Good day and thank you for standing by. Welcome to the Third Quarter Dine Brands Global Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised today’s conference is being recorded.

[Operator Instructions] I would now like to hand the conference over to your speaker today Executive Director of Investor Relations, Ken Diptee. Please go ahead..

Thank you. Good morning and welcome to Dine Brands third quarter 2021 conference call. I'm joined by John Peyton, CEO; Vance Chang, CFO; Jay Johns, President of IHOP; and John Cywinski, President of Applebee's. Before I turn the call over to John, please remember our Safe Harbor regarding forward-looking information.

During the call, management may discuss information that is forward-looking and involves known and unknown risks, uncertainties and other factors, which may cause the actual results to be different than those expressed or implied.

Please evaluate the forward-looking information in the context of these factors, which are detailed in today's press release and 10-Q filings. 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 our website. With that, I'll turn the call over to John..

there our planet, our people our food and our governance. And for us our business and our social responsibilities are inextricably linked. And while I'm encouraged by the progress we've made, we've got a lot more to do to meet our goals, to deepen our impact and innovate our systems.

And with that I'll turn it over to Vance to discuss our financial performance..

Thank you, John and good morning, everyone. I'll start with a review of our operating results. Franchise revenues for the third quarter were $161.1 million compared to $121.8 million for the same quarter of 2020. Excluding advertising revenue, franchise revenues increased 30% primarily driven by higher domestic franchise restaurant same-store sales.

Turning to the company restaurant segment. Sales for the third quarter were $35.3 million compared to $27.4 million for the third quarter of 2020 improvement of 29%. The improvement was mainly due to an increase in customer traffic.

Rental segment revenues for the third quarter of 2021 was $31.3 million compared to $26.2 million for the same quarter of 2020, an increase of $5.1 million. This included an increase in percent rental income based on franchisees' retail sales and a decline in level rent adjustments.

Adjusted EPS for the third quarter of 2021 was $1.55 compared to adjusted EPS of $0.80 for the same quarter of 2020. The increase was primarily due to higher gross profit partially offset by higher G&A expenses. Now regarding G&A. G&A for the third quarter of 2021 was $43.7 million compared to $36.9 million for the third quarter of 2020.

The increase was primarily due to higher personnel costs associated with our incentive compensation accrual, which will fluctuate based on company's performance. Regarding our GAAP effective tax rate. Our effective tax rate for the third quarter of 2021 was 24.9% expense compared to a 9.4% benefit for the same period of last year.

Our effective tax rate for the third quarter of 2021 varied from the rate for the same period of last year primarily due to the onetime recognition of income tax benefits from the release of unrecognized tax benefits in the third quarter of 2020. I'll now provide highlights from the cash flow statement.

Our highly franchised model generated adjusted free cash flow of $146.1 million for the first nine months of 2021 compared to $35.6 million for the same period of last year. Cash from operations for the first nine months of 2021 was $145.6 million compared to $36.7 million for the comparable period of 2020.

The improvement in both was primarily due to a favorable change in working capital and improvement in gross profit partially offset by an increase in G&A expenses and the recognition of excess tax benefits on stock-based comp.

As of September 30 almost all of the $62 million in royalty advertising fees and rent payment deferrals that Dine Brands provided to 223 franchisees has been repaid. Repayment of deferred amounts started in the third quarter of 2020.

The collection of these balances during the first nine months of the year had a favorable impact on cash from operations for the first nine months of 2021. A few comments on our balance sheet and capital structure. The continued improvement in our business has helped us maintain our strong cash position and financial flexibility.

We ended the third quarter with a total unrestricted cash of $304.2 million. This compares to unrestricted cash of $259.5 million at the end of the second quarter.

Our leverage ratio as of September 30 was 4.36 times compared to 4.94 times as of June 30 with our leverage ratio well below 5.25 times and the quarterly principal payments on the company's senior secured notes are no longer required. Our debt service coverage ratio also improved to 4.8 times as of September 30 from 4.6 times as of June 30.

Turning to the outlook for commodity inflation and labor challenges. We're seeing its effects on the cost of pork, eggs, poultry, paper and packaging products. And based on current conditions we now expect commodity inflation in the range of approximately 6% on average across both brands for 2021.

This compares to our previous expectation for inflation of approximately 4% to 5% for the year. Increases in commodity and labor costs at our franchisee-owned restaurants could impact us if our franchisees are faced with a sustained decline in the operating margins. At company-owned restaurants, these costs impact us directly.

As of Q3 2021, we owned and operated 69 Applebee restaurants, representing 2% of the 3439 restaurants in our system. Now, I'll briefly discuss our 2021 financial performance guidance. Our guidance for G&A and capital expenditures remain unchanged. We reiterate expectations for G&A to range between approximately $168 million to $178 million.

We expect G&A to be near the high end of the range with Q4 being in the quarter reflecting previously discussed deferred G&A costs including professional services and travel expenses and continued incentive compensation accruals based on company performance.

We also reiterate expectations for capital expenditures to be approximately $19 million inclusive of approximately $7 million related to the company restaurant segment. Given the strong recovery in our business, we now have better visibility to provide additional guidance. Please see our press release issued this morning for complete details.

