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

All right. Thanks for being here. My name is Brian Mullan. I'm the restaurant and food distribution analyst here at Piper Sandler. We're very pleased to have the team from Dine Brands. We've got CEO, John Peyton; and CFO, Vance Chang. We've also got members from the IR team in the audience. Thank you, guys, for being here.

Just want to start with IHOP. Brand got a new leader in January of '25, right, with Lawrence Kim, been a little over 1.5 years. A bit of an open-ended question for you. But John, it would be great to get your perspective. How have you seen the brand evolve in that time? What lies ahead on the priority list for the stand-alone brand? And I ask that in the context of 3 really solid quarters of outperformance in a row in Black Box to traffic. And so we just would love to hear your big-picture thoughts on that stand-alone, and we'll get to the dual later.

Got it. So IHOP welcomed Lawrence Kim, who came in as President 2 years ago. He has a long career -- had a long career at Yum! Brands and Taco Bell. So we were attracted by his Taco Bell pedigree as well as strong marketing, digital, social. And what you're seeing now in the last couple of quarters of IHOP outperforming Black Box in traffic and most recently in comps is the fruits of 2 years of the strategy that he's put in place along with the team. And the key components of that, Brian, are, believe it or not, IHOP never had an everyday value menu. And so last year, we went to 5 days of everyday value, this year, 7 days, and that's combo meals for $6. And so it's the lead of the barbell strategy, and it's driving traffic into the restaurants. And then once you're in the restaurant, we do a really good job of merchandising the higher-end, higher-margin more exciting items. Second thing he's done is he's focused on accelerating menu innovation. And so things like Dubai Pancakes and the Stuffed French Toast that rolled out Monday are examples of the pipeline getting much stronger. And then finally, what he's really good at is digital and social, and we're seeing a big difference there in terms of the way IHOP is playing and appearing in culture on a much more regular basis.

And then as that everyday value platform made that shift from 5 days to 7 days, clearly, it's working. But is it fair to say you're happy with what it's done for the business for Dine, but then also franchisees broadly on board with that as well, sales and profitability, everyone is happy with how that's going?

Yes. Franchisees are on board for a couple of reasons. But one is we've got a very elaborate committee structure where the brand team and the franchisees work together. So IHOP or Applebee's can't and won't put a promotion in place that the franchisees don't agree with in terms of the price point, the margin and the food item itself. And so they're on board from the beginning with everyday value, but it was a sales process that convinced them that the 5 days would generate the incremental traffic. We proved that. Then we went to 7 days, had to prove that, and they voted this year to make it permanent. So it is a process, but they're on board.

Okay. And then sticking to IHOP, just on the -- your most recent earnings call, you discussed off-premise sales. We continue to see growth at IHOP. You also called out catering in particular. Maybe just speak to both of those off-premise demand for IHOP more broadly and then just elaborate a little bit more on the catering opportunity and where that stands.

Yes, sure. And the answer for IHOP is very similar to Applebee's as well. And so just for context, before COVID, off-prem was about 6%, 7%, 8% of sales for both brands. And in the 5 years post pandemic, it's 22%, 23% and growing. And so it's been very consistent there in terms of that opportunity. So the 2 brands both became part of the off-prem consideration set in a way they weren't before. We had to do a lot to learn how to do that, right? So all those 3,000 restaurants were not built to have 1/4 of their business going out the side door. So there's a lot of MacGyvering back of house in terms of process and procedures in order to carve out the space to effectively do off-prem. We had to look into and improve our packaging because it just wasn't as important when you're only doing 7% or 8% in terms of how the packaging looks, but also how it functions in keeping the food hot. We had to learn how to work with DoorDash and Uber Eats and merchandise our product on the third-party sites, et cetera. And now your point about catering, it's been double-digit quarter-over-quarter growth since IHOP relaunched its catering program last quarter. There's a technology component to it with the catering-enabled websites. All of our to-go packaging or catering packaging is new and accommodates the larger portions and it's been driving off-prem. And we think there's a lot more upside.

Okay. And then let's switch over to Applebee's. John, you're currently the President. You are already the CEO of the company. So I'm sure you knew a lot about Applebee's before that happened, but maybe since...

I know a little bit more now. Yes, right.

So where I was going with that, what have you learned? What's going well at the brand right now? And then what are your biggest priorities or the brand's biggest priorities for the stand-alone brand over, say, the next 12, 24 months?

