Earnings Call: Q2 2020

Jul 29, 2020

Hello, and welcome to the Second Quarter 2020 Dine Brands Global Earnings Conference Call. My name is Patty, and I will be your conference today. Please note that this conference is being recorded. I will now turn the call over to Mr. Ken Bitti, Executive Director of Investor Relations. Sir, you may begin. Good morning, and welcome to Dine Brands' 2nd quarter conference call. I'm joined by Steve Joyce, CEO Tom Song, CFO Jay Toms, President of IHOP and John Iwinski, President of Applebee's. Before I turn the call over to Steve for opening remarks, please remember our safe harbor regarding forward looking information. During the call, management may discuss the forward looking and involves known and unknown risks, uncertainties and other factors, which may cause the actual results to be different from those expressed or implied. Please evaluate the forward looking information in the context of these factors, which are detailed in today's press release and 10 Q filing. The forward looking statements are as of today and assumes no obligation to update or supplement these statements. We may also refer to certain non GAAP financial measures, which are described in our press release and also available on the Dine Brands' Investor Relations website. With that, I'll turn the call over to Steve. Thank you, Ken. Well, good morning, everyone, and thank you for joining us. Before we get started, I know the last few months have been challenging for everyone. So I hope you're all safe and doing well. I'd also like to recognize our franchisees and team members for their continued hard work during these difficult times, which has brought out the best in our team across both our organization and system from creating resourceful ways to drive our business during these times to having a solid focus on our guests and welcoming them back into our restaurants. Our approach has generated some good progress. With that, let's turn to the 2nd quarter results. When we last spoke to you, we provided a look into the sequential improvement in weekly comp sales trends for April. Notably, after reaching lows in late March, the sales trajectory for both brands continued to improve through June as dining restrictions were eased and states began to gradually reopen. Guests who felt more comfortable about restaurant dining were eager to get out after a long period of staying at home, whether that was through off premise, outdoor or indoor dining. We set out to bolster this variety of options to meet the different needs of our guests and establish stringent safety protocols that would instill confidence and keep guests coming back. Despite the impact of COVID-nineteen, our brands showed meaningful progress in recovery, which we believe reflects the successful execution of our off premise business and the affinity guests have for our brands. While our restaurants have always offered guests respite and a place to enjoy being with friends and family, they've continued to savor our great food increasingly in the comfort of their own homes as the strong growth of our off premise business demonstrates. We remain optimistic about the overall marked improvement in industry sales and traffic data since April, which would support continued momentum in our business. We're closely monitoring those states that have recently reversed their reopening plans. This situation is obviously fluid at both the state and local levels, so it will be premature to attempt to quantify any impact presently. However, we're staying nimble in this ever changing environment and shifting our approaches when warranted, such as refocusing on outdoor dining and off premise service where it makes sense. We've demonstrated the ability to manage our business during a challenging second quarter and our franchisees proved their tremendous resiliency in meeting the convenience and safety needs of our guests. We've also leveraged our digital capabilities to support significant growth in our off premise business. To provide some details, Applebee's online to go sales for the Q2 increased sequentially by approximately 18 percentage points to 23% of total sales, with off premise sales representing 61% of total sales. Similarly, IHOP experienced growth of 28 percentage points in online to go sales to 35% of total sales during the same period, with off premise sales representing 54% of total sales. The off premise business at both brands continued to post significant growth in the Q2 as guests became more familiar with the platform. We believe our sales will be further supported as dining room restrictions are lower. John and Jay will provide additional details on their respective brands later. During the reopening process, Dine's Crisis Management team remains fully engaged with local, state and federal authorities to obtain the latest information available, enabling us and our franchisees to make well informed decisions. I'm pleased to say that at the end of the second quarter, 95% of our domestic restaurants are open for either dine in or off premise service. This compares to 82% at the end of the first quarter, which primarily consisted of takeout and delivery service. As we reopened dining rooms in accordance with government mandates, the health and safety of our guests, franchisees and team members are top priorities. In addition to following guidelines provided by the CDC, as well as state and local governments, we've implemented our own operating procedures at both Applebee's and IHOP. These include, but are not limited to, safe food handling procedures in addition to practices to ensure that the restaurants are sanitized, including team members who focus on cleaning and sanitizing common touch points throughout the restaurant. As we continue to welcome guests back, we want to ensure that they feel safe and comfortable whether they choose to dine in restaurant or off premise. Our research has shown that consumers have a strong desire to return to restaurants. In fact, out of the top 5 categories that consumers said brought them the most joy, dining out was ranked the highest. As we enter a new normal for dine in, we know that guests will view health and safety as equal to value and credibility, and will continue to serve our guests' needs and desires. Our cross functional teams have worked relentlessly to ensure our franchisees are equipped with the right information to make sound decisions for their operations and their teams. We're working closely with our franchisees and taking the necessary steps to prepare our restaurants so that we can emerge from this pandemic in a strong competitive position. The coronavirus has had a profound impact on businesses across the country and the globe. As you know, the restaurant industry has been especially hard hit. As a result, industry analysts estimate that a substantial number of independent restaurants that have closed due to COVID-nineteen will not survive. In contrast, Dine Brands has the advantage of scale, a strong cash position and liquidity, experienced restaurant operators and an asset light business model. Collectively, this profile has enabled us to withstand the challenges facing our industry, which makes me more optimistic about our future. Looking ahead, we believe that there are potential opportunities to increase our market share due to expected closure of independent restaurants. We'll continue to assess the competitive landscape as we focus on our near term priority, which is returning our core business to sustainable growth. With that, I'll now turn the call to Tom to provide an overview of the Q1 results. Tom? Thank you, Steve. Good morning, everyone. I hope that you and your families are all doing well. Given the circumstances, I'm going to first review the