We're introducing guidance on one additional metric adjusted EBITDA. Consolidated adjusted EBITDA for the year is expected to range between approximately $245 million and $250 million, demonstrating the continued strong recovery from 2020 that we have been experiencing in the last few quarters. Moving to capital allocation.

As John discussed earlier, we have seen several quarters of improvement in performance which has positioned us to declare a quarterly cash dividend of $0.40 per share for the fourth quarter.

Our capital allocation priorities are to maintain an attractive dividend yield while concurrently making additional CapEx and G&A investments in the business to support long-term growth. We also intend to opportunistically repurchase our shares. Our level of repurchases will primarily be based on our analysis of the company's intrinsic value.

At the end of the third quarter, there was $70.2 million remaining on our current repurchase authorization. We believe our strategic priorities will continue to drive additional shareholder value.

To close, we're very encouraged by our strong results this year through the third quarter, including the improvement in our comp sales, our robust off-premise business, and significant generation of adjusted free cash flow. Now, I'll turn the call over to John Cywinski, who will provide an update on the progress at Applebee's.

John?.

Thank you, Vance and good morning everyone. I'm really proud of our team and our franchise partners as they delivered another exceptional quarter for the Applebee's brand. After posting a 10.5% comp sales increase in Q2, Applebee's delivered a 12.5% increase in Q3 when compared with our 2019 baseline.

This marks Applebee's best quarterly comp sales performance under Dine Brands ownership highlighted by sequential improvement throughout the quarter. Additionally, our Q3 year-to-date comp sales increase of 5.3% has surpassed our record-setting 2018 performance.

I'm also pleased to report that our company restaurant portfolio is now our number four ranking comp sales performer throughout the system. To put all this in proper perspective, according to Black Box Intelligence, Applebee's has now outperformed the casual dining category for 35 consecutive weeks by an average margin of more than 600 basis points.

I attribute our sustained success to three primary factors; superior restaurant level execution, breakthrough marketing innovation, and our genuinely relevant brand positioning. Applebee's is that affordable little escape from your every day.

In a turbulent world where that's familiar and comfortable place right around the corner where you can simply come as you are. In many respects, we're kind of like a good friend which clearly resonates with America in this environment.

Most importantly, America trust Applebee's, we consistently see this in our data, and it's certainly evident in these unprecedented results.

This momentum is also reflected in our brand attributes where Applebee's continues to rank number one with within casual dining on brand awareness, affordability, menu variety, convenience to go and deliver awareness, and advertising awareness.

In addition, Applebee's continues to outperform the category average on key metrics such as overall experience, staff makes me feel valued, family-friendly, great-tasting food brand, affinity, and importantly, visit intent. As I break down the quarter, weekly restaurant sales averaged $51,000.

In fact, March through September sales have been remarkably consistent with each month delivering record high volumes under Dine ownership. Applebee's Q3 sales mix consisted of 73% dine-in, 15% Dine in 15% car side to-go and 12% delivery.

Of particular note, is the fact that our weekly off-premise volume continues to hold very steady at about $14,000 per restaurant. The off-premise volume is more than double our pre-pandemic level and supported by ongoing technology investments in our call center I-arrived notification.

And new kitchen printers which significantly assist team members with order accuracy, while reassuring our guests that we have it right. I should also note that dining room volumes continue to escalate as they are now approximately 90% of pre-pandemic levels, reflecting guest demand for dining out again.

Our dine-in business is also bolstered by relevant investments in QR code menus, Pay & Go mobile payment and handheld server tablets making it easier for our guests and our team members as we expand these initiatives in 2022. Additionally, one of the interesting insights from my perspective throughout the pandemic is the shift in our age demographic.

Dine-in guests have become even younger, while not surprisingly our boomer guests have shifted their behavior to more off-premise dining. At present about 51% of Applebee's guests are under the age of 35 with millennials being our largest segment at 33%.

Looking forward to next year, we still have meaningful headroom with our late-night weekend business which remains a bit constrained due to labor challenges after midnight in about 500 restaurants. I fully expect this current late-night headwind to become a meaningful opportunity and a very leverageable tailwind in 2022.

As I stated previously, having a sophisticated supply chain is a huge point of difference in this environment. Our supply chain organization is indeed best-in-class and a real difference maker in navigating the current challenges facing the industry.

Bottom-line those with scale and strong supply chains will likely prosper moving forward, while others struggle to compete. This is more evident today than ever before. And one of the reasons I absolutely love Dine's position in the market.

Now, a big part of our Q3 success was the innovation behind Disney's Jungle Cruise, Dwayne Johnson's, Teramont a tequila, and with today show dubbed the song of the summer Fancy Like which has since become known as the Applebee's song.

It's rare that an artist writes a song about your brand and its relevance in everyday life, but that's precisely what happened this summer as Walker Hays showcased date-night and Applebee's. And it connected with America like nothing I've seen before. After 18 months of lockdowns our objective was simple. Make America smile.

