded our demographic reach, attracting a younger age group, many of whom visited Applebee’s for the first time. We will continue to execute on this successful formula via our Q1 partnership with Brian Cranston and Aaron Paul’s Dos Ombres brand and the launch of three new Mezcal Margaritas, along with our $5 Tipsy Cupid Mocho and $6 Blue Moon. This builds on the success of DOLLARITA and recognizes the promotional mindset of our guest as evidenced by 19% of transactions in Q4 were attributed to an LTO or promotion.
Applebee’s also has a full pipeline of new menu products and exciting marketing partnerships. The culinary team has now tested over 200 new menu concepts, and we are excited to start rolling out the top performing items to Applebee’s nationwide in Q2. We want to continue to be at the forefront of guest minds and in an increasingly crowded space being culturally relevant is essential, which is why we will be increasing the number of On-Air Weeks in a marketing calendar. Our approach is to weave together a strategic mix of promotions, new menu items, and to drive traffic frequency and check. In Q4, we also took a big step forward improving our guest digital experience. In December, Applebee’s launched its new website and mobile app, which features a fresh design and offers guests a personalized and elevated ordering experience.
Applebee’s site and app now allow guests to pick up their orders using CAR site to go, in restaurant pickup or have it delivered straight to their door. Since the launch of the new website and mobile app, we have seen a higher percentage of guests choosing to place their order digitally, higher conversion rates and increased check averages compared to our prior site and app. Now, while the off premise side of the business remains above pre-pandemic levels, it has softened somewhat and we believe that there are opportunities to improve on our off-premise offering and execution, we have new initiatives to drive this segment of our business. Our job in 2024 is to build on this progress by delivering innovative menu technology and marketing to propel this iconic brand in an increasingly value-driven market.
We are optimistic about Applebee’s continued performance and expect to deliver positive growth for Applebee’s throughout 2024. Now moving on to IHOP. In the fourth quarter, we delivered our 11th consecutive quarter of positive comp sales, average weekly sales over $50,000 for the first time in the last week of December, and we opened 46 new IHOP restaurants domestically. IHOP is truly a growth brand and it success reflects our steady and consistent investments in menu and marketing innovation, technology enhancements, and the build out of the loyalty program. To expend a bit more on the loyalty program, when we embarked on the International Bank of Pancakes, it was based on the theory that loyalty drives frequency and the results have surpassed our own goals.
Last year, we enrolled over three and a half million new members bringing our total loyalty members to 8 million people. Our Dine-in loyalty members are on average visiting nearly twice as often as non-members, and they spend on average 5% more than non royalty members. The IHOP app is being downloaded 8,000 times per day, and Newsweek for the second year in a row recognized our loyalty program is one of the best in America. I believe that there is much more upside here, notwithstanding the quick growth of the program, loyalty only accounts for approximately 6.5% of total sales for IHOP up from less than 3% in 2022. We are just beginning to scratch the surface in terms of the loyalty program’s ability to drive incremental traffic and sales, and we are also starting to learn the purchasing habits of our loyalty members that will lead to more personalized marketing, 2023 was also an important year for IHOPs menu with the knowledge that 70% of our sales are breakfast items, including at dinner.
We added the new categories of biscuits and benedicts and fresh, the French toast and crepes categories. These additions all sustain their performance during the fourth quarter, and both the menu items and the visual design of the new menu were industry award winners. Under marketing, IHOP’s omnichannel approach to marketing connects with guests focusing on limited time promotions and the basics of great value. For example, our fourth quarter partnership with Warner Brothers Wonka included a film inspired limited time menu that enhanced brand awareness and drove sales. In fact, IHOP outperformed black box in family dining and comp sales four out of five weeks during Q4s Wonka campaign on the technology front. 92% of our IHOP restaurants have implemented the new POS system and server tablets.
Our preliminary data shows that franchisees that have fully enabled their server tablets are experiencing a higher beverage attachment rate, improvement in ticket time, higher average check, and higher tips for servers. Last year, IHOP also made significant strides in advancing our consumer packaged goods program. According to Kraft Heinz, our IHOP coffee became one of the fastest growing new launches in dry coffee over indexing with Gen Z and millennials, momentum continues to grow as marketing support and social media ramp up. Additional sizes are being added in Q1 and new flavor innovations and formats are on track for Q2. The new to market iced lattes offer cafe style beverages at home, making inroads with younger consumers. Kraft Heinz gained exclusive distribution of the new IHOP Ice Lattes in Walmart in 2023, and we launched nationally in 2024.
