Denny's Corp (DENN) 2004 Q1 法說會逐字稿

Good afternoon, my name is Chastity, and I will be your conference facilitator today. At this is time, I would like to welcome everyone to the Denny's Corporation first quarter 2004 earnings release conference call with your host, Ken Jones, Vice-President and Treasurer of the company. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Jones, you may begin your conference.

Good afternoon, and thank you for joining us. If you followed our calls in the past, you will notice a slight change in our speaking line-up. Speaking first today will be Nelson Marchioli, Denny's's President and CEO. Nelson will provide an update on the business and a general overview of the quarter. Andrew Green, Denny's Chief Financial Officer, will then provide a financial review of our first quarter's results. I will then provide a liquidity and capital structure update. We will follow that up with our standard Q&A period.

Let me remind you that a replay of this call can be reviewed later today either from the Denny's website, or by dialing into the telephone replay number. Feel free to contact me if you need further information on accessing the replay.

But before we begin, here is the Safe Harbor disclosure. In accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, the Company notes that certain matters to be discussed by members of management during this call may constitute forward-looking statements. Such be subject to risks, uncertainties, and other factors that may cause the actual performance of Denny's to be materially different from the performance indicated or implied by such statements. Such risks and factors are set forth in the Company's annual report on form 10-K for the period ended December 31, 2003, and in any subsequent quarterly reports on form 10-Q. With that, I will now turn it over to Nelson Marchioli, Denny's CEO.

Thank you Ken and good afternoon, everyone. Thank you for joining us. I'm certainly pleased with our sales performance to date in 2004. We followed up a strong first quarter with a very similarly strong month of April. While I acknowledge that many competitors in the industry are enjoying positive sales, we have seldom shared in that particular wealth. The industry experienced strong growth in the late 90's, but Denny's was left behind.

I believe the fundamental operating improvements we've made are, for the first time in a long time, allowing Denny's to take advantage of a strong economic cycle. I think our marketing message has played a key role in our recent success. Our 4.99 featured breakfasts have been very successful. If fact, they have been our top sellers since August of last year, when we debuted our three complete breakfasts. This trio, let by our Meat Lover's Breakfast, performed exceptionally through January.

In February and March, our media promotions featured our French Toast Slam as our 4.99 offering. Our French Toast is a great product with a proprietary recipe. It already had loyal following, but we were able to introduce it to a whole new audience as our featured breakfast item. In April, we introduced another new product, Superscrambles, which are fluffy scrambled eggs, mixed with your choice of delicious ingredients. Of course.our abundant value strategy is evident as the Superscrambles are served with sausage links, two bacon strips, hash browns, and three pancakes, all for just 4.99.

We will continue to use our breakfast message as a traffic generator. In fact, these promotions have been successful in driving traffic at all day parts, and we are using in store merchandising to sell traditional lunch and dinner selections in addition to our breakfast offerings.

Last quarter I told you how encouraged I was about the changes at Denny's. Today I want to convey how excited our operational personnel are with our improving results.

Based on our first quarter performance, we we paid a handsome incentive bonus to our restaurant management for the first time in many years. This is having a remarkable energizing effect throughout the organization. Employee morale is running very high, and the expectations are for even more. I believe the taste of success is just the boost our employees needed to believe that this brand -- to believe in this brand, and its potential.

Another particularly encouraging sign is that our franchise partners are sharing in our success. The franchise restaurants are matching company store sales performance. In recent years the franchise units always seemed to trail our same store sales by a point or more. This gap has tightened to a dead heat in recent months. I think this confirms that the system as a whole, in fact the brand, is being revitalized, and demonstrates a healthy system.

As we head into our higher volume season, we expect to keep reporting strong results. My operations personnel believe they're going to smoke the plan, as they tell me. Well, time will tell. The real proof of our turnaround will be when we continue to post positive results later this year and next year. Now that we have the ship moving in the right direction, it is full steam ahead.

We still have many operational improvements targeted. We are investing heavily in our restaurant facilities, and we are increasing our marketing spend. We are managing our menu more meticulously than ever before. We are testing new remodel designs, we are putting in the hard work and it appears to be paying off. As always, I genuinely thank you for your interest in Denny's. I will now turn the phone over to Andrew Green, our CFO,who will take you through the first quarter numbers.