So we partnered with Walker, created a couple of ads future real folks across the country letting loose and having some fun. And as they say the rest is history. It's a lucky strike extra that Walker Hays and his family have always been loyal, Applebee's guests. That's a fact.

And I honestly can't think of a better embodiment of who we are and what we stand for as a brand than the lyrics to the song. For a little context on the media front, Q3 included a favorable spending comparison versus Q3 of 2019. And I expect a favorable comparison in Q4 as well to close out the year.

Needless to say, because of sales performance and collections we are well positioned heading into next year from a national media perspective. As John referenced on the development front, 2021 represents the conclusion of our planned portfolio optimization.

Looking forward we plan to close less than 1% of our restaurants in 2022, while returning Applebee's to net new unit growth in 2023 with annual acceleration thereafter. In closing, Applebee's business momentum is steady and strong and our fundamentals remain rock solid.

Franchisee financial health confidence and optimism in our future are equally strong even in the face of labor and supply challenges. Bottom-line Applebee's is exceedingly well positioned to thrive in this environment and we very much look forward to 2022. With that, I'll turn to my partner Jay for an overview of the IHOP business..

Thanks John and congratulations on the impressive results again this quarter. Good morning everyone. IHOP's business continued to improve. Third quarter comp sales were essentially flat relative to the same quarter of 2019. This reflects a sequential improvement of three percentage points compared to the previous quarter.

Our strong results led to IHOP outperforming the family dining category for the second consecutive quarter according to Black Box. I'm excited to report that domestic average weekly sales – unit sales are back above our pre-pandemic levels for the first time this year.

Average weekly sales for the third quarter were slightly above $36,000 per week, exceeding the average for the same quarter of 2019.

Approximately 83% of our domestic restaurants are open for standard operating hours or greater and approximately 27% are operating 24/7, which trails pre-pandemic levels of approximately 45% that were operating 24/7 previously. We believe that additional upside as more restaurants resume standard operating hours as well as overnight.

For the third quarter, off-premise sales accounted for 23% of sales mix, which is more than double the mix for the third quarter of 2019 and reflects significant retention compared to the same quarter of 2020, when restricted in capacity stricter indoor capacity restrictions and governmental mandates related to COVID-19 were in effect.

We believe we can retain most of our off-premise dollar volume and we're confident that our strong off-premise business will be complemented by the demand for in-restaurant dining. For the third quarter, our sales mix consisted of 76.7% dine-in, 13.1% delivery and 10.2% to go.

To build on our achievements and remain the leader in family dining, we're going to continue to focus on what we can control. This framework includes a new approach to marketing, launching a loyalty program, development and virtual brands. I'll briefly touch on each of these starting with marketing.

Consumers are generally more tech savvy now than ever before. We believe the shift in our media strategy to place a greater emphasis on digital marketing will greatly leverage our guest connection IHOP and drive incremental visitation. This brings me to our engaging loyalty program.

According to a study by Datassential, nearly 50% of those surveyed said that loyalty incentives are critical when choosing a brand. We're focused on leveraging our investments in CRM and consumer-facing technology, doubling down on our commitment to modernize our guest relationships and importantly, drive incremental visits.

We're optimistic about our very creative and fun loyalty program which we plan to launch over the next few months. Regarding development, since early 2020, consumers' dining behaviors have changed significantly. As a result, IAB has been able to quickly pivot and adapt, simply put.

We're focused on meeting guests in the channels that they frequent and trust either in our restaurants or off-premise. Our guests want to access the brand in ways that are most convenient for them.

We believe that flipped by IHOP our new innovative fast casual concept that leverages IHOP equities and brand affinity will meet the evolving needs of guests. I'm happy to report that our first slip by IHOP opened on September 21 in Lawrence Kansas.

And while it's too early to share any of the results we look forward to providing more information in the months ahead. We expect to open our second location in New York City in the very near future.

We've expanded our pilot strategy for Flip, which was originally focused on locations only in large metropolitan cities to now include suburban areas and nontraditional venues as well.

We're laser-focused on doubling our historic unit growth and believe that Flip will nicely complement our three other development vehicles, which include our traditional formats, nontraditional and a new small prototype scheduled to test later this year.

Importantly, all of these formats can be done in conversions, which we believe amplifies the opportunity. Due to the impact of the pandemic, there are more potential sites to develop in areas we may not have had prior. Turning now to virtual brands. We see a lot of potential and flexibility with virtual.

We continue to see this as a huge industry trend with the opportunity to drive incremental sales in a cost-effective manner, especially at non-peak hours like PM. We'll have more details as our progress continues on testing. Changing gears to technology innovation at IHOP.

It's imperative that we reach our guests on their terms and with approximately 56% of IHOP's guest being aged 34 or younger, technology is a key factor in becoming and staying more relevant.

Today's guests expect us to offer services that make their lives easier, such as the ability to pay with their own phones and IHOP being available on all the major delivery search providers platforms. We've invested in innovation to enhance the guest experience, whether they're in our restaurants, off-premise and across all day parts.