financial initiatives and decisions that Dine has taken during the pandemic, then I'll discuss our financial results for the quarter. First, we responded by fortifying our financial position during this challenging period for our industry. As a reminder, we borrowed a total of $220,000,000 from our revolving credit facility in March. As of June 30, the entire amount remains strong. At the end of the Q2, we continued to have a strong liquidity position and significant cash on our balance sheet totaling $342,500,000 of which $278,500,000 is unrestricted. I'd like to highlight that non current restricted cash increased by $16,400,000 due to Dine voluntarily doubling its interest reserve to enhance our securitization structure. In addition to further support our securitization, we voluntarily accelerated the funding of quarterly interest. And as of today, for example, we have already fully funded interest payments due on September 8. We did not repurchase our common stock during the quarter and to furlough approximately 1 third of our corporate staff, which led to to furlough approximately 1 third of our corporate staff, which led to the sharp decrease in G and A for the Q2 of 2020 to $30,900,000 as compared to $39,400,000 for the Q2 of 2019, this represents a 22% decline. The decrease was mainly due to lower compensation expenses as well as reductions in other discretionary costs. I would like to clarify that during this quarter of extreme austerity, we were able to reduce our gross cash G and A to approximately $27,000,000 which includes capital expenditures. However, we are not changing a $30,000,000 per quarter figure that we previously mentioned for G and A and capital expenditures for the remainder of the year as we have recalled some of our team members from furlough and anticipate resourcing our business to serve our franchisees. To provide financial support for our franchisees, we disclosed last quarter that we implemented franchisee assistance measures aimed at enhancing the stability of both brands. The assistance primarily consisted of deferrals of royalty and advertising payments primarily from March April for both brands and for certain IHOP franchisees also rent payments. Additionally, we allowed IHOP franchisees to defer to remodel the new unit development obligations for 2020. Most franchisees did avail themselves of our support. In aggregate, we provided nearly $56,000,000 of deferral for franchisees. Offsetting these significant deferrals, we received approximately $11,000,000 of deferrals and maintenance from our landlords on IHOP properties that are subleased to our franchisees as well as our other leased properties. While the programs offered both through Dine and the CARES Act helped to somewhat mitigate the financial impact COVID-nineteen on our franchisees, the effect of dining room closures and restrictions has caused significant deterioration in franchisee cash flows. As a result, we recognized over $5,000,000 of bad debt expense during the Q2. I would like to note that after the deferral period, both Applebee's and IHOP franchisee collections have been strong and each brand's ad fund is in a stable position at this point. Also as previously disclosed, an IHOP franchisee that operates in 49 locations initiated an assignment for the benefit of creditors and then subsequently filed for bankruptcy. In July, 41 of the 49 units were sold to a new franchisee approved by us. As part of the transaction, we received $4,600,000 which represents a complete recovery in fees. Let's switch gears to our Q2 financial results. For the Q2 of 2020, we reported an adjusted net loss per diluted share of $0.87 compared to adjusted EPS of $1.71 for the same quarter of 2019. While we started the quarter at a very low point with weekly comps down 77% at Applebee's and down 82% at IHOP for the weekend of April 5, both brands improved dramatically with Applebee's down 18% and IHOP down 34% for the last week of the quarter. This represents improvements of 59 percentage points and 47 percentage points for Applebee's and IHOP respectively. You'll also see in our reported results that we recorded over $120,000,000 of impairment losses for the quarter, most of which was attributable to Applebee's goodwill and intangibles. Turning to our securitization, our leverage ratio as of June 30 was 6.3 times, up from 4.8 times as of March 31. Under our securitization structure, we are required to make quarterly principal payments of $3,250,000 when our leverage ratio is greater than or equal to 5.25 times, which is our total debt at quarter end divided by adjusted EBITDA for the 4 preceding quarters. Please note that exceeding the leverage ratio applied in a quarter times does not violate any covenants related to the securitization. We anticipate making a principal payment in the Q4 of 2020. I would like to highlight that our debt service coverage ratio or DSCR remains robust at 3.34x as of June 30. The first key DSCR measurement is tripped when a ratio is below 1.75x. So we have ample cushion. Adjusted EBITDA for the Q2 of 2020 was $12,100,000 compared to $68,000,000 in last year's Q2. Turning to our tax rate. Our GAAP effective tax rate for the Q2 of 2020 was 8.2 percent tax benefit compared to 26.4 percent expense for the Q2 of last year. The primary reason for the variance was due to the non deductibility of the impairment of Applebee's goodwill in the amount of $92,000,000 I'll wrap up on a positive note. Our international business is off to a promising start in the Q3. We recently opened 4 new restaurants. These include 2 IHOPs in Canada, 1 Applebee's in Mexico City and 1 Applebee's in Puerto Rico. We also recently entered into a 13 unit development agreement for IOPS in India with a very experienced multiunit QSR developer. This is a key market for us and complements our prior development agreement for Applebee's in India, which we executed in late 2019. I would also like to welcome Tony Moruego, President of our International division and Justin Skelton, our new CIO on Dime's executive team. To close, while our industry remains challenged, we have taken steps to ensure we continue to maintain strong liquidity and remain responsive to franchisees. Our brands have significant scale as Speed Merchant and are well positioned to benefit from any potential contraction in restaurant industry competition. We've experienced meaningful improvement in our off premise business at both brands, which will greatly complement our dine in sales when restrictions on restaurant operations are further lifted. With that, I'll now turn the call over to John. Thanks, Tom, and good morning, good afternoon, everyone. I've been looking forward to sharing these results given all that's unfolded since we last spoke about 90 days ago. I plan to provide detail on Q2 as well as a review of what's transpired here in the month of July. Let's start with a bit of context. Pre COVID, the Applebee's brand had tremendous momentum. We posted a 3.2% comp sales increase through March 8, meaningfully outperforming the casual dining category and delivering 10 consecutive weeks of positive sales to start the year. Once the pandemic emerged in March, we temporarily closed about 2 50 restaurants and quickly moved to an off premise business model. As a result, April comp sales declined 70.4%. May sales declined 54.1% as we began to reopen our dining rooms. And June, sales were down 29.3% as we began to see a real shift in momentum. Four primary factors impacted our Q2 results. The most obvious was the closing of dining rooms, which represented approximately 85% of our business pre COVID. Once dining rooms began to reopen, government imposed capacity constraints represented another meaningful variable with most geographies imposing a 25% to 