Overall, IHOP solidified its market leadership last year, and we expect this momentum to continue in 2024, supported by ongoing innovation and operational enhancements. Turning that of Fuzzy’s, the highlight here, of course, is that the integration process was completed last year, and Fuzzy’s is now set up to benefit from Dine Shared resources. We are excited about the cross pollination underway. As existing Dine Portfolio franchisees are looking to opportunities across all three brands in the Dine Family portfolio. Alongside integration, we have also been applying IHOP and Applebee’s, tried and tested insights and expertise including menu optimization and innovation and analytics to improve pricing and to drive smarter data informed decisions.
We are pleased that Fuzzy’s LTOs last year, such as the margarita shrimp taco, chicken alotte, and its newest Burrito Taco Bowl and Queso were the best in the brand’s history. Already in Q1 Fuzzy’s has launched its new traditional Baha fish taco and premium Baha menu category. This is the first step of bringing the Baha program to life in 2024.Starting Q1, 2024 we will provide more details on Fuzzy’s performance. And finally, our international division had a strong year of growth in 2023 with a total of 23 openings for the year, resulting in 11 net new restaurants. Our IHOP and Applebee’s dual branded prototype continues to perform well in its markets and we opened our eighth dual branded restaurant in January in Leone, Mexico, which represents a compelling opportunity for further growth since Mexico is one of our largest international markets.
And with that, I will hand the call over to Vance.
Vance Chang: Thank you, John. Overall, we delivered a solid performance in 2023. In addition to the significant operational gains, we generated $103 million of free cash flow, three consecutive years of positive comp sales at Applebee’s and continued sales momentum at IHOP. We exceeded our EBITDA guidance, reduced leverage to 4.2 turns, and we have successfully completed the refinancing of our class 821 notes while continuing to return capital to shareholders. Our fourth quarter total revenues were $206.3 million, which declined 1% on a year-over-year basis, primarily due to the refranchising of the 69 company operated Applebee’s units in October of 2022. Excluding the refranchising fourth quarter total revenues would have been up 4%.
For the full-year we generated $831.1 million in total revenues, which was 9% lower than prior year again, primarily due to the refranchising. Excluding the refranchising revenues increased 5% due to the positive comp sales at IHOP and Applebee’s and full-years revenue contribution from Fuzzy’s, which we acquired in December of 2022. If we exclude advertising revenues franchise revenues in Q4 increased 6.5% year-over-year and 8.7% for the full-year. Rental segment revenues for the fourth quarter of 2023 remained flat at $29.5 million compared to the same quarter of 2022. G&A for the fourth quarter of 2023 was $50.5 million compared to $58.8 million for the same quarter of last year. We ended the year with $198.1 million of G&A expenses up from $190.7 million last year due to costs resulting from the inclusion of Fuzzy’s operations, stopping of the IHOP flip initiative and increases in compensation related and software maintenance costs offset by the refranchising of the company operated restaurants and transaction costs related to Fuzzy’s acquisition in 2022.
We generated consolidated adjusted EBITDA of $62.2 million in this quarter compared with last year’s $57 million quarterly results. Our consolidated adjusted 2023 EBITDA of $256.4 million was ahead of our guidance and up from last year’s $251.9 million. Finally adjusted earnings per diluted share for the fourth quarter and full-year were a $1.40 per share and $6.65 per share respectively. Our pacing lasts fourth quarters, $1.34 per share and 2022’s $6.20 per share. Despite higher interest expense from our refinancing, we increase EPS primarily due to an increase in segment profit and the benefit of our share repurchases. Turning to our cashflow statement balance sheet and strategic usage of capital, we generate adjusted free cash flow of $103.3 million in 2023.
This compares favorably to $64.6 million for 2022. Our full-year2023 cash flows from operations came in at $131.1 million compared with $89.3 million in the prior year. The increase was primarily due to a favorable change in working capital, and an increase in segment profit. CapExfor2023 was $37.2 million compared to $35.3 million for 2022, our 2023 CapEx number does not reflect the $11 million of TI reimbursement that we received, which would have lowered our effective CapEx. We ended the fourth quarter with total unrestricted cash of $146 million. This compares favorably to unrestricted cash of $98 million at the end of the third quarter. Our leverage ratio also improved by 0.4 turns due to a combination of EBITDA growth and strong cash generation, which is a testament to the strength and stability of Dine’s business model in challenging environments.
Regarding capital allocation would continue to remain disciplined. We return $58 million of capital to shareholders in 2023 through dividends and stock buybacks. In addition to that, we return capital to bond holders of $151.7 million through debt buybacks and the refinancing. We know that capital return is important to our shareholders and we continue to evaluate the optimal mix of dividends and buybacks, while also ensuring we invest in our business for growth and maintain a healthy balance sheet. In 2023, Dine system sales reach over $7.9 billion, demonstrating the scale that our brands collectively have. Applebee’s 2023, same restaurant sales increased 0.6% year-over-year. Applebee’s system sales results have remained fairly steady in 2023 as average weekly sales were $54,000, including close to $12,000 from off-premise, or about 22% of total sales, of which 11% is from to go, and 11% is from delivery.