One of our biggest opportunities has become more relevant for more occasions. Great food and menu innovation are permanent staples at IHOP. We're known for providing freshly served, high-quality food, while also allowing guests the option to customize the orders, particularly breakfast items.

With that, I'm very pleased to report that our breakfast daypart comp sales for the third quarter increased 8% relative to the same period of 2019. This is a testament to the execution of our strategy. We focused on providing abundant value and variety while also increasing IHOP's appeal across other dayparts besides breakfast.

This brings me to providing guests with great value. Understandably value plays an increasingly major role in dining decisions in part because many consumers still remain under financial pressure due to pandemic. We have research that shows that our guests equate value with affordability.

A great example of this is our IHOP Hour menu, which was introduced in September 2020 This IHOP’s first ever afternoon and evening focus value-oriented menu. I'm pleased to say it's been well received and generated incremental traffic for our franchisees.

Last September marked the one-year anniversary of IHOP Hour, which continues to drive incremental traffic generating approximately eight percentage point lift in traffic and sales during the available hours. This actually equates to a low to mid-single-digit increase in overall sales.

Lastly, in conjunction with our Halloween panc expansion, we announced that Reon was the winner of our third annual kids chef contest, which is coordinated with Children's Miracle Network Hospital. The event was a huge success and supports a great cause. To close we have several reasons to be optimistic. Off-premise sales dollar volume remains robust.

We outperformed the family dining category according to Black Box for the second consecutive quarter. We're focused on strong unit growth. And overall we've made great progress this year and I'm looking forward to returning to positive comp sales. And now I'll turn the call back over to John Peyton, for his closing comments..

Thanks, Jay and congratulations to kid Chef, Ryan. We're super proud of him and thanks John and thanks Vance, and to your entire team for all the hard work and delivering on our solid quarter. The road recovery from the pandemic has certainly been a winding one for all of us. And despite the twist and turns, we at Dine know where we're going.

We're focused on both the here and now of supporting our franchisees and giving guests the experiences they know and love. And we're also focused on the long-term plans and actions that we need to undertake to accelerate our growth.

Most importantly, we never lose sight of the fact that the key to hospitality is those very special intimate human connections between our guests, and our team members however and wherever those connections occur. And with that we're looking forward to taking your questions..

[Operator Instructions] Our first question comes from the line of Brian Mullan with Deutsche Bank. Your line is now open.

Thank you. Congrats on good quarter. John in the prepared remarks, you referenced you recently hired a VP of Development at IHOP.

Can you maybe remind us is this a new position at in, or is this replacing someone was at IHOP when you joined? And then related can you just talk about your expectations for the position, what the person brings to the table just highlight any -- a few things you'd like to see him help change moving forward? I know you want to double the historical unit growth pace by 2023.

Any tangible action items you could highlight for us?.

Sure, Brian. Thanks for the question. I mentioned we hired three Vice President of Development. So I'll specify on all 3. The VP of development at Applebee's is a new position. It was a shared position in the past, person and multiple responsibilities. We're now devoting one senior role only to development. The same is true for international.

We've had an international leader of the business that was responsible for both development and operations. Now we've added in a senior leader who is only responsible for development. And at IHOP to your point it was a replacement of a leader who we had.

And our hopes and expectations for Jake and for all of our VPs is to take is to bring a strategic approach to the way in which we develop our restaurants, and the way in which we work with our franchisees.

And when I say strategic I think that we can be much more assertive as an organization and bringing opportunities to our franchisees and doing extensive analysis of the markets to demonstrate the potential for new restaurants and that we can move from being order takers, to bringing the market and the opportunities to our franchisees.

That's my expectation not only of Jake, but of our other two development leaders as well..

Yes. This is Jay Johns at IHOP. As John had said, it is a replacement position. And we really want to become more strategic with our development. It's not just about hitting certain numbers. It's about how we're doing the market planning to add additional restaurants to the markets we're already in.

How do we start in territories maybe we haven't been in before. This is where some of our new vehicles may come into play, you think about flipped, the smaller prototype. This starts to open up some other territories that we may not have gone to before. So we needed some new thinking, some fresh thinking and that's where we're going with that..

Okay. Thank you. And then a follow-up on IHOP, Jay you mentioned, I think, 27% of the locations are now 24/7. I think you said it was 45% prior to the pandemic.

My question is, do you anticipate that going all the way back to where it was? And is staffing the only issue here, or are there perhaps other considerations for franchisees? Are there some franchisees who maybe don't want to, for whatever their reasons may be? Any color would be great. Thanks..

Thanks, Brian. I think that it's a combination of a few factors.

So, obviously, staffing is part of, just the economics part of it as well, right? When the pandemic happened, people were trying to cut costs, they're trying to make things easier to execute, because you have less staff, that's also important that things are easier to do and they tighten down on what hours they were operating.

I think we've seen it slowly coming back. But it's not going to all come back at once. This is going to be location by location and franchisee by franchisee. As they get staffed, as they see the ability to get back open more hours you'll see that. And I think, we'll -- what typically would happen, no different than sometimes in a new restaurant opening.

That's almost what this has been like. The franchisees have had almost reopen their restaurants from doing to go an off-premise only to now you get the dining room open.