50% capacity restriction. Another factor limiting our revenue recovery is the understandably cautious nature of the American consumer in this environment, which of course varies depending upon the geography. And finally, we chose to discontinue all national marketing back on March 18, and we've been on a self imposed media hiatus through almost all of Q2. In hindsight, this was absolutely the right strategy as we allowed our ad fund to replenish while waiting for the right time to reintroduce Applebee's to America. Now let's talk about where we are today. I'm very pleased to announce that 1600 Applebee's restaurants are currently open for business in the U. S, representing 97% of our portfolio. The remaining 56 restaurants are a combination of temporary and permanent closures that will evolve slightly as we progress through the balance of the year. Of the 1600 open restaurants, about 1450 are fully operational with open dining rooms. And given the recent dining room shutdowns in New Jersey, New York, California, New Mexico, South Florida and Philly, to name most of them. We now have about 150 restaurants operating in an off premise only mode with some outdoor dining. And we certainly expect these numbers to evolve as local governments modify their guidelines in this very fluid environment. I want to take a moment to talk about our franchise partners, the restaurant teams and our cross functional leadership team. Throughout this pandemic, our top priority has always been the safety of our team members and guests, and our partners have simply been exceptional in delivering upon our elevated brand standards. Remember, there was no playbook for this back in March. The pandemic took us all by surprise, yet this adversity has unlocked a from my perspective, a remarkable entrepreneurial spirit of creativity, agility and resilience. Virtually everything we do in this environment is new and different and in many cases better than it was 4 months ago. And I couldn't be more proud to be associated with this talented team than I am today. I've often stated that Applebee's is at its best in tough times, and that's certainly proving to be the case once again. And the good news is we're now beginning to see genuine momentum return to the business. Thanks to our franchise partners and our Chief Operations Officer, Kevin Carroll, our restaurants were prepared and ready with respect to safety, sanitation, parking lot staging, social distancing, contact free dining, outdoor dining as well as all of our food and beverage standards. After an approximate 90 day media hiatus, we returned to national marketing in mid June with a terrific digital media plan crafted by our Chief Marketing Officer, Joel Yushinski. That plan was broadened in early July to welcome guests back to our dining rooms while continuing our off premise messaging. In particular, we received positive feedback around the tonality and authenticity of our current advertising to the music from Welcome Back, Kotter, for those of you on the call old enough to remember that show. I hope you've had a chance to see that ad because it's the perfect message for Applebee's as though the lyrics were written specifically for us at this precise point in time, and it appears to have really resonated with our guests. In addition, the current product we're featuring, Applebee's Irresistibles, is a great example of abundant value and broadly appealing innovation developed by our Chief Culinary Officer, Stephen Bulgarelli. And this also illustrates, importantly, the power of our supply chain team and their ability to move fast and supply the brand with very little notice as was certainly the case here. Our restaurant P and Ls have also benefited in this environment from a substantial reduction in our core menu, resulting in the simplification of our operation, better execution and a reduction in food and labor costs. Of course, some of this benefit is offset by a heavier reliance upon off premise and its packaging cost as well as our investments related to safety and sanitation. So let's talk about our business momentum and provide the complete picture as to where we stand today. After steady and sequential progress throughout Q2, we saw a noteworthy change in our comp sales trajectory from minus 37% in early June to an average of minus 18% over the past 6 weeks, while posting a minus 15.6 percent result this past week ending July 26, representing our best comp sales performance since the crisis began. Additionally and importantly, according to most recent 4 weeks of black box reporting, Applebee's is once again outperforming the casual dining category. At present, of our 14 50 restaurants with open dining rooms, average weekly sales are about $39,000 with 64% of this volume being dine in and 36% off premise. Now of this off premise volume, approximately 68% is Applebee's car side to go and 32% would be delivery. From my perspective, this convenience oriented and digitally led business has really thrived under the leadership of Scott Gladstone and for obvious reasons is more important to us and our guests than ever before. We remain very well positioned in the soft premise segment and execution has really holding most of our off premise business with only about a 15% to 20% cannibalization rate, suggesting the relevance and staying power of Applebee's to go and delivery. On another positive note, after the deferral of March April royalty and advertising payments, I'd like to highlight that Applebee's ad fund is now in a cash flow positive position as we're also beginning to restore our royalty income stream. While we navigate the uncertainties of this environment, we remain 100% aligned with our franchise partners to return our business to its full revenue potential as quickly as market conditions allow. In closing, I believe Americans will choose brands they trust in this environment. And we've been working hard to nurture that long standing trust in Applebee's over the past several months. Looking forward, I'm confident Applebee's is well positioned to continue its trajectory, particularly given our momentum and the likely contraction of CDR restaurant supply over time. With that, I'll turn it to Jay. Thank you, John. Good morning, everyone. I hope you're all doing well. IHOP's performance continued to be impacted by the effects of governmental mandated restrictions on restaurant operations due to COVID-nineteen. This was consistent with the overall family dining category according to industry data. For the Q2, IOPS comp sales declined 59.1% as traffic remained challenged primarily due to dine in restrictions, statewide stay at home orders, continued high unemployment and temporary restaurant closures. However, I'd like to highlight that our weekly comp sales for the Q2 improved since the week ended April 5. In fact, the brand posted 12 consecutive weeks of sequential sales improvement in the Q2. Additionally, comp traffic improved sequentially every week during the quarter as states began to gradually allow dining rooms to reopen with capacity restrictions, which were generally around 50%. As we entered the 3rd quarter, our performance in July reflected the resurgence of coronavirus cases and dining room restrictions put in place by state and local governments due to the spike. Additionally, we did not utilize national media through the 1st 3 weeks of July. As a reminder, we discontinued our marketing late in the Q1 except for some basic local marketing and a brief off premise campaign. Regarding daypart performance, every dayparts sales and traffic improved sequentially month to month in the Q2. While the overall sales improvement from April to June was fairly even across all dayparts, breakfast was approximately 200 basis points behind lunch and dinner