Thank you, Nelson Good afternoon, this is Andrew Green. Let me start by detailing our first quarter same-store sales results, which Nelson mentioned in his remarks. I am pleased to report that our positive sales momentum from the second half of 2003 has not only continued, but has accelerated so far this year. Our company restaurant same-store sales were up 6.4% for the quarter, on the strength of a 3.3% increase in guest counts, combined with a 3.0% increase in average guest check.

I'm also pleased to report that these sales continued strong into April, as our sales release yesterday revealed. We reported same-store sales up 6.4% for April, with average guest check up 3.5%, and guest counts up 2.8%. This marked our 8th consecutive month of positive sales, and the 7th consecutive month of positive guest traffic.

Now, turning to the P&L. Sales at Denny's's company owned restaurants increased 8 million, to 208 million in the first quarter as a result of the strong same-store sales. As our company sales improved in the fourth quarter, so too did our company operating margin, which increased 1.9 percentage points compared with last year's first quarter. This improvement is summarized in the margin analysis table in our press release.

The largest contributor to this margin improvement was a 1.9 percentage point decline in payroll and benefits costs. After the rise in our labor costs last year, we put a lot of emphasis on efficient labor scheduling, and this seems to be paying off. Also, we redesigned our health benefits programs. As we headed into 2004, and this has resulted in significantly lower health benefits expenses this year.

We also reported a 7/10ths of a percentage point decline in repairs and maintenance costs. As we noted last quarter, we expect this expense to run about 2% of sales for the year.

Now, partially offsetting these costs improvements was a 4/10ths of a percentage point increase in product costs. Which excludes an additional half a point increase due to lower noncash deferred gain amortization in this year's quarter. The product cost increase is attributable to higher commodity prices.

As many others in the industry have reported, commodity prices remain much higher year-over-year. At Denny's, we 're impacted primarily by rising pork, beef, and poultry prices, but also higher costs for eggs, cheese, and oils.

In an effort to offset these higher costs, we have locked in prices from our suppliers on selected items, such as beef, poultry, and oils. In addition, we took a 2% menu price increase in April, a couple of weeks ago, with the rollout of the our latest menu.

Franchise and licensing revenue in the first quarter increased slightly to 22 million. As a 6.7% increase in franchise same-store sales offset a 42-unit decline in franchise restaurants compared to last year this time. Costs of franchise revenue increased by 700,000 due primarily to the collection of certain past due accounts, which benefited last year's first quarter.

Our first quarter G&A expenses increased approximately 2 million from last year. Due primary to $2 million in nonrecurring costs related to exploring possible recapitalization alternatives. In addition, we accrued approximately 1.2 million more for incentive compensation in this year's first quarter, compared to last year. Assuming our strong results continue for the remainder of the year, our incentive compensation could be from 6 to $9 million higher in 2004 than the previous year, last year, when frankly we did not pay out any significant bonuses.

The transaction cost and compensation increases in the first quarter were partially offset by reductions in corporate overhead, related to organizational changes as we continue to fine tune the organization and make it as efficient as possible. Now, despite sales and margin improvements, operating income in the first quarter increased only half a million dollars, compared with the same period last year. This was due primarily to $2.2 million less of asset sale gains in this year's first quarter, compared with last year, combined with increased G&A expenses from the $2 million in recapitalization costs I mentioned a moment ago.

Regarding bottom line net income, we reported a net loss of 8.7 million for the first quarter, compared with a net loss of 9.1 million in the same period last year.

Now let me update activity in the Denny's restaurant portfolio. Our company owned unit count at quarter end was 558. A decline of 5 units from the first quarter of last year. During that time, we closed 6 company units, and reacquired one unit from a franchisee. For the full year of 2004, we expect to close approximately 5 company stores.

As we noted on our last call, we do plan to resume limited company restaurant development later this year, with the opening of a new restaurant on the strip in Las Vegas. Depending on our capital constraints and the availability of development sites, such as this one, we hope to expand our development efforts in 2005.

Turning to the franchise restaurant portfolio. Our franchise and licensed unit count at quarter earned was 1,064, a decline of 42 units from the first quarter of last year. Since last year franchisees closed 58 units while opening 16 new units. Of those totals, 16 closures, and three new unit openings occurred in the first quarter of '04.

As far as expectations for the full year, we project 17 new franchise unit openings this year, and approximately 40 franchise unit closures, as our franchisees continue to evaluate their lower volume units. However, we do expect franchise closures to slow down as sales have improved, and we are heading into the higher volume summer months. We are also placing increased focus on our franchise development efforts in order to attract new franchisees, as well as to promote growth among the strong franchisees already in our system.