Yes, the biggest opportunity for Applebee's that if you step back a moment, the full-service dining or the category that Applebee's competes in is having a bit of a shakeout, right? So there's brands that seem to be fading a little bit like Fridays and Red Lobster. And there's a couple of our competitors have had a really good couple of years or a really good couple of quarters. And we're -- Applebee's is posting 1%, 2% comp sales growth. And that's okay, but not good enough. So what we're focused on, no surprises because the formula is pretty similar. So we've spent the last 1.5 years really investing in a new menu innovation and not just individual items, but categories and platforms that will be new and can be built out. And you'll see those begin to roll out in the first quarter of next year. We've implemented more new food this year than we have in years because we built up that pipeline. O-M-Cheese Burger in the first quarter was an example of that. The second thing that we're focused on is our marketing message, which when I got there 2 years ago, we didn't have even an in-house social media team. So now we've got a bunch of kids sitting in a room that are doing social all day long and monitoring everything. A great example of that, Brian, is we weren't even, 2 years ago, doing regular social listening. So an example of that is a week ago, someone we didn't know posted I never -- I haven't eaten Applebee's in 10 years and I never would. And normally, we wouldn't even know that happened. Our guys found it right away. We sent her a Applebee's gift card. She went to Applebee's and did a mea culpa and posted that. It was great, and she didn't realize, 2.5 million views. And we were missing that last -- this time 2 years ago. So it's been the food, social and bricks and mortar. So the Applebee's restaurants, the last renovation cycle was 2020, beginning of COVID. So we excused it because the franchisees and we were not going to invest in that at the time. So they're now 14 years behind the last renovation. And we're now 2 years into a refresh of all the restaurants. And the franchisees will complete about 1/3 of the portfolio this year on the way to half next year. So the short answer to your question, coming into it 2 years ago, focus on the bricks and mortar, so the restaurant buildings themselves look fresh and clean; menu innovation; much more contemporary marketing. And the fourth one is just focusing on core operations, which is managers in the front of the house, not in the back of the house, talking to the guests and off-premise accuracy, which is our #1 mistake on off-prem missing items.

Okay. And then I'm going to ask about dual brands, very important part of the story, some really encouraging signs so far. Just give a little context for everyone. And will be a little long-winded, I'm sorry, but I promise there's a question here. Maybe just to go through, there's something like 1,500 Applebee's. There's something like 1,800 IHOPs open today. Majority of those are in the U.S., not all of them, but the majority. So John, that's the context. Maybe give us the background on the dual brand strategy. How does this originate, the logic and the business case? And where are you with that strategy now today?

So there is a bit of a story here. Of our 3,600 restaurants, all but 220 are in the U.S. So we're primarily U.S. for both brands. The dual brand, if you haven't seen it, is having Applebee's and IHOP in the same restaurant. It's one combined menu that goes from breakfast through late night. If you know diners in the Northeast, it kind of looks like a diners menu and subtly cues the 2 brands going from blue to red as the dayparts progress. The staff are cross-trained. The restaurant itself is a beautiful combination of the IHOP blue and the Applebee's red. And it's one restaurant, but you certainly see both brands there. Guests can choose to sit wherever they want, and they can order from that single menu all day long. The strategy behind it is it's a daypart play, and it's activating the restaurant all day long. And so when other brands in the past have tried duals like KFC and things like that, they're competing dayparts. What's so compelling about this is Dine Brands just happens to own the premier AM and premier PM brand. IHOP, since it was invented in 1967 (sic) [ 1958, ] has been trying to address dinner as its most difficult daypart. And so for the IHOP franchisees, this is a solution to dinner that they've been looking for, for 60 years. For Applebee's franchisees, it's the morning daypart, which they're closed for. So it's a whole new revenue opportunity they didn't have. And so in terms of making the box more productive 24/7, that's exactly what this does. The first one was overseas, in the Middle East of all places. And I think when you're 6,000 miles from headquarters, you can do whatever you want and then ask permission later. So they actually designed and opened half a dozen of them on their own before we were even paying attention in Pasadena where we're headquartered. I was hearing great things, and there were a couple in Mexico as well. I flew to see them 2 years ago, came back and said to the team, this is a really big idea. And we opened the first one a year ago, April. So it's been about 1.5 years outside San Antonio, partnership with a franchisee who's really good at developing and building restaurants. And in 1.5 years, we now have 45 opened, on the way to 80 will be open by the end of the year. All but 3 of those are conversions, meaning the original brand added the second brand. The economics are, now that we have 45 open, very steady in the sense that it costs about $1 million to add the second brand, a little bit more if you're an IHOP adding an Applebee's because you got to build out the bar and all the equipment with that, a little bit less if you're an Applebee's adding an IHOP. They're seeing consistent revenue growth of 1.5 to 2.5x the original revenue. That was a $2 million IHOP, it becomes a $3 million combo. And the most compelling thing for me, Brian, is when you talk about innovation, right, no one came to us and said, you should put IHOP and Applebee's in the same building because no one ever think of that. But when you look at the tickets, 2/3 of the tickets in the restaurants are items from both sides of the menu. So in the morning, we're selling pancakes and ribs. And in the evening, we're selling omelets and skillets. And so guests that are experiencing it are actually taking advantage of it. So we're giving them something they didn't know they wanted. And we've got a very robust pipeline for next year as well. And most of them, Bloody Mary is now available at IHOP via the Applebee's liquor license, yes.