IHOP system sales continue their positive momentum in 2023 with same restaurant sales growth of 3.5%. Average weekly sales in 2023 were a little over $38,000, including approximately $8,000 from off-premise, or 21% of total sales, of which 9% is from to go, and 12% is from delivery. On the commodities front, Applebee’s Q4 commodity costs improved by 2.9% versus a year-ago an IHOPs commodity cost improved by 2.3% versus 2022. Our supply chain co-OP CSCS is expecting pricing in 2024 at Applebee’s to be flat to low single digit deflation, indicating further potential tailwind for our franchisees, and IHOP. We are expecting pricing to remain steady in the range of flat to low single digit inflation. In partnership with the CSCS, we continue to leverage our scale and make progress on our cross-functional restaurant profitability initiative.
In 2023, we implemented several projects with the Applebee’s and IHOP franchisees that resulted in about $53 million in annualized savings for our franchisees. We are pleased with the results of this initiative and continue to actively identify new savings ideas for the future. Based on data we have collected from the franchisees, while labor wages have gone up over the last couple of years, restaurant staffing has improved and we are seeing labor as a percent of sales at levels similar to pre-COVID levels at both brands. On the food side, food as a percent of sales has declined from its peak in 2022 and is improving, but it is still elevated relative to pre-COVID levels at both brands by approximately 50 bips. However, we continue to leverage the purchasing power of our brand’s co-op CSCS, which continuously evaluates cost savings from market basket to equipment.
As mentioned, we expect food cost to stabilize in 2024 and will continue to support our franchisees to drive additional efficiencies. Lastly, to recap Q4 and full-year development numbers, Applebee’s had net domestic closings of 33 restaurants in 2023, IHOP opened 46 restaurants domestically in 2023, 17 of which were in Q4.For the year, IHOP had net domestic openings of 19 restaurants in 2023. And this brings me to a discussion of our full-year guidance for 2024. As John mentioned, we are reintroducing comp sales into our guidance. In 2024 we are expecting Applebee’s domestic system-wide comp sales to range between zero to 2%. We are expecting IHOPs domestic system-wide comp sales to range between one and 3%. We are forecasting a G&A range of $200 million to $210 million, including non-cash, stock based compensation and depreciation of approximately $35 million.
On EBITDA we are guiding to a range of $255 million to $265 million. We anticipate 2024 CapEx spend to be in the range of approximately $15 million to $20 million. On 2024 development, we are expecting 25 to 35 net fewer domestic Applebee restaurants and 15 to 25 net new domestic IHOP restaurants. With our new development strategy in place, we feel confident in our ability to continue to open up new restaurants and scale the footprint of our brands over time. Now, I will turn the call back to John to further discuss our development strategy and to close out today’s earnings. John.
John Peyton: Thanks so much, Vance. I will wrap up by speaking a bit more about our development efforts. We are in the fortunate position that as a result of our healthy balance sheet, strong cash flow generation and prudent use of capital, we are able to enhance our strategy and execution on development. As I said at the start of the call, we believe that there is plenty of opportunity to grow the global footprint of our three brands. However, development is not a one size solution for our brands, nor for our franchisees. Our brands each have different starting points and areas of focus. Specifically, IHOP has a track record of growth upon which to build. Applebee’s focus is on conversions and developing a prototype with an ROI that will return the brand to net unit openings.
As the largest brands in their respective segments by unit count, both brands are focused on infill opportunities. In fact, this week we reached an agreement with our largest franchisee, the Flynn Group, reflecting their plans and goals to develop 25 restaurants over the next seven years. With Fuzzy’s our approach is to recruit new franchisees to develop new markets, while also tapping into our IHOP and Applebee’s franchisee network. This approach is the same in our international markets attract new franchisees and also leverage the dual brand option. Similarly, our franchisees also have different needs. Some are looking for different forms of financial support. Others may need help finding real estate opportunities. Others need assistance with the permitting and construction process, while some may desire help with the pre-opening marketing.
We will address these specific needs in its target and analytical way to create profitable growth for Dine and our franchisees. Lastly, it is important to note that we are funding the investment and development by reallocating costs within dines existing cost structure and not by increasing overall spend. To wrap up, I want to thank our franchisees and team members for a strong performance in 2023. And reiterate my confidence in the outlook of our business. Dine is uniquely positioned and the attributes that make us so our asset like model, our iconic brands, our scale and our expertise, our all the more impactful in the current economic environment. In an environment in which our guests remain price sensitive, our brands are known for delivering abundant value.
We are further strengthening our recipe for growth in 2024 with our methodical development strategy that will generate sustainable value over the long term for our shareholders and franchisees. And with that, I will return the call to the operator to open up for questions.
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