Moving on to capital expenditures. Our cash capital spending for the first quarter was approximately $4 million, while this number is lower than the last few quarters, we expect to ramp up our capital spending as the year progresses. Our full year 2004 estimate remains approximately $40 million.

The majority of this capital will be spent on basic needs, such as parking lots, lighting, refrigeration, and heating and cooling equipment. In addition, approximately 9 million will be spent to remodel 60 restaurants at an average cost of approximately $150,000 per unit.

We are certainly pleased with our sales results as well as our improved operating margins. Looking ahead, we are optimistic that our current sales momentum will continue through the summer. Obviously, a lot depends on external factors, particularly the economy, but we are growing more confident with each passing month that the progress we are making is sustainable.

Now, I'm going to turn the telephone back to Ken Jones, our Treasurer, for a liquidity update. Ken?

Thank you Andrew. Our liquidity position remains strong in the first quarter, as our operating performance continued to improve. At the end of March, we had net availability under our credit facility of 64 million. This consisted of revolver advances of 19 million, letters of credit of 35 million, as well as 40 million in term loans. At the end of March, commitments under the facility did step down by 3 million to 158 million as scheduled in the credit agreement.

I would like to point out that already reflected in our liquidity position in the first quarter, we made semi-annual interest payments on both our 11.25% senior notes, and our 12 3/4% senior notes totaling 29 million, and including those payments, we have already made a total cash interest payments of 32 million for the quarter. This represents over 45% of our estimated full year cash interest payments of about 70 million.

As of this morning, outstanding term loans remain at 40 million, and letters of credit remain at 35 million, while revolver advances have decreased slightly to 18 million. Regarding bank covenants, we did meet all of our financial covenants for the quarter, and under the most restricted covenant, we maintained an EBITDA cushion of approximately 17 million. As we noted in our 8-K filing on April 21, the company recently held discussions with an ad hoc committee of our 11.25% noteholders, regarding a possible recapitalization of the company.. As we were enable to reach a mutually agreeable transaction, we suspended negotiations with our 11.25 holders. Although we are no longer in active discussions with our bondholders, we continue to work with our financial advisor UBS to explore various capital structure options that would improve our long term flexibility.

At this time, there is nothing specific to report. We will update the process as appropriate, and when any developments warrant disclosure, we will certainly make those public through a press release or S.E.C. filing.

As most of you are aware, the Denny's credit facility matures in December of this year. We are currently exploring our options for refinancing this facility, in parallel with our ongoing capital structure evaluation process. Based on preliminary feedback from potential interested sources, at this time we are confident that we will be able to successfully negotiate a replacement facility prior to maturity, weather or not we pursue a broadbased capitalization transaction. We will comment further on this process when there is something more definitive to report.

With that, I will ask the operator to begin the Q & A portion of our program.

At this time, I would like to remind everyone in order to ask a question, please press star then the number 1 on your telephone keypad. If you are on a speakerphone, please pick up the handset for audibility. We ask that you please limit your questions to one, plus one follow-up. Then you may return into queue for additional questions. We'll pause for a just a moment to compile the Q&A roster. Your first question comes from the line of Andre Gardner, with Kelso management.

Hi guys. Thanks for taking my question. I read the 8-K you guys filed and the 13Ds that have been filed over the past couple of months, and I was look at different valuations that were presented, and I wanted to ask you if someone were to show up on your doorstep right now and wanted to buy Denny's, what kind of valuation would you guys put on the company?

I mean, if your question is what kind of valuation would we place on the company? I mean we're not going to -- we're not going to speculate on valuation. As I mentioned -- this is Ken. As I mentioned, we're continuing to look at our options, to look at -- to improve our long term flexibility, but right now there's nothing specific that we can report on that's definitive.

Okay. What about -- one of the issues that was brought up in the 13D was do something sort of a rights issue that would align the management's interest more closely with those of the shareholders. Would you guys comment on this, and tell us if this is something you're considering?

No, we're not going to comment on that. That 13D filing was not our filing. That was a shareholders filing. It was not our disclosure.

Is that something that you guys would consider?

We're not going to comment on specific transactions.

All right. Fair enough. Thank you.

Thank you. Your next question comes from the line of Ken Bann with Jefferies and Company.

Good afternoon. One thing I wanted to make sure that through the rest of this summer, are you going to continue to promote and push your breakfast items, which seem to be propelling sales across all of your day parts? Is that something you're going to continue to do?