respectively. Mainly due to statewide mandates remain at home and rising unemployment, there were essentially less people stopping for breakfast on their way to work. Additionally, the breakfast category in general has faced some pressure compared to other meal periods. According to the MPD Group, breakfast or the morning snack occasion has experienced the steepest transaction declines. However, with more people generally staying at home, I'm pleased to report continued strong growth in our off premise business even as dining rooms started to reopen. Off premise comp sales for the 2nd quarter increased by 145%, primarily driven by traffic. Delivery sales accounted for 23.4 percent of sales mix and takeout accounted for 33.5% of sales mix for the 2nd quarter. We're successfully leveraging technology to support our to go business while meeting the convenience needs of our guests. In the Q2, digital sales grew by approximately 28 percentage points to 35% of total sales. Another facet of our off premise platform experiencing meaningful growth is curbside pickup, which was launched during the week ending March 29. The service doubled to 6.3% as a percentage of total off premise sales for the week ending April 5 compared to the prior week. I'm pleased to say we've seen progressive growth increasing to 8% of off premise sales for the week ending June 28. We believe our collective off premise initiatives will continue to drive sustainable growth as more people are utilizing to go now than before the pandemic. As a result, a wider range of guests are familiar with the ease and convenience of having their favorite IHOP meals to pick up or be delivered. Now let's switch gears to the status of reopening our domestic dining rooms. We started reopening on April 21. As of June 30, approximately 92% of our domestic system was open for business, of which 88% was open for in restaurant dining and 4% for takeout delivery only. Approximately 8% were temporarily closed. As of July 27, 15 65 domestic restaurants or 92% were open for dine in or off premise. Undoubtedly, the coronavirus is having a profound impact on our industry. As a result, a significant number of Indian restaurants are not expected to survive, as Steve mentioned earlier. This scenario actually provides an opportunity for IHOP to increase its market share as some independents close their doors permanently and IHOP continues to grow through traditional and non traditional development. While our growth this year has been adversely affected by COVID-nineteen, our franchisees opened 13 restaurants in the first half of the year, reflecting their continued confidence in the brand and our long term strategy. Looking ahead, our near term priorities are to quickly and most importantly, safely restore sales and traffic to last year's levels. This can be achieved by 1st focusing on the safety of our guests and team members to provide a comfortable environment in our restaurants. Secondly, continue to grow our off premise business and third, to provide compelling value propositions to entice guests to come back into our restaurant. While consumers still have some concerns about dining out, there is a strong desire to return to restaurants based on our proprietary consumer research. Now to tie this all together, we have plans to return to marketing broadly and emphasize IHOP's appeal across all dayparts, while also focusing on driving off premise sales. In fact, we recently started national advertising again on the 22nd of this month. To wrap up, our goal is to return to a sense of normalcy in a way that meets the comfort needs of our guests. We've made some good progress in the withstand current industry headwinds and demonstrate why the brand has been ranked the leader in family dining based on domestic restaurant sales for over 10 consecutive years according to Nation's Restaurant News. I'm very optimistic about the road ahead as state and local government restrictions on restaurant operations are lowered. With that, I'll turn the call back over to Steve for closing comments. Thanks, Jay. To recap, both Applebee's and IHOP posted steady improvement in weekly comp sales and traffic during the quarter. Our off premise business continued to deliver substantial growth as guests became more familiar with the 2 Go service. We ended the quarter with a strong cash position and ample liquidity. Lastly, we are well positioned to withstand current industry headwinds and stand to benefit from the potential opportunities to expand our market share. Now we'll be pleased to open up the call to any questions you may have. Operator? We have your questions in the queue from Mr. Jake Bartlett from SunTrust. Your line is open, sir. Great. Thanks for taking the questions. My first one is about I just want to make sure I understand how many stores are offering dining currently after California was shut back down. I think some of the numbers you've given were at the end of June. So maybe just to clarify that. And then also in terms of Applebee's and I'm glad to hear the detail on average weekly sales stores with offering dine in, I think it was 39,000. How does that compare to the similar period last year? I'm just trying to get a gauge how those stores really are comping versus stores with only off premise? So let's start with Husband Restaurants and then John the Applebee's. Yes. The JK, this is John. 1450 plus restaurants had dining rooms open at Applebee's. That number is fluid. It literally fluctuates on a daily, weekly basis, California being the most recent where we lost, I think, 90 plus restaurants in terms of shutting down dining rooms. And I'll come back on the other question after Jay speaks to IHOP. Yes. On the IHOP side, we've got basically 78% of our restaurants are open without restrictions with 13 20 plus restaurants. We've got 244 restaurants now that are back to doing off premise only. It's mainly driven by the California change. That's 14% of our system is off premise. And then like I said, we've stood at about 8% that are closed at the moment. I guess for us in California, we have a larger footprint, I think, than Applebee's does out there. Clearly, it has an impact on us. We've been doing on average about 35% of our business in to go across the nation. So that's hits up in California, obviously, when the dine in goes down. But in looking at our numbers, just as a comparison, when we have a location that if you look at all of our restaurants that are open for dine in, they're running a little less than 30% down in sales. If you look at restaurants where they're only doing on premise, those restaurants average down about 57%. So it clearly makes a difference, over 20% difference if you don't have to dine in. And then, Jake, your final question, the $39,000 weekly volume per restaurant that I referenced is recent, as recent as last week. That would be, to your question, about a 15% drop from a year ago. Average weekly restaurant volumes last year, keep in mind for a brand, it's $2,400,000 $2,500,000 annual volume, would be about 46,000 weekly. So we're getting close and we're seeing sequential improvement each month. I think it's also important to note that those numbers are highly variable depending on market. So we've got some folks that are pretty close to where they were on occasion ahead. We've got some folks, particularly in California that are obviously given the restrictions are struggling. So it's a those are averages and it's varying quite significantly across the board. Yes. I think, Jake, that's an important point. You could look at a state like California where you had a comp sales number of 50 minus 50%, and you could add some other geographies that are positive comp sales. And we have we certainly have that right now of late. Great. And