Dine Brands Global, Inc. (DIN) Earnings Call Transcript & Summary

Good afternoon, everyone. Thank you very much for joining us as we move through day 2 of our conference. I very much appreciate all of your attendance. My name is Jeff Bernstein. I'm the restaurant and foodservice distribution analyst here at Barclays. We are thrilled to have our next presenting company with me on stage. It is Dine Brands. With me on stage from Glendale, California, we have John Peyton, the CEO, sitting in the middle. We have Vance Chang, the CFO, sitting closest to me. And we have Lawrence Kim at the end, the President of IHOP and the Chief Commercial Officer. By way of background, for those not familiar, Dine Brands is a portfolio with 2 very large brands that I think everybody knows that would be led by 1,550 Applebee's units. 1,800 IHOP units, and I do not want to underestimate the future opportunity with the 100 Fuzzy's Taco units. They also have -- and that includes the licensing of a combined 240 units outside the United States. So clearly, 2 powerhouse brands, of course, Applebee's and IHOP. Clearly, they have a good look at the consumer, and we're thrilled to have them with us at our consumer conference. I've got a number of questions for management. So I will kick it off right now. But again, we want to thank Dine Brands for joining us today.

Thanks for having us.

Absolutely.

So being that you do have 2 very large brands that do touch the consumer across the U.S. I was hoping maybe you could just provide some high-level thought on the consumer. Obviously, there's been a lot of talk of pressure on the consumer, different lower income versus higher income or age cohorts or whatnot. Like how would you define the consumer and whether or not that's changed in terms of your view over the past 12 months?

Sure. So just to give you a sense from a demographic perspective, the demographic of the IHOP and the Applebee's guests is pretty similar. Each of them has a household income between $50,000 and $100,000 a year. We span all age ranges fairly consistently. The IHOP guests and the IHOP restaurants tend to be a little bit more urban. They skew urban versus Applebee's. Applebee's is a little bit more rural and suburban. But between the 3,000-plus restaurants, I think we're in almost every ZIP code in the country. So in terms of consumer behavior, it's been remarkably consistent, not just for 24 months, but for 48 months and into next year. We see our guests as very value-driven, the value message that both of our brands have. At IHOP, it's $6 everyday value. At Applebee's, it's 2 for $25, so 2 entrees and an appetizer for $25. Those messages are super compelling. It's important to attach an innovative or new item to that message in order to keep it fresh. And then when we see them in the restaurant, we do see them, I would say, moderately managing their check. And I say moderately because our average check is pretty consistent in both brands for the last several quarters, yet our franchisees have raised prices 2% to 3%. So there's a little bit of check management. We're seeing more frequent visits from higher-income guests. And we're seeing a little bit of a wash in terms of losing lower-income guests and then also gaining lower income guests as I think QSR guests are trading up to full service.

And there's lots of talk about food at home versus food away from home, and this is a Staples conference. There are a lot of people saying that food at home is winning. We tend to believe food away from home has been taking share. I believe the statistics support that. But do you believe the most recent value push that you're doing puts your brands and the broader restaurant industry in a position to continue taking share from food at home? Or do you feel like that's an ongoing battle that might kind of go back and forth?

We think it bounces back and forth depending on sort of from a price perspective, who's in the lead. And right now, when you look at the overall increase in prices from, call it, coming out of COVID in the 5 years till today, Applebee's is a little bit lower than food from home in terms of the compounded growth. IHOP is a bit higher in terms of price. So we straddle home. The most important thing about competing with home is that you come to the restaurant for something you can't get at home. So if we didn't have O-M-Cheese Burger at Applebee's, which is a hamburger cut in half in a sizzling skillet of cheese and when you pull it, you get a big cheese pull, you can't do that at home. You can't get a Dubai pancake at home, and you got to give them a reason to want to come as well. It's not just the price benefit.

And I will add one other thing, which is when you have a strong value pipeline like the $6 everyday value menu, some of the comments that we receive is, wow, I can't make that breakfast at home for $6. It's just not just the cost of the ingredients, but it's also the time, the cleaning, the prep and its IHOP quality. So all these part of the value equation are critically important as these families are making decisions.

