All right. Thanks for being here. My name is Brian Mullan. I am the Restaurant and Food Distribution Analyst here at Piper Sandler. We are very pleased to have the team from Dine Brands. We have CEO, John Peyton, and the CFO, Vance Chang. We have also got members from the IR team in the audience. Thank you guys for being here. Just want to start with IHOP. The brand got a new leader in January of 2025.
Right.
With Lawrence Kim, it has been a little over a year and a half. It is 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 standalone brand? I ask that in the context of three really solid quarters of outperformance in a row on Black Box Intelligence traffic. Just would love to hear your big picture thoughts on that standalone, and we will get to the dual brand later.
Got it. IHOP welcomed Lawrence Kim, who came in as president two years ago. He had a long career at Yum! Brands and Taco Bell. We were attracted by his Taco Bell pedigree, as well as strong marketing, digital, social. What you are seeing now, the last couple of quarters of IHOP outperforming Black Box Intelligence and traffic, and most recently in comps is, the fruits of two years of the strategy that he has put in place, along with the team. The key components of that, Brian, are, believe it or not, IHOP never had an everyday value menu. Last year, we went to five days of everyday value. This year, seven days, and that is combo meals for $6. It is the lead of the barbell strategy, and it is driving traffic into the restaurants.
Once you are in the restaurant, we do a really good job of merchandising the higher end, higher margin, more exciting items. Second thing he has done is he has focused on accelerating menu innovation. Things like Dubai Chocolate Pancakes and the stuffed French toast that rolled out Monday are examples of the pipeline getting much stronger. Finally, what he is really good at is digital and social, and we are seeing a big difference there in terms of the way IHOP is playing and appearing in culture on a much more regular basis.
Thank you. As that everyday value platform made that shift from five days to seven days, clearly it is working. Is it fair to say you are happy with what it has 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 is going?
Yeah. Franchisees are on board for a couple of reasons, but one is we have got a very elaborate committee structure where the brand team and the franchisees work together. IHOP or Applebee's cannot and will not put a promotion in place that the franchisees do not agree with in terms of the price point, the margin, and the food item itself. They were on board from the beginning with everyday value. It was a sales process to convince them that the five days would generate the incremental traffic. We proved that. We went to seven days, had to prove that. Then they voted this year to make it permanent. It is a process, but they are on board.
Okay, sticking to IHOP, your most recent earnings call, you discussed off-premise sales. They 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.
Yeah, sure. The answer for IHOP is very similar to Applebee's as well. Just for context, before COVID, off-prem was about 6%, 7%, 8% of sales for both brands. In the five years post-pandemic, it is 22%, 23% and growing. It has been very consistent there in terms of that opportunity. The two brands both became part of the off-prem consideration set in a way they were not before. We had to do a lot to learn how to do that, right? Those 3,000 restaurants were not built to have a quarter of their business going out the side door. There was 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 in 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. Now, your point about catering, it's been double digit QoQ 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. Thank you for that. Then we'll 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 taking-
I know a little bit more now.
Yeah. Right.
Yeah.
Where I was going with that is, what have you learned, what is going well at the brand right now? What are your biggest priorities or the brand's biggest priorities for the standalone brand over, say, the next 12 to 24 months?
Yeah. The biggest opportunity for Applebee's, 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? There are brands that seem to be fading a little bit, like Fridays and Red Lobster, and there are a couple of our competitors that have had a really good couple of years or a really good couple of quarters. Applebee's is posting 1%, 2% comp sales growth, and that is okay, but not good enough. What we are focused on, no surprises because the formula is pretty similar. We have spent the last year and a half 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. You will see those begin to roll out in the first quarter of next year.
We have implemented more new food this year than we have in years because we built up that pipeline. O.M.G. Cheese Burger in the first quarter was an example of that. The second thing that we are focused on is our marketing message, which when I got there two years ago, we did not have even an in-house social media team. Now we have 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 were not even two years ago doing regular social listening. An example of that is a week ago, someone we did not know posted, "I have not eaten at Applebee's in 10 years, and I never would." Normally we would not even know that happened. Our guys found it right away. We sent her an Applebee's gift card.
She went to Applebee's and did a mea culpa and posted that it was great, and she did not realize 2.5 million views. We were missing that this time two years ago. It has been the food, social, and bricks and mortar. The Applebee's restaurants, the last renovation cycle was 2020, beginning of COVID. We excused it because the franchisees and we were not going to invest in that at the time. They are now 14 years behind the last renovation, and we are now two years into a refresh of all the restaurants. The franchisees will complete about a third of the portfolio this year on the way to half next year.
The short answer to your question, coming into it two years ago, focus on the bricks and mortar so that the restaurant buildings themselves look fresh and clean, menu innovation, much more contemporary marketing. 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 their guests, and off-premise accuracy, which is our number one mistake on off-prem, missing items.