would you be able to share on the Applebee's side much like Jay just shared on the IHOP side, the percentage down for dine in versus off premise, I can we can kind of roughly do the math, but if you could help us out, that would be great. The percentage down look, the delta between I'll just frame it this way. The delta between total system performance and dining rooms would be about 200 to 300 basis points. In other words, if those dining rooms were open, you'd see a 200 basis point, 300 basis point lift in system comp sales. Great. And then last question was really on the you shared on the last call some breakeven estimates for sales declines at the store level. Have those changed now that you've had experience with dining rooms being open? Just if you can update us on kind of breakeven cash flow sales levels and basically kind of what I guess what that would mean for restaurant margins going forward? Tom, why don't you help with that? Yes. Jake, as Steve alluded to, there's a tremendous amount of variability. So we did indicate our view on averages as applicable in a highly stressed environment also benefiting from the fee relief program that we provided in Q2. So at this point, you do have a range where depending on where our franchisees are located, they're experiencing a variety of different cash flow situations and we are closely monitoring that. I will speak to our company operated portfolio, which we have obviously a lot of visibility. This is our North and South Carolina Apple leasing. And so we've obviously experienced dramatic improvements. The portfolio is performing in line with the entire Applebee's system. And there we anticipate from a 4 wall soft building perspective to be EBITDA positive for the year. And so hopefully that gives you a little bit of indication just as a data point. Great. Thank you very much. Yes. And I think the point that Tom made that's important is we are very closely working with our franchisees on their financial health, which obviously has been significantly enhanced by the PPP program. However, we're working very closely with the leadership groups well as monitoring every single franchisee in terms of where they stand, so that we know when people need help and individually we will work with them to help everybody survive. Thank you. Your next question comes from the line of Mr. Nick Setyan from Wedbush. Your line is open, sir. Thanks for taking the questions. It's great to obviously, it's great to see the trends here in July and the cadence of the top line. Tom, just to address a couple of the bigger concerns out there, relative to the Q2 closure rates and relative to the Q2 gross margins, where are we headed in the near term? Can we safely assume that those gross margin in Q2 were as bad as it's going to get? And also just kind of address what your thoughts are around unit closures for each brand end? Yes. So we have an updated guidance. We suspended it as you know Nick. But let me give you some context into why some of these normally we wouldn't be able to provide some color on that. But the reason why it's a little tough is simply because you have circumstances, for example, the instance of a IHOP franchisee that had some closures and then we were able to get a good amount of them transferred to a new franchisee. And so we did have some closures that we deemed permanent during the quarter, but the predictability of that is going to be difficult to determine at this point. With respect to gross margins, a lot of that since it was obviously by our collections experience. And as I mentioned, the good news there is our collections are getting to be very strong coming out of the release program. So we believe the release program had a good intended effect. The PPP program provided a lot of liquidity into the system. And now as Steve mentioned, we are monitoring our individual franchisees very closely. Nick, one other comment. I've been in this business almost 40 years. I've never seen a quarter like this quarter. I sure hope we're not going to see anything else like this. So it's getting better and it's got to get better from here. So it's a remarkable period. I mean, I just have never seen anything like a quarter like this and it's just good to have it behind us and good to be moving forward with some momentum. Yes, absolutely. Fair enough. And then just on the marketing for both brands, clearly the Applebee's marketing has had some has really worked. How are you thinking about the rest of the year? Are we back to pretty much a normalized cadence? Are there going to be any periods, short periods or long periods where you're going to go off again? Is menu innovations going to come back with the value focus? How are we thinking about all of those things? Yes. Let me let both folks in to address their individual brands. But in general, our view is we're going to make sure that our marketing efforts are sufficient to the opportunity and that we're on air when we need to be. There are some obviously as we have every year some planned gaps, but they're carefully planned so that we don't believe that they're going to cause drops in the momentum. And the interesting thing for Applebee's had a lot of momentum going into this and so now we want to obviously recoup that. IHOP was doing okay, but we were hoping to pick up from that and they're showing that they're running neck and neck with the competition at this point. At least it looks like they're actually running a little ahead of the competition. So obviously, we want to maintain that positioning. What you will see is we have significantly increased the level of digital because of the fact that a lot of the efforts that we're doing are about off premise And we want to make sure that we're communicating to our 10,000,000 or 11,000,000 members between IOPS program and Applebee's program about specials that we've got available and reasons to come either pick up or come into the restaurant and dine. And so you'll see us shifting a little bit more towards the digital side as we've done and had some great success. And then obviously as we bring additional technology to bear, we're use your own device and a technology menu that allows us then to continue to grow our ability to communicate with customers. You're going to see us probably step up those digital efforts. And then obviously, we're going to continue to be on air with commercials that we think drive folks either to off premise or into the restaurant. So Jay, you want to talk a little bit about IHOP? Yes. So we just went back on the air on the 22nd this month. And I would think for us without disclosing what we're planning on usage marketing will look more similar to what we would typically do. We intentionally turned off our marketing for a long period of time to save that money for the more appropriate time to start marketing. We think the appropriate time is now. I think the other thing we'll do is, we've already pivoted behind the scenes a couple of times as to when we were going to start marketing, what we wanted to market, etcetera. And I think that we'll continue to do that the rest of the year. This is a very fluid situation still as you can see with them closing down dining rooms in California again. So we don't want to spend a ton of marketing dollars pushing just a get back into the restaurant message if those restaurants aren't going to be open for dining or if they have too much of a capacity restriction. So we're going to be watching the situation closely. We do have the funds and we will be doing marketing. What we market, we will pivot as time goes by to think about what's the value play we want to do, what's the innovation we want to talk about, what's the capacity in restaurants, how do you keep supporting the off premise to go