Being that you've sat through meetings today and meetings perpetually, I'm just wondering, maybe what do you hear -- what questions do you hear most that surprise you? And maybe on the flip side, what question do you wonder why people aren't asking them, maybe they don't fully appreciate?

In terms of questions from investors and analysts?

Investor, yes.

Our CFO gets most of those questions.

I get a lot of the questions around our balance sheet. I get a lot of questions around the company-owned portfolio. The question on the balance sheet is they do a quick Bloomberg view and they say, wow, you're 5x levered, seems really high. Are you worried? Now we have -- because we're so highly franchised, our capital structure is -- we're using securitization. It's a very, very shareholder-friendly capital structure in terms of cost of capital, in terms of cost of light. And so it's -- the leverage level we have is comparable to other highly franchised companies in the sector. So we definitely -- I don't lose sleep over our leverage level. Now over time, as our company restaurant portfolio improves, as we -- our dual brand takes hold of development pipeline, I think our EBITDA will grow. We will delever. We've been in this leverage level before. So that's one question. On the company restaurant portfolio, right, we have, call it, 130 restaurants that we took back from franchisees. And they're some of the lower-performing restaurants, but we took them back for offensive and defensive purposes. So offensively, we're trying to use this portfolio as a tool, as a way to advance our dual brand and remodeling initiatives. So we want to showcase to our franchisees that if you spend this much money, this is what you do to the restaurants, and this is what the sort of the lift that you're expecting to see and therefore, you should all do it, right? And so that's one thing. And then defensively, we want to protect the system. We want to improve the reputation of these restaurants within the communities and make sure that we protect our NAF, our marketing fund and make sure that the rest of the system stays healthy. So there are different reasons we're doing it for, and we're making progress, and we're happy with where we are. So that's -- those 2 questions I get a lot. And then I think, John, we always want to talk about dual brands and that's...

The third question is dual brands particularly in the context of how is it fueling unit growth or growth in general. For those of you that don't know about what a dual brand is, about 3 or 4 years ago, our international division in the Middle East did an experiment. They put Applebee's and IHOP together in the same restaurant with a common menu, a shared footprint and it did really well. And they got to about 20 of them, and we went and visited and said, this is a big idea. And we took it back to the U.S. We opened our first one 18 months ago in Seguin, Texas outside San Antonio. Today, we have 45 open, and we'll have 80 open by the end of the year with a strong pipeline for next year. And so the concept is not to create a new brand, right? The concept is to take the best of Applebee's, the best of IHOP in one box, imagine a red side and a blue side in terms of the decor. It's an all-day dining menu. So if you're familiar with diners here in the Northeast. It goes from breakfast through evening. The menu suddenly choose IHOP and Applebee's going from blue to red coloring as the day progresses. The back of house is cross-trained. The front of house is cross-trained. Guests can sit wherever they want and order anything off the combined menu at any time of day. And we're seeing some really compelling numbers come out of it, right? The first is it costs about $1 million to add a second brand to an existing restaurant, a little bit more if you're an IHOP adding an Applebee's because you have to build out the bar, a little bit less if you're an Applebee's adding an IHOP because you've already got the bar. You're growing your revenue about 1.5 to 2.5x the base revenue of the restaurant, and we're seeing that consistently now with the 45 restaurants. That incremental revenue, call it, an incremental $1 million is flowing through at 2 or 3x the rate of the margin that you'd normally see in that restaurant, right, because the fixed costs are fixed. And the really good thing from a Dine Brands perspective is strategically, it checks a lot of boxes. So one is, we're first movers. Two is, it's a really high walled garden in that we just happen to own the premier a.m. and p.m. brands that we can put together. If anybody else wants to do it, they've got to go buy one of the other dayparts. And the key to this for franchisees is dayparts, right? When others have done it in the past, like KFC, et cetera, it was 2 dayparts competing with themselves. This is an a.m. brand and a p.m. brand and it activates the box all day long. So it's taking dead space for both brands and activating it. The same way you don't want an airline seat to be empty or a hotel bed to be empty. And our favorite part is one of the interesting insights about innovation is giving consumer or in our case, the guest something they didn't know they wanted. No one asked us to put IHOP and Applebee's together, right? No one knows the same company owns both brands. But 65% of the tickets in the dual-branded restaurants include items from both sides of the menu. So in the morning, we're selling omelets and ribs. In the evening, we're selling skillets and pancakes. And so when guests have the choice to order from both brands, they do it 2 out of 3 times per ticket. So that's our big growth engine in terms of accelerating our revenues as well as franchisee revenues. And interestingly, unlike in the past, where you would look at us through the traditional lens of unit growth, here, it's about adding incremental revenue to an existing restaurant. But besides that, there's 900 opportunities in the U.S. for dual-branded restaurants that won't ever encroach on an existing restaurant, meaning we have no territorial issues. Of those 900, 450 are new builds, 450 are an existing restaurant adding a second brand. So there's a long runway here in terms of growth for the company.