The next stage will be how do you get to usually, what we call, 24/2 which is stay open 24 hours on just Friday and Saturday night where the busiest opportunity is and then you expand from there. So I think we'll get back a lot closer to where we were. I just can't give you a time line on when that's going to be.

But it will continue week by week and month by month as we move, until we get back much closer to where we were in the past..

Thank you..

Our next question comes from the line of Jake Bartlett with Truist Securities. Your line is now open..

Great. Thanks for taking the questions. My first was on the comment, on Applebee's and I'm not sure if I got it right, but I think you mentioned quarter-to-date same-store sales were 5.3%. Maybe if you can just confirm the comments on the fourth quarter to date sales level. And if that's right, what would have driven the deceleration.

We saw pretty consistent monthly improvement throughout the third quarter. So maybe just some comments there. And then also, on the IHOP side, anything you share on the quarter-to-date would be helpful..

Hey, Jake. Good morning. This is John. The year-to-date through Q3 comp sales figure for Applebee's plus 5.3%, within the quarter 12.5% increase versus 2019. Those are both versus 2019 and sequential improvement throughout.

We love the trajectory and the momentum and it's what we expected and is obviously creating a very healthy environment for our franchise partners..

Yes. This is Jay. On the IHOP side, again, we've been making improvements throughout the year and getting very close to flat this past quarter. We're still down a little over 8% for the total year. First quarter was still pretty tough for us.

But we've been making progress ever since and we'd look for that to continue to improve, the staffing improves, et cetera. But we're not sharing anything about fourth quarter right now..

Got it, got it. And just as I look -- this is on the Applebee's side. As I look at the cadence struck in the quarter, there was an improvement, as I mentioned, as you guys mentioned, which is different than other concepts have seen. So trying to understand what drove that? You mentioned the summer marketing kind of viral hit there.

Any reason to think that that wouldn't continue to accelerate, just given your marketing plan, or was there something unusual in the quarter from a marketing perspective that maybe shouldn't be replicated?.

Jake, the progression was solid from the low 12% range to the high 12% range. As I mentioned, remarkably consistent since March, all-time highs under Dine ownership. It's fundamentally restaurant execution and innovation, not just marketing innovation, culinary innovation, technology innovation, advertising, media you name it.

The team is locked in in partnership with their franchisees. And we have visibility to a 2022 plan and it quite frankly fires us up. So I'm not going to speculate on a future look. But suffice it to say the brand has probably a tighter partnership and a more optimistic partnership with its franchisees than I've seen in my five-year tenure..

Great. And then last question is just on really getting down to a franchise profitability and some of the drivers there. You mentioned your 6% commodity inflation for the year.

Could you remind us what that would and what inflation was for the third quarter what that implies for the fourth? And then given I assume that the accelerating pressure, what are franchisees doing to offset that? How much pricing might they be taking, how is there.

Do you have a sense as to whether your profitability is taking a hit here or there's offset such as less discounting or pricing or what have you?.

Thanks for the question, Jake. So look on inflation, generally speaking, I'd say it takes about 2 to 2.5 points of menu pricing to cover 10% of commodity inflation for our franchisees. We do provide pricing elasticity tools to our franchisee partners to help them with pricing decisions.

And depending on the franchisee, they've been tracking anywhere between 1%, 2%, 3% of menu pricing increase per year in the past two years to cover inflation..

Yeah. And Jake, this is John. On the Applebee's side, I would say, if you look generally speaking full year 2021 versus a year ago, 6% bump in commodity costs, our franchisees continue and they're independent operators. So they take independent actions. They tend to be highly strategic and measured in how they apply pricing.

And if I look at 2021 versus 2020 as an example, the average price increase throughout Applebee's from our franchisees would be about 3%. And historically, as Vance referenced, typically between 1% and 2% on an annual basis..

Got it. Thank you very much. Appreciate it..

Our next question comes from the line of Brian Vaccaro with Raymond James. Your line is now open..

Thanks, and good morning. I wanted to start out on the Applebee's advertising and obviously you saw some huge successes this quarter. But John, can you help also just frame how much the spend was up say versus Q3 2019.

And just ballpark your expectations on where spend levels might shake out moving through 2022? I imagine Q1 2022 will be up a lot versus Q1 of 2021 because you didn't spend much this year. But just any context on -- you can provide on the year overall would be appreciated..

Hey, Brian. Yeah, good question. I probably won't quantify for you to the extent, you'd like me to. Recall in Q1 we pulled back on spending in 2021. So naturally, the full year is kind of backloaded Q2, Q3 and Q4 elevated versus -- actually not so much Q2, but certainly Q3 and Q4 elevated versus that 2019 baseline.

And then on a full year basis, a pretty comparable media allocation. Again, we pulled back in Q1. We're well positioned in the balance of the year. And then as I look forward for the reasons, I've referenced, I anticipate the brand being in in really great shape as we move into 2022 from a media perspective. I like our position..

All right. That's helpful. And I guess shifting gears a little bit just a little context on staffing levels at each brand. Maybe you could provide some perspective on where average levels are. But also help us with the pockets of tightness maybe what percent of units might still be meaningfully below 2019 levels, however you might define that.