Okay. Thank you for that. Then I am 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 it will be a little long-winded, I am sorry, but I promise there is a question here. Maybe just to go through, there is something like 1,500 Applebee's, there is something like 1,800 IHOPs open today. Majority of those are in the U.S., not all of them, the majority. So John, that is the context. Maybe give us the background on the dual brand strategy. How did this originate, the logic and the business case, and where are you with that strategy now today?
There is a bit of a story here. Of our 3,600 restaurants, all but 220 are in the U.S., so we are primarily a U.S. both for both brands. The dual brand, if you have not seen it, is having Applebee's and IHOP in the same restaurant. It is one combined menu that goes from breakfast through late night. If you know diners in the Northeast, it kind of looks like a diner's menu, and subtly cues the two brands going from blue to red as the day parts progress. The staff are cross-trained. The restaurant itself is a beautiful combination of the IHOP blue and the Applebee's red. It is 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 is a day part play, and it is activating the restaurant all day long. When other brands in the past have tried duals, like KFC and things like that, they are competing day parts. What is so compelling about this is Dine Brands just happens to own the premier A.M. and premier P.M. brand. IHOP, since it was invented in 1967, has been trying to address dinner as its most difficult day part. For the IHOP franchisees, this is a solution to dinner that they have been looking for for 60 years.
For Applebee's franchisees, it is the morning day part, which they are closed for, so it is a whole new revenue opportunity they did not have. In terms of making the box more productive 24/7, that is exactly what this does. The first one was overseas in the Middle East, of all places.
I think when you are 6,000 miles from headquarters, you can do whatever you want and then ask permission later. They actually designed and opened half a dozen of them on their own before we were even paying attention in Pasadena, where we are headquartered. I was hearing great things, and there were a couple in Mexico as well. I flew to see them two years ago, came back and said to the team, "This is a really big idea." We opened the first one a year ago April, so it has been about a year and a half, outside San Antonio. Partnership with a franchisee who is really good at developing and building restaurants. In a year and a half, we now have 45 open on the way to 80 will be open by the end of the year.
All but three 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 are an IHOP adding an Applebee's because you have to build out the bar and all the equipment with that. A little bit less if you are an Applebee's adding an IHOP. They are seeing consistent revenue growth of 1.5 to 2.5 times the original revenue. If it was a $2 million IHOP, it becomes a $3 million combo. 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 would ever think of that.
When you look at the tickets, two-thirds of the tickets in the restaurants are items from both sides of the menu. In the morning, we are selling pancakes and ribs, and in the evening, we are selling omelets and skillets. Guests that are experiencing it are actually taking advantage of it. We are giving them something we did not know they wanted. We have a very robust pipeline for next year as well.
Mimosas for the morning, too.
Mimosas and Bloody Marys now available at IHOP via the Applebee's liquor license. Yes.
Very good. Thank you for that. It is very helpful. Then maybe just 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 standalone concept, maybe with a remodel, maybe not. Convert it to a dual brand, or maybe just naturally some restaurants are going to close. As you work with your franchisees across the two brands on these situations, 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 is literally what you just described, right? We know when leases are up, for example, and when we know when franchise agreements are up, as do the franchisees, and those conversations begin one, two years in advance. It is not sudden, typically, it is not sudden. That is the conversation, which is, "Okay, you have 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 is a very high renewal rate. Then it comes down to renovate or convert to a dual. I cannot remember if I mentioned, but we see 900 opportunities for dual brands in the U.S.
Of those 900, 450 are new builds and 450 are conversions, meaning an existing brand adding a second brand. 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. We ran the model saying that we are not going to approve any restaurant that would cannibalize an existing restaurant. If we had, for example, said, "Okay, run it with 5%-10% impact," it would have been 1,600 restaurants instead of 900. Many franchisees do not have the opportunity to convert to a dual. If you are an Applebee's and there is an IHOP 2 miles away, we are not going to approve it, which is why we get to that 900.
You will continue to see the majority get renovated and the minority, this 900, become
Point understood, it is not sudden you have visibility. When you get to this is qualitative, is there a lot of nudging and convincing, or do you feel like you have already got a lot of franchisees where they are aligned, the ones that make sense?
On duals?
Yeah, on duals.
On duals, it's been an interesting process that has not unfolded exactly as we thought it would. Our initial hypothesis when we said we're going to do this is we figured Dine Brands would have to build the first 10 as proof of concept to demonstrate the numbers to get franchisees on board. Then we'd probably have to heavily subsidize and incent the first franchisees to go. Our first one was in partnership with our franchisee in San Antonio, longtime IHOP franchisee that had 30+ 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. 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. Our book of business built right from there. 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. 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 are 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. The answer to your question is, it's not a hard sell generally.
Of course, with 400 franchisees, there are those that are traditionalists and are still in wait-and-see mode, but more than enough are building the pipeline that we've got.
Brian, I would also add that we're in the process of creating FDD for the dual brand next year. Everything John said is based on existing franchisee base. Once the FDD is out, we then can have a sales force and go out and pitch to new franchisees.
We're precluded from doing that.
Yeah.
That might contribute to the 450 of the 900, yeah. Okay. I did not know that. Thank you.