Yes. This is Nelson. We will continue for the remainder of this year to promote our breakfast day part in a similar fashion as you have seen since August.

And can you give us any more detail on a breakout on your payroll reductions? What part of that has been due to the benefits, and are there any other significant things on the benefits side that can be done to reduce those payroll costs? And what part of it is due to better scheduling, and will there be any increases in payroll costs as your sales increase and there's more demand for increased service in your restaurants?

As far as the reduction in payroll benefits, it's about half and half, in terms of half of it is on the labor line itself, in terms of hourly labor, and the other half is really coming from the benefits reduction. I think we've largely done what we could on the benefits side. I mean, frankly, the fact that our benefits costs are down this year is, I think, quite out of the ordinary, from what I read about other entities, so we're going to be as cautious as we can to keep them from trending back up along with everyone else, and I would be pleased if we could accomplish that. I don't think there's a lot of additional reduction that we can expect there. Was there another part of the question?

Well, yes, I guess also what I'm searching store there any risk that payroll costs go up as your sales increase and you need more labor in the restaurants? Or will you be able to control that and make sure that those costs as a percent of sales stay where they are now, or maybe even decline a little bit further from where they are now?

I think as a percentage of sales, they should be able to stay about where they are, which means that if sales go up, of course, you have more dollars to put more labor on the floor, when which you have to do as you have more guests coming in, but as a percentage, I thing we're pretty comfortable with the level we're running at now, that we've got it about where we want it.

Okay. And as far as the expected bonus payments through the rest of the year, are they based on the projections you had in the latest 8-K, or what levels of sales and earnings are they based on?

You know, it's really based on first quarter results, and we're only booking a quarter's worth, so, you know, these are -- the bonuses I was referencing was restaurant management. We pay our restaurant management bonuses on a monthly basis, or a quarterly basis, so those are actual incentive compensation amounts for the first quarter, and we've just assumed that that would continue over the balance of the year, and of course to the extent results are better or worse than they were in the first quarter, you would adjust the bonuses appropriately. Of course -- what's unusual, of course, is that going from one year where frankly last year at this time last year there were virtually no bonus payments to a very strong quarter, so it becomes a material variance from year to year, and that's why we pointed it out.

Okay. But is the bonus set based on improvements in same-store sales at the restaurants, or is there a combination of sales and margins at the restaurants? How does that work?

It's -- there's actually four or five components to a restaurant manager's bonus. Sales and profitability are two. We also have a component related to customer satisfaction and a component related to cleanliness and -- and what? Customer count.

Okay. So in general, though, you're feeling that the rest of the year should be, in comparison to last year, much better than last year.

We certainly do.

Okay. Great. Thank you.

Thank you. Your next question comes from the line of Andrew Ebersole, with KDP Investment Advisors.

I was wondering if you could update us on your expectations for free cash flow generation, given the current operating trends. You had talked a little bit about it on the last quarter, and I just wanted to get a fresh outlook.

We're thinking Andrew, we're not sure exactly -- you know --

I mean, generally, Andy, we did put significant guidance on EBITDA. And that's a good proxy. The other items that aren't related to traditional EBITDA cash flow are generally what we expect to happen for the year. So you can do some math with those numbers. And, of course, a lot will depend on where we end up on EBITDA.

Right. When you talk about the EBITDA guidance, are you referring to the projections that were provided in the 8-K, or other types of guidance that you've provided on a previous call.

We did not hear that, you broke up.

I was wondering when you were talking about the EBITDA guidance that you had provided, was that in connection with disclosures in the 8-K you made, or was that in connection with disclosures in a prior conference call?

We're talking about the 8-K disclosure.

Okay. Thank you.

Thank you. Your next question comes from the line of Karen Eldrick, with Goldman Sachs.

Couple questions on the competition, as you guys observe the entire restaurant sector.

Karen, we can't hear you.

Can you hear me now?

Yes.

As you guys observed the entire restaurant sector is doing very well right now. With this, and with from what I understand are easier lending standards, are you seeing any acceleration in competitive openings?

Acceleration in competitive openings?

Yeah, or any pick up so to speak.

I really have not noticed much. I'm look over at Nelson to see. It's been pretty slow, you know, for a couple of years now, and I haven't seen any acceleration yet.

And as a second part, McDonald's has been very aggressive in expanding their 24 hour windows. Is this been impacting your business at all, or have you been able to defend yourselves?

I think as Nelson may have mentioned in his comments, Karen, we're pleased that our guest