Do you think that's 900 incremental, 100 units, half of which would be new builds and half is you already have one and you're putting the other in it.

Correct.

Got you. But I was going to say, we've seen others over the past few decades where they have tried this approach. Some have worked, some have not. But to your point, having one that's primarily breakfast-led, breakfast lunch and one's more dinner and layering them together is more efficient in terms of leveraging your fixed costs.

That's right. And we have the endorsement of our franchisees in the sense that we've done a couple of ourselves, but the vast majority are -- have been converted by our existing franchisees who have been in the business for decades. And so when they flew to Seguin to see the first one, they all left saying, this is a big idea. So when you can convince the Doherty's of the world, right, that have 100 restaurants here in New York and New Jersey and the Flynn Group, et cetera, et cetera, when these guys see a product like this and they want to build it, that's an endorsement, not just that we're saying it's a good idea. It's -- Jeffrey, it's about people who really know the business well are converting.

And just as one last topic from a broad industry perspective, there's always lots of questions over the past couple of years in terms of GLP-1 and the implication that has on the restaurant industry. It seems like it's only more prevalent and available and affordable to the consumer, which the concern is that there's less, either you're going out for less occasions or you're going out for the same number of occasions where you're just not ordering as much. Have you seen any sign of that in your business? I don't know how you detect it necessarily, but do you have concerns about that over the next few years or maybe changes to your business to try and address that?

We've been monitoring it closely, as I'm sure most of the industry have. The great part is there are 2 main aspects that we look at. Number one is menu variety. And number two is kind of what you mentioned, which is the occasion. And so Applebee's, IHOP, we are an everyday occasion, but you really look at also the occasions that each brand really targets. So date nights for Applebee's, a huge platform also. But even for IHOP, if you think about the weekends, which is a big percentage of our business and post church, Little League events and soccer games, et cetera. And so those moments, those occasions are still true. And this -- we have not seen any impact to date yet, but we've been monitoring closely. But to prepare. We also look at the variety of our menu. So at Applebee's, I was just there a few days ago, so many healthier options from salmon and broccoli. And even at IHOP, when you think about -- we were a pancake and breakfast, definitely equity. But we have obviously things like protein pancakes, and we've been emphasizing them. There's 37 grams in our protein pancakes, and there's other variety of options. So we look at the extensive nature of our menus and also our innovation pipeline, and we are planning accordingly as we go into the future, but while staying true to the roots and the equities of our brands.

I think the key insight here is we spend a lot of work talking with GLP-1 users as well as collecting all of the research is that while they are changing or limiting the way they eat, they are not reducing the occasions that they go out to eat. So they might eat differently when they're with us, but they're not changing their lifestyle because they're eating less or eating differently.

Yes. And as we close out on 2026, hard to believe, but we think about 2027, like what do you think is -- what are you most excited about that you think we'll be saying about 2027 when we think about Dine Brands?

For Dine Brands, I'll take 2 of them. One is that dual brands are approaching at the end of '27 200 restaurants and that not only are our existing franchisees participating, but we are attracting new franchisees to the system as a result of the success. And at Applebee's, at the end of '27, we will be talking about that we've introduced more food innovation, new food and new platforms than we have in a decade.