message. We'll balance all of that and make good decisions through the balance of the year to market the right mix. And then Nick, on the Applebee's front, we're pretty good at this. We know how to market effectively in this environment. We've demonstrated that our fund is healthy. That's really important. That was the benefit of taking that 90 day hiatus. We'll continue to market. Our objective is to maintain top of mind awareness and we'll have extraordinary sensitivity to the environment. That's everything from how our guests feel about dining out, both from a dine in perspective and an off premise perspective to the variability across the country in terms of government restrictions. We can effectively drive demand as to the constraint on that demand. We will actively seek that out. And then to your final question, there will be a balance of value orientation and innovation, probably less innovation to be quite frank in this environment given our reduced menu, which has had some significant operational benefits. And then the final point that I would make is the media landscape is going to be different. America needs its sports and I'm hopeful that some of those currently restricted media vehicles become available. As a result, I anticipate that the media landscape, generally speaking, as we go into next year is going to have less demand. And for the first time in a long time, an absence of inflation, which is good news. And then you have the election variable, which will be interesting come November. Thank you very much. Your next question comes from the line of Mr. Jeffrey Bernstein from Barclays. Your line is open, sir. Great. Thank you very much. Two questions. 1, it seemed like both brands you talked about independence and potential for significant store closures. I'm just wondering what you've seen already or what your expectation is in terms of the industry as a whole or whether any particular brand is more or less vulnerable. Presumably that creates a market share opportunity for you. And it does raise the question because I think many people think of franchisees as independent operators. I'm just wondering whether you guys see yourself vulnerable to more closures in your system at either brand? And then I had one follow-up. So let me start and up. So look, you're seeing the same numbers that we're seeing where people are projecting upwards of 75% or higher of independents clothing. So obviously, there's going to be a lot of buildings available for conversion. And you had several brands that went pre virus were struggling. So obviously, and you've seen some of the numbers, they're closing a lot of restaurants. We're obviously looking at this all very carefully. There are some restaurants that will probably close. A lot of those restaurants were marginal before they started. So it's this has sort of just hastened the potential loss of couple more units. We are not viewing this as a major change to either of the systems. And obviously, we're prepared to step in and assist where we think it makes sense with individual franchisees. We're also prepared to look at restaurants long term that probably are on the margin anyway and say, okay, well, do they have a long term viability or not? Now is as good a time as any to try to figure out a way out of those restaurants provided we get replacements for them. So it's a combination of efforts that we think is mostly upside for us. And we think at the far end of this episode, I think what you're going to see is the companies that emerge with strong financial capabilities are going to be in a really good position for growth. And that's sort of the way that we're viewing it. Tom, you want to comment and what the brand has thought? Yes. I think the one thing independents don't have and to your point on whether or not franchisees are viewed as independent, we view them as independent operators obviously, their ability with a national brand with all of our resources. And I did mention we are bringing back resources as appropriated. We also have a very strong liquidity position and we are willing to step in. We did that in the past. We have our own company operated portfolio obviously, Jeff. And so we have a number of levers that we can apply that true independents probably don't have at the disposal. Yes. I'd just say from the IHOP side, keep in mind, like I said, we opened 13 restaurants this year at the beginning of the year. We have a strong desire for growth on the IHOP side and had a lot more restaurants that we're planning on opening this year that we allowed deferrals for franchisees. So we think our growth engine is going to get going again once this passes. But as Steve said, we have a long history of working with franchisees and trying to find replacement restaurants or finding new owners in some situations because the reasons why restaurants closed down are varied. There's a lot of different reasons why those things happen. And we assess those situations and figure out is this restaurant viable with a little different structure, with a new ownership group or not? Or does it just need to be replaced with a new restaurant? So we assess all those things as we're making these decisions. I would expect we will have more closures. How many though is it's just too many variables to even kind of think through what that might look like right now. And any time we get those situations, we're trying our best to save the restaurant through a different franchisee or to not have a permanent closure. That's why we have temporary closures that we talk about because we tend to get those restaurants back. And as you heard Tom say, we lost 49 restaurants in a bankruptcy deal. We're going to get probably 41 of those back here pretty soon. And then, Jeff, this is John. The reason I'm bullish on Applebee's is the if you look at the categories, you look at QSR and fast casual and casual dining, in particular, the one category that is absolutely disproportionately reliant upon independent restaurants is casual dining. 90 plus percent of all restaurants in casual dining are independent, which means strong vibrant brands with scale who are well positioned, will benefit significantly. It will be the one category that stands out in terms of opportunity. And to clarify, I think at the beginning of your comments, Steve, you mentioned something about you hear numbers of 75 percent of independents were potentially closing. I just want to make sure I heard that correctly. Yes. Yes. Those are the headlines that we've been seeing. I've seen numbers 75% to 85%. I don't know whether that's right or not. I've also seen the restaurant associations saying they think the total number for the industry could be a third to 40% of losses and most of those being in the independent range. So I think the discussion around scale and brand awareness and the ability to do digital work and the technology we can bring is just out of reach for most independents. That's why you're seeing them bear the brunt of this. And so our expectation is, there's no question, we will close some restaurants, but we don't think the number is going to be a big number. And when people write articles about the industry being under turmoil, they'll throw things in like that bankruptcy. They say, look, IHOP's closed, we're in our restaurants. They don't come back and say, but they reopened 41 of them, which is pretty much the case as we've seen in a couple of these instances so far. So our expectation is we're going to keep most of our restaurants and we'll have some closures, but then we're going to have a lot of growth opportunity afterwards. Understood. Thanks for the color. Your next question comes from the line of Brett Levi from 10 Kilometers Partners. Your line is open. Thank you for taking my