Very good. And then -- that's very helpful. And then maybe just kind of to build upon that answer. If you were to assume an Applebee's unit is up on lease expiration or franchise expiration or you could assume an IHOP unit, either way, maybe just take us through the decision tree for that hypothetical franchisee. It seems like the options are renew it as a stand-alone concept, maybe with the remodel, maybe not, convert it to a dual brand or maybe just naturally some restaurants are going to close. So as you work with your franchisees across the 2 brands on these situations, like how involved are you? And how are you helping them evaluate? And how are these discussions going? And how has that evolved now that you have 45?

It's literally what you just described, right? So we know when leases are up, for example, and we know when franchise agreements are up, as do the franchisees, and those conversations begin 1, 2 years in advance. So it's not sudden, typically, it's not sudden. And that is the conversation, which is, okay, you've been here for 30 years. Does it make sense to continue here? Or has the market moved and you really need to be 10 blocks down the street is always the first conversation. If it makes sense to continue, which typically it does because 94% or something of our agreements are renewed. So it's a very high renewal rate. Then it comes down to renovate or convert to a dual. I can't remember if I mentioned, but we see 900 opportunities for dual brands in the U.S. And of those 900, 450 are new builds and 450 are conversions, meaning an existing brand adding the second brand. And when we came up with 900, you can imagine we built a big model back at headquarters that has a lot of assumptions and market conditions and population growth and traffic into all those markets. And we ran the model saying that we're not going to approve any restaurant that would cannibalize an existing restaurant. If we had, for example, said, okay, run it with 5% to 10% impact, it would have been 1,600 restaurants instead of 900. So many franchisees don't have the opportunity to convert to a dual. So if you're an Applebee's and there's an IHOP 2 miles away, we're not going to approve it, which is why we get to that 900. So you'll continue to see the majority get renovated and the minority of this 900 become...

And point understood, it's not sudden you have visibility. When you get to this, is there -- this is qualitative, is there a lot of nudging and convincing? Or do you feel like you've already kind of got a lot of franchisees where they're aligned? The ones that make sense.

On duals?

Yes, on duals.

So on duals, it's been an interesting process. It has not unfolded exactly as we thought it would. So our initial hypothesis when said we're going to do this is we figured Dine Brands would have to build the first 10 as like proof of concept to demonstrate the numbers to get franchisees on board. And then we probably have to heavily subsidize and incent the first franchisees to go. So our first one was in partnership with our franchisee in San Antonio, a long-time IHOP franchisee that had 30-plus restaurants there. They actually purchased the Applebee's franchisee in San Antonio, so they then owned the market for both brands and could put a conversion anywhere they wanted to, that made it easy. And so we subsidized that one as we expected to. Then when it opened, we flew the Applebee's and IHOP franchisees that are the typical developers down there, about 20 of them, to see it. And our book of business built right from there. So we -- as you know, we didn't have to build 10 of them ourselves and our incentive to franchisees in terms of key money has been steadily declining. And what was particularly impressive to us is the guys we flew down there are the restaurateurs who've been doing this for 30 or 40 years and our largest franchisees, Flynn Group, Doherty in New York, Thrive in Kansas, those franchisees own hundreds of restaurants in multiple brands. They saw the concept and they said there's something going on here, and they signed up. So the answer to your question is it's not a hard sell generally. Of course, the 400 franchisees, there are those that are traditionalists and are still in wait-and-see mode, but more than enough for building the pipeline that we've got.