And at IHOP, I would mirror that. We have been focused the past 1.5 years on value and really driving that value equity. Now we have a $6 everyday value menu continues into next year as well. And we've been owning that platform, which is fantastic, not just for traffic, but also just driving that value equity and being accessible to guests and consumers out there. But we have now an extremely strong innovation pipeline. The first one actually starts this coming Monday. So if any of you here in IHOP starting Monday, definitely check it out. You'll see a lot of media. But in '27, we also have a great innovation pipeline ahead as well.

Specific to the brands, the focus is typically first and foremost on comp growth. I think you said most recently that IHOP has now outperformed Black Box for the third straight quarter, which is encouraging. How do we sustain that momentum? What do you think is the primary driver of what's allowed IHOP to see this most recent acceleration?

Yes. It's definitely what I just referred to, which is the balance of value and new news. And new news can come in many different ways from products to marketing and culture buzz driving innovation. But the real focus and the reason why we've outperformed Black Box in sales the past 3 quarters, but traffic the past 6 is because of our focus and dedication to the everyday value platform and the consistency in messaging. So now the consumers really understand IHOP has a $6 value menu, and it's a consistent word-of-mouth and mass media play. But the other thing is we have improved on our operations and -- because you have not just the traffic drivers of value and our core iconic menu items, but it's the operations that we wanted to make sure that we really optimize and improve. So our speed has improved. Even just since December, even to the current day, we've increased or improved table turn time by over 4 minutes. And also our to-go order product accuracy has also improved just because we've sustained operational excellence. We use tablet technology, KDS. And more importantly, we've simplified some of the back-of-house operations to make it easier for our team members, and it's a constant effort that we take extreme focus on.

You often make the point that you're pushing $6 value all the time. However, it's only 20% of your sales by design.

That's correct. Yes. So value, we like to say you're shouting value from the mountain tops. So mass media, digital channels talk about $6. But when you get into the restaurants, a key important part is getting the check and the profit drivers, I would say, amplified. So POP features, for example, our pumpkin pancakes right now in combos. We have our Stuffed 'N Stacked omelets, so we rebranded that. And we really want -- it's available. It's obviously -- the value is a key part of the message, but it is not magnified in the restaurants. The check drivers and the premium items are, and it's been a great balance, and we sustained that 20% check or 20% of our checks are value items and sustained since we've launched it.

I was going to say value seems like the core of the business. And I know that was a perfect segue. I mean Applebee's with the 2 for $25, I think you told us most recently that value mix there sits in the mid-20% range, and you're saying the IHOP is more in the low 20% range. Do you share the profitability of those? I mean, it sounds like if that got to 30% or 40%, you'd be making some changes to try and shift people to other items. But how do you think about balancing that mix, what the right level is, whether or not you want to have it move from where they are today?

So Applebee's key value message is 2 for $25, which is 2 appetizers and an entree for $25. That's been our value platform for 20 years, but we didn't often talk about it constantly, as Lawrence just described. The last 2 years, we've made the decision that our primary message on television as well as on digital is 2 for $25. What's important about that in terms of profitability is that 65% or so of 2 for $25s are upgraded. So you can add $3 for chicken, you can add $6 for steak, whatever those are. And the franchisees choose which items they want in their tiers. They also choose how many incremental dollars to charge per tier. So you're actually only selling 1/3 of that 25% at $25. The others, depending on the market are $28, $33, $36.

That's what I think investors and the consumer doesn't fully appreciate because we see lots of commercials from lots of brands. It's like, I don't know how IHOP can succeed with a $6 platter. But in reality, it's not the majority of people who are spending $6. It brings them in the door and then ultimately, it's the job of the franchisee to upsell.

And the other reality, excuse me, is the $6 items are still profitable. So we focus on profitable transaction growth. So even if it is an item sold, which is a $6 value item, they are still making money. There is still profit to be made on the product. Of course, as John just mentioned, there's beverage upsell, there's different menu item upsell. And it's that fine balance. And that's the beauty of the variety of the menu that both brands have where you just have a plethora of options. And so ultimately, as you're perusing through the menu and through the -- and you see the beautiful POP in front of you, you are definitely upsold.