And are you -- is it possible to frame kind of a comp drag you might be seeing at either brand due to staffing challenges?.

Hey, Brian. This is Jay Jonas. I'll start with IHOP and then turn it over to John. The franchisees they're still having staffing issues. And there's probably several hundred restaurants that are more impacted than others. And you can see that in some -- they still have some reduced hours of operations. And most of that is because of staffing level.

So once they can get enough staff they fully intend to get back to regular operating hours. And that is causing a little bit of a drag on our business. You think about earlier, we were talking about the overnight hours where I'm still missing almost half of my overnight hours.

So we're probably impacted by a couple of percentage points just on reduction of hours compared to 2019, and that is staffing related. They're making progress and we get more restaurants and open a few more hours weekly. But again, it's somewhat of a slow process right now, and it's very fluid.

You get ahead and the next week, you're back behind is another restaurant across the street is also short staffed. It's a competitive – very competitive world out there, and people will move quickly for an extra $1 an hour in this marketplace. So it's going to take a little more time before this gets back.

But right now, I would say that, our restaurants are probably in the 85% staff range..

And I would say, Brian on the Applebee's side very similar. Where we feel it most quite naturally as you'd expect, would be on the Friday. On Friday and Saturday nights late night, I think 11 o’clock, 12 o’clock even into the 1 A.M. hours parts of the weekend to staff it's coming back.

And I would argue that brands with – it's not just trust from a guest perspective brands who have a clear reputation in the market, and are trusted by team members. And franchisees who have very strong culture, and I would say, our 30 partners have exceptional culture. They're sophisticated. They know how to recruit and retain with the best of them.

But I'd be lying to suggest, we're 100% staffed we're not at the moment. Weekend late night is where we feel it. It's getting better, but it remains a priority and a challenge throughout the industry..

Okay. And then more broadly just on the labor environment. Are you hearing in kind of the recent conditions, are you hearing from your franchisees that they're starting to see any green shoots of improvement as delta concerns seem to be easing are you seeing application flow increase, or maybe turnover declining? Any color on those dynamics..

I wouldn't – this is John. I wouldn't quantify anything, Brian. The marketplace is improving generally speaking. And in those late night hours is where we specifically see the challenge. And one would have to imagine that, each and every brand in this industry approaches this challenge differently. I do love the fact that, we have a strong culture.

We have an aspirational brand, and we have sophisticated franchisees, who know how to navigate. So I believe we are very well positioned on this front, relative to others in the category..

Okay. And then just one quick clarification if I could, just on the franchisee profitability comment you made at Applebee's, is it right that the strong sales leverage you're seeing versus 2019 and some of the ops improvements I think you rolled out as well.

Is it right that that's sufficient to offset sort of the near-term COGS and labor pressures we're all aware of.

We're store margins and profitability can sustain solidly above 2019 levels in your view moving through next year?.

Yeah, Brian cash is flowing well. And certainly, revenue is a big part of that. We're working both sides of the equation.

Revenue growth puts our franchisees in a terrific position, but we're all also work on the cost side productivity, throughput, efficiency, technology, taking steps to reduce cost, you've heard us reference in the past some PwC work that we've done, historically in Applebee's that has removed 200 basis points of cost from the P&L, we very much took a hiatus on that initiative.

Over the past 18 months, we will be activating that again in 2022, which represents meaningful opportunities. So yeah, revenue would be the biggest lever there. And as a result, they're in very good shape..

All right. I’ll pass it along. Thank you..

Thanks, Brian..

Our next question comes from the line of Eric Gonzalez from KeyBanc Capital Markets. Your line is now open..

Hey. Thanks. And great results this quarter. Just wondering if I could ask about the recently announced capital allocation strategy. The payout ratio is maybe towards the lower end of what one might expect from a highly franchised business.

Should we think about that as a starting point, or is that 25% or so payout ratio likely to be maintained over the next few quarters? And maybe you can give us a little more color on how we should think about the share repurchase -- the level of share repurchases we should think about as we model going forward. Thanks..

Thanks for the question Eric. So as you know we've added a really strong track record of returning capital to our shareholders and that will remain one of our top priorities. For dividends, we think that the $0.40 quarterly dividend represents a healthy dividend yield and payout ratio as a starting point to grow from as you pointed out.

Going forward, we will continue to evaluate and balance our capital allocation strategy focusing on the things that John talked about earlier, which is investments in business and technology and other growth initiatives, returning capital to shareholders, debt management, and more importantly maintaining financial flexibility to address any remaining uncertainty from the pandemic.

Now on the buybacks, our goal is to support the stock opportunistically with ROI in line, right, based on our view of the intrinsic value of dine and we'll do that with our 10b5-1 plan and will be other consistently supporting our stock..

Yes, Eric, it's John Peyton. I would add that the key word is our approach here is to be prudent. And I said to you the last couple of quarters when we got comfortable that we've had some sequential quarters of predictable and sustainable performance, we would return to the dividend and that's what we did.