call. Hope you are all doing well. I guess if we could just try to circle back on some of the questions that were asked, try asking them in a different way, see if I get a different answer. When you figure out your breakeven propositions for units that have dining rooms versus those that are off premise only. What do you think the sales gap is? What kind of is it possible that the margins given the operational improvements you're making can actually expand beyond where they were or are these incremental costs that you're introducing for greater off premise and safety? Are those enough to overwhelm any of the recovery? So that's a great question. So I'm going to have Tom weigh in a little bit on the margin. So here's the way to think about it. We've got some incremental costs associated with PPE, making sure that guests are safe, associates are safe. But those have been offset and probably benefited from a more tightly grouped menu, with a focus on the things that are really moving. So one of the benefits of this is in both brands, we have had extensive menus and have been working with franchisees to try to bring that number down. Obviously, everybody feels their guests like something different, so hence the proliferation of products on the menu. But this has allowed us to tighten the menu in conjunction with the franchisees in a way that allows better execution in the kitchen and also provides better cost management as a result. So our view is coming out of this, we have the opportunity to maintain that off premise and return to comparable dining room levels over a period of time. And your guess as to the recovery line is as good as mine at this point. Well, I think we'll know a lot more this fall. But the opportunity on the upside is if we gain back those restaurant sales and we maintain the bulk of the off premise, that puts us in a better position from a revenue standpoint than before. And with a lower number of different items on the menu, a higher efficiency in the kitchen, we're probably going to be more profitable. Now that's notwithstanding sort of food cost spikes that we're seeing, whether it's in pork or beef or whatever. But those will presumably settle out as well. So the opportunity going forward for profitability in the restaurants is probably better than it was provided we return everybody back in the dining room. And so the combination of those 2 we feel is potentially an upside in the long term. So Brad, let me give some additional data points here. So with respect to the incremental costs, we did ask both brands' operations teams to assess the one time cost of reopening the restaurants. So those are indeed the costs that are borne to enhance approximately $1,000 per week. And so they're not insignificant. They are incremental to the restaurants. Now when you look at dining rooms that are open versus that are in off premise mode only, I'm going to apply this number to both brands because it's about the same. There's a 30 point sales lift if the dining rooms are available to be open. So again, if you look at our averages that we put out there with respect to comps for both brands, that's a blend. That's a blend of dining rooms are open and dining rooms are closed. And if the dining rooms open, you get a 30 percentage point lift. When we think about even those restaurants are open, let's keep in mind, they're not open to 100%. So using our North and South Carolina restaurants as an example, they're subject to 6 foot distancing or 50% restrictions. That's very typical of dining rooms that are open. So they're capacity constrained and that puts a cap on some of the sales performance even in those restaurants that are open. For Applebee's in particular, there's restrictions on late night operations or the bar past certain hour. And so again, we feel as things improve in the country and some of these incremental it's not a digital function of dining room being open or not. We think there's some room for improvement as even those restaurants with dining rooms open have additional restrictions lifted. So I would just say from an IMO standpoint, if you talk to our franchisees, they will tell you there are puts and takes on this, right? In some ways, having reduced menu probably reduces some food costs, you get more efficient with what you're managing, etcetera. And some franchisees have seen less prepayment because they're not making as many things that we were doing before. But the takes, the amount of costs for the ongoing sanitizer, gloves, masks, etcetera are probably outweighing that right now. So if you talk to the franchisees, they would probably tell you not enough puts, too many takes right now. I think the key thing Steve said there was, we have a huge top line opportunity coming out of this because we have taught people how to use this for to go and to do off premise. And as Steve said, we can maintain even half of the increase we've gotten on that and get our dining rooms back with full capacity, our sales are up. And that flow through and that leverage is going to lead to higher profits. So there's a big opportunity for us. But if you have to franchisees right now while they're still down 35% in sales, they'll tell you it's not working for them right now. We got to get the top line back. Nothing to add on my end, Brett. And if you think about franchise system just in general, if you could bucket it, like what percentage of the system do you think is healthier versus those that are still extremely or significantly challenged and might need some additional help either handholding or financially? And then what kind of bucket of your franchisees are out there saying, you know what, we are interested in buying more, we are interested in building more, we want to get back to the growth algorithm? Yes. So obviously, there are variances in the health of the franchisees. I will tell you it existed pre virus. And so the virus may have made some situations a little more intense than before that. I will tell you that because all of the franchisees were our bulk vast majority were able to take advantage of the PPP program, that's clearly helped. And then we've got individual franchisees that we're working with, who are going to need some assistance from a short term basis to weather the storm. And we plan on doing that individually with him as opposed to what we've done at when the virus started on a programmatic basis. And so that which is what we've always done by the way. And so our view is franchisees in general are in a pretty good position, but it also depends on the recovery. And so if you're telling me that we're going to get a relatively rapid bounce back this fall and into the end of next year and then end of this year, the next year looks pretty normal, we're in pretty good shape. If the if it's an extended period of recovery, then individual franchisees by franchisees are some of them are going to need some assistance and some of them will end up figuring out what the best long term solution is for those restaurants. So it is a but it is a kind of week by week scenario of look, if you look at our restaurants, we are cash flowing in North and South Carolina. We're not making a lot of money, but we're cash flowing. And so and that's not we've got a lot of franchisees in that position. We also got some franchisees that are in tougher markets that are not doing as well. And California is a great example of with dining rooms closed, nobody's going to make any money. So question is how long does that last and do they have the sufficient funds to withstand that period of time before they reopen and then recover. And then we're going to assist individually with franchisees to help them either figure out long term positioning of their assets or to maintain to sustain into