Yeah. Our expectation is that once we have an FDD early next year, by that time we'll have 100 open, 30 or 40 of which will have been open for nine to 12 months, you'll have much better stats to rely on, and we'll bring in fresh franchisees that will probably tackle the open market.
Okay, that is great. More recently, I have heard you discuss fine-tuning the operational model, maybe making the kitchen more efficient. This is to duals still. Could you just elaborate a little bit on what that means, what you are working on? I think you discussed looking at the next generation of the menu. Is this just learnings from what you have and what is going on there?
Yeah. We are calling it, what we launched with to now is 1.0, and now we are working on 2.0 based upon the lessons we learned. We think we got it 80% right out of the gate. The biggest learnings we have is that IHOP franchisees need more help in running a bar. We have been sending our teams in, coaching them real-time, and we have to think about the training. They looked at it as another cost center and did not think about it as much in terms of what is the role of a bartender and in terms of building a culture and welcoming in regulars and helping servers learn how to sell drinks and all of that. On the Applebee's side, no matter how much we warned them, it was hard for them to anticipate what happens at an IHOP on Saturday and Sunday morning.
The volume of work there is a surprise to them. What is surprising about it is everything at IHOP is scratch. It is all real eggs. There is nothing formula there. With breakfast, as you all know, it is all scratch and almost everything is custom. Everybody does something to their eggs differently than how it is listed on the menu or their pancakes. That was a whole new way of working for the IHOP kitchen staff, I mean, the Applebee's kitchen staff. It is things like that we are going back at to strengthen the training based upon what we now know is hard.
We have also seen some insights around you need a little bit reconfiguration of some of the equipment in the kitchen, where is the flat top relative to the fryer, based upon the different ways the menus are mixed, and that is all sort of just tweaks going forward.
Okay, thank you. Moving away from the dual, just back to the standalone brands. It seems like corporate has an option here sometimes. Dine Brands now owns 118 Applebee's units, I think that's the right number, on the balance sheet. That's grown a little bit over the last year or two. Just understanding that you want to refranchise those over the long term, which you've said. As you look in the near to medium term, do you anticipate maybe taking more restaurants on the balance sheet before you're able to refranchise that? Are there still situations where that might make sense for you?
Brian, John has mentioned that we are comfortable with up to about 5% of the portfolio being company-owned restaurants. There are strategic reasons why it's good for us to have these restaurants play offense and defense at the same time. Having said that's not the goal. We're just saying we're comfortable up to that point. Even with our existing restaurants, we're early in the process of turning them around. Even in our current state, there is already demand for the restaurants already. What I foresee, meaning franchisees have contacted us, from the franchisees. What I foresee is this portfolio not really being static. What's likely to happen is we're going to refranchise a bunch of them. We may take on some more and then back and forth. It'll be some inflow and outflow of the portfolio.
But the long-term objective is to improve the physical infrastructure of these restaurants and turn around the operations and prove out the remodeling case study, prove out the dual brand case study to the franchisees. Plus, we build credibility with the franchisees as well. We get a lot of street cred from the franchisee communities because we know their pain, we understand what they're going through.
Understood, skin in the game, and keep company ownership at or around 5% as it recycles.
That's right.
Yeah. Okay. Vance, capital allocation b oard recently authorized another 100, well, it was in May, but another $100 million of share repurchases. I think you've repurchased indeed a sizable chunk of shares on a year-to-date basis. As you move forward, how do you evaluate the opportunity to continue to repurchase shares? What kind of leverage target ratio should investors be mindful of in that context as you sit here today?
Our leverage level is sitting a little bit above 5x right now, and it's because we're really excited about the investment opportunities, not just within the company, but also with our stock. So we've been deploying capital towards CapEx, company restaurants, dual brand initiatives, remodeling incentives, as well as buyback of our stock. So as long as there's returns there, I think we're going to keep the current strategy, the playbook at play, while protecting our balance sheet. You asked the question, what's our long-term leverage level target? What we've said in the past is, it should be in the mid-fours. We've been at this current leverage level before, and we've worked it down subsequently. So we're going to do that again here.
It's going to be done through growth of EBITDA based on turning around company restaurants, based on dual brands start contributing to our bottom line, and we're going to see that soon.
Do you want to talk about the unique nature of our debt.
That's a really good point. A lot of investors, especially if you're new, you don't understand sort of the securitization capital structure that we have, which is very shareholder-friendly, and it's very flexible. It's covenant light. It's not like bank debt or the traditional corporate bond market, and high yield. We have access to investment-grade cost of capital, again, like I said, covenant light, and our debt service, DSCR, which is the only really leveraged covenant that we would lose sleep over. We have over 70% cushion in terms of where the covenant requires and where we're sitting at.
It's less about leverage, it's more about DSCR, and we're comfortably over that, and our bonds are trading at par, above par. The market is comfortable with our credit quality.
Okay. Very good. We are actually up on time. That went quick. Thank you guys both for being here.
Thank you.
Appreciate it.
Appreciate it.