And now we want to see another couple of quarters of predictable and sustainable growth, as we think we're on the other side of the pandemic and that will enable us to look at the dividend and potentially increase it over time. But we think it's best to be prudent right now given this point of time..

Understood. And the -- earlier in the call, I think maybe as Jake who asked about the inflation -- or implied inflation for the fourth quarter.

So, maybe if you can comment on that? And maybe an early outlook on what you think inflation might be into next year, including any comments on hedging or contracts that you have outstanding?.

Based on what we can see second half inflation is about 10%. And I talked about it earlier just generally speaking, it takes about two to 2.5 points of menu pricing increase to cover a 10% hit on commodity inflation pricing.

So John and Jay both talked about the fact that in the past year or two our franchisees have been taking anywhere between 1% to 3% of pricing increase per year, so that's covered what we've seen so far..

And the second part of your question about next year we're going to wait until next quarter Eric, when we do our guidance for 2022 to talk about costs and all of our guidance as part of one conversation..

Great. Thanks. I’ll pass it on..

Our next question comes from the line of Brett Levy with MKM Partners. Your line is now open..

Great. Thanks for taking my call.

On the development side, when you think about your approach, how are you thinking in terms of new versus existing? Are you thinking about anything in terms of with your capital allocation maybe buying in franchisees to drive some consolidation? And how are you thinking about company ownership?.

Brett, I'll speak on the Applebee's front since we're kind of newest to the game. As you know we've spent the better part of the past four years optimizing the brand, pruning up the system, we closed about 300 underperforming low-volume restaurants. So we're ready for growth. We plan to close fewer than 1% of our portfolio next year.

We've lined up a number of franchise partners and plan to build 15-plus new restaurants in the near term as soon as we can activate those sites with our new development partner [indiscernible], as John referenced. And some of those will be traditional, some of those will be conversions. There's a high level of enthusiasm there.

And then I do expect that to accelerate moving forward for the Applebee's brand, which is refreshing. We've been building to this in setting the system up for this new level of growth in this very modest closure rate for quite a while, pandemic got in the way of us activating it. But we're ready now and we're moving forward beginning next year..

Brett, this is Jay at IHOP. Obviously, we've been doing development quite some time. And as I just referenced earlier, we're going to try to be more strategic about this and how we develop markets how do we -- we have franchisees that already have multistory development agreements. So obviously there'll be some of that.

There's territories where there are no development agreements at this point. So that's a possibility in those areas. We have a lot of existing franchisees that we believe we'll like to get into the development game post pandemic especially if the economics are right to do that. And the amount of conversion opportunities that are out here.

Obviously the economics are very good on conversions. And we've been seeing about half of the pipeline over the last year or so has been conversion opportunities. We've got about 600 restaurants in our system now that are conversions. So we're very good at doing this. We've got a lot of experience doing it.

And then we've got our new platform I've been talking about with Flip and our small prototype. And I think that's going to open up more territory still. And I think in some markets there's a lot of opportunity to bring in some new franchisees as well into the system besides the ones that we already have..

And Brett, it's John Pete. Just wanted to address two of the questions that you asked as well, which is you asked about our own funding and if we would use that to potentially consolidate franchisees.

And the answer to that is no we're much more likely to use our funding though to encourage franchisees to develop in the form of key money or incentives. And we've got a program like that already in the marketplace for Flip. You also asked about our inclination to own restaurants.

And there too I would say we're not inclined to own additional restaurants. One of the reasons we're performing so well this year is because of the asset-light model that I mentioned in the opening comments. And our intention is to remain a highly franchised business..

Right. Just following up on that.

With the existing units that you have in place what are your thoughts on your company operated? Is that something you see as a good fertile testing ground and you want to hold on to it, or is that something that you'd look to get yourself back to the 100% level?.

Yes, it's certainly a fertile testing ground, while we have them and we'll have them because of COVID right. Our intention to sell them has been delayed.

What we're proud of is, is we purchased a portfolio that was underperforming and because of the management team that's been in place there it's now one of our top five performing portfolios both in our same-store sales improvement as well as guest improvement.

Originally the company said we'll hold them for two or three years two years of COVID has delayed that. And so we've got another year or two to go and then we'll report back on where we are..

And then just on moving into another direction.

Can you talk a little bit more about how you're thinking about the pacing of your loyalty rollout not just at IHOP, but also as it makes its way over into Applebee's?.

This is Jay. As far as IHOP goes we're actually going to be in test in piloting this at the end of the year here in the fourth quarter. And our intention is to roll this out system-wide probably first half of next year..

And Brett on the Applebee's front we have significant investments on the -- in terms of personalization and customization from a CRM perspective. We continue to believe the best form of loyalty is wow that guest every hour, 1.5 hours are there and ensure a high degree of affinity for the brand and loyalty and repeat visitation.

So we believe in restaurant execution and it's one of the reasons the brand is performing so well..

Thank you..

Our next question comes from the line of Nick Sapien [ph] with Wedbush Securities. Your line is now open..