a recovery period. Thank you very much. The last question comes from the line of Mr. Brian Vaccaro from Raymond James. Your line is open, sir. Hi. Thanks for taking my questions. So back to the last one you were just talking about on franchisee health. In the past, I guess, a few years ago, you did a nice job disclosing sort of how many franchisees you were working with, the 9 and the 3 that obviously healed from there. But would you be willing to maybe just frame a little bit more how many franchisees or what percent of units at each brand are operated by franchisees that are on your radar of receiving additional relief or help? Yes. Well, and the reason we're not doing that is because it's very different situation. So the answer is there's a handful that we may or may not begin talking with, but it's nothing like the previous downturn for the Applebee's franchisees. There are obviously, everybody's hurting that everybody's looking for profitability. And so but we don't have a there's not a one of the reasons we're doing a dramatically stepped up cooperative effort with the franchisees is to take a deep look into the sustainability longer term. If this thing runs at this levels through the end of the year and next year starts out slow, that changed the picture dramatically. But we're not there's no major program underway at this point. And Brian, the I guess the other point that I'd make is an obvious one. But the one thing that we're working hard to do is return each business to full revenue as quickly as possible considering market conditions. So Q3 is important. Q3 is going to give us some visibility to that rate of return towards positive sales. Yes. And I think that the 2 you've heard about were problems pre virus. They had nothing to do with the virus. And those both turned out pretty well for us. Yes, yes, understood. Okay. And I guess just to be clear on the status of franchisee release more recently as the business has recovered, Are essentially all franchisees now paying royalties and advertising fees in the case of IHOP rental payments? And if not, what percent of each brand are still receiving some level of deferrals? Hey, Brian. So for all intents and purposes, we're back to kind of a normative rate of collections on both brands. And with respect to IHOP, actually, there were many of our franchisees that you saw the numbers they were struggling. Having said that, one of the conditions of PPP was that the money was used to pay not only employees, but also rent. And so we had a good rate of payment on the rents well after the deferral period. Okay. All right. And then I wanted to ask on the Applebee's side and the fact of some of the operational changes that were made. In terms of streamlining the menu, could you help frame what percent of the items you've removed? And how do you plan to manage adding back items to the menu? And where could that land ultimately compared to the historical menu? Hey, Brian. It's a good question. This is John. The proliferation of a menu in any mature brand is something that has taken place over a couple of decades. So we've taken about onethree directionally of our menu items off the menu. It will stay off that we have focused on items that are in high demand, high velocity, low complexity. And we've removed the third that we've removed represent probably 10% of dollar volume, but we easily move guests to like items. Our franchisees are very enthusiastic about that. And in terms of adding items back, I don't anticipate additional proliferation. We'll be smart and strategic. If we decide to add items, we're going to take other items off. And so that discipline has been in place for a while here. The pandemic has accelerated our movement to a simplified operation, which has guest benefits and financial benefits. Yes, this is Jay. On the IHOP side, we did very similar thing. We cut the menu by a percentage and we intend to leave most of that off as well. We think there'll be some items that may come back and more importantly, we leave ourselves a little bit of space for some new innovation as time goes by, But it's not going to get back to the level that it was. Okay. And then also on the operational side, could you provide more color on the measures that franchisees have taken to expand capacity during COVID, whether it be expanded outdoor seating or adding plastic barriers in the restaurants to optimize booth seating, just kind of frame or quantify how important those factors have been? Hey, Brian, John here. We have 30 partners at Applebee's. They're naturally entrepreneurial. They've been successful. And what we see both and of course, this assumes they are permitted to have outdoor dining, which is its own complexity, but significant creativity around that. And then the whether it's a barrier or a anything that can be introduced inside of a restaurant that allows additional and eliminate and eliminate the need for 6 foot distancing. Those tend to be branded. They tend to be high quality. As Tom referenced, cost, some of that is initial kind of out of pocket one time cost that won't be recurring, but allows these guys to maximize their capacity in the face of constraints. All good. I mean, there's a whole lot of creativity taking place right now on a daily basis. Yes. On the IHOP side, we're doing very similar things. And this is where it's great to be in a franchise system because franchisees are much more entrepreneurial. That is where they are similar to independents. And When their survival is at stake, they find creative ways to solve problems. And they've done some very interesting things. And what we do is when we get the things that they have done locally, oftentimes we'll share those as best practices out to the system. In fact, we do regular town hall calls with of these. We actually had our architect on the call with them on one of our recent calls to walk them through how to execute this if your local municipalities will allow it and what are the steps to do it and what how to make it look and what are the specs to do that. So yes, this has been very, very successful where they've done it. All right. Thank you. I'll pass it along. Thanks, Brent. Thank you. Thank you. So just for the question about sort of the overall industry, there's a National Restaurant Association statement out that says the restaurants have lost more revenues and jobs than any other industry. And they estimate that in June, for the 1st 3 months of the pandemic, it was $120,000,000,000 in lost revenue, which is why we're working with the National Restaurant Association, International Franchise Association, National Retail Federation for more assistance for the industry and our franchisees. And then according to the Restaurant Coalition, the Independent Restaurant Coalition, they were the ones that put out the number that 85% of independent restaurants may go out of business by the end of 2020. So, sobering numbers. However, one person's crisis is another person's opportunity. And our view is we're going to emerge from this thing with a lot of strength and capital, and that's going to put us in a position to resume a significant growth trajectory for the company. And we are excited about seeing that momentum build, and we get a recovery and full opening of all the restaurants and then take the lessons learned and have higher revenues and higher profitability as a result. It looks like a long road to that at this point, but there is a road a vision to get there over time. So with that, I just want to close, say thank you for time. I hope everyone's staying safe and healthy. Visit our restaurants. We do a good job of creating a safe, healthy environment with great food. So thank you again for your time, and we'll look forward to speaking with you next quarter.