Thank you and congrats on an incredible quarter. Just given the momentum we're seeing here in Q3 and out of Q3, the EBITDA guidance just given the year-to-date EBITDA in Q4 implies a step down in Q4 maybe even a little bit above the step-up in G&A. So I guess I just wanted to kind of get the puts and takes around the implied Q4 EBITDA..

Sure, Nick. Good question.

We do expect Q4 performance to hold strong, but we also do anticipate higher G&A costs from activities such as consumer research and product development, franchisee support services and headcount, travel expenses, et cetera, that we more or less paused until now and plus the continued incentive compensation accrual based on company performance.

So you're reading it right and that's – that's our guidance so far for this year.

Yes. It's John P. I'll give you a good example that we're happy to have, which is our Applebee's annual conference is back on. In November, we'll have 350 people, who are really excited to come together and celebrate the brand. They haven't gotten together in almost two years.

And Nick, in my mind that's an expense worth having in the fourth quarter to bring the team back together in all of our franchisees after a two-year absence..

Yes, it makes sense. When you talk about sort of doubling the IHOP historical unit growth rate by 2023, can you just give us – just point to what that exactly means. 2019 I think it was sub-1% but before that it was 3%.

So are we talking about 5%, 6%, potentially net unit growth in 2023, or are we talking about a different number?.

Well, I've talked about this. Typically – this is Jay. I've talked about this typically in our units we've developed. So to put it in perspective, I think historically over the last decade we've developed about 40 new restaurants a year. So to double that you're looking at it more like 80 restaurants by the time you get to 2023.

So we're not doing future guidance that far out on exactly what those numbers look like. So that gives you a ballpark idea of what we're talking about as far as amount of development..

That's very helpful. And then just last question.

Cosmic Wing any update there?.

Nick I know you'd be asking about that. This is John. We love Cosmic Wings. I referenced that we held off on a very meaningful expansion to DoorDash, the number one delivery player because of supply challenges in particular around boneless wings and bone-in wings.

I anticipate expanding Cosmic Wings from a delivery perspective to DoorDash in very early Q1. That supply of product will be there. And the reason we're being prudent and thoughtful on that front is we're going to generate some incremental demand there. We want to be able to satisfy it.

And then the final point I'll leave you with is a little tease that in a couple of weeks there's going to be some meaningful news on the Cosmic Wings front. So stay tuned. And there will be something buzzworthy that comes across the transom very soon..

Sounds good. Looking forward to it. Thank you very much..

Thank you..

Our next question comes from the line of Jeffrey Bernstein with Barclays. Your line is now open..

That's quite a teaser. Look forward to the news on Cosmic Wings. Two bigger picture questions, John P, I think you mentioned that research showed 110,000 restaurant closures. My guess is that's a number since the start of the pandemic. That would work out to be north of 15% of the industry but my math. Just curious, if you would say that's a similar mix.

I'm just wondering what your thoughts are as the operator of two of the biggest brands in America in terms of the outlook for reopenings of a lot of those closed restaurants maybe an outsized acceleration for growth in 2022.

Just wondering, your kind of bigger picture thoughts being your context in real estate and development and just your touch around the country.

Any thoughts on the reopening opportunity for all those units across the industry?.

Yes, Jeff, thanks for the question. So number one, your math is right. There's multiple sources on restaurant closures since the beginning of the pandemic and it's about 10% to 15%. And the number I cited on the call today was from BCG.

The sources of data will also show that unfortunately it was disproportionately independents that closed during the pandemic. And so, it's less likely that those restaurants will reopen because of what we know about the economic nature of independence.

And we see that while our heart breaks for the independents, it is an opportunity for the big chains like ours. And that's why we are leaning into development. And that's why we've hired three new development leaders that we think our world-class and upgrade the talent that we have, and it's taking advantage of an opportunity at this moment in time..

Understood. And then my other question is just, as you think about the broader portfolio obviously 2021. Good luck trying to find any rhyme reason to trends that we saw like you said.

But as we think about 2022, 2023, just thinking on more normalized, I mean we can kind of forecast our own comps and you gave some color on the unit growth, but assuming there's some modest G&A leverage, which I'm just curious your thoughts on, what we should think about over the next few years in terms of more normalized EBITDA and EPS growth not looking for specific guidance per se, but just what you think the model can generate over the next couple of years on a more steady-state basis on the bottom line? Thank you..

Yes. Jeff, we will get into more guidance in our Q4 announcement. But we are taking a more balanced approach going forward in terms of how we manage our G&A investments. And the goal is to invest in organic and strategic growth and also looking -- continuing to look at acquisitions. So, this is an asset-light model.

There is leverage to be have with our infrastructure, but there is potentially more that we see with prudent investment in growth..

And in terms of potential for bottom line growth over the next few years in terms of the portfolio?.

Top line and bottom line. But without getting into specific guidance numbers, we think there is growth because this is -- again this is an asset-light model, our G&A infrastructure can be leveraged. You're exactly right..

Thank you..

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All right. Thanks guys. We appreciate the time and your questions and we look forward to speaking with you next quarter. Have a great day..

This concludes today's conference call. Thank you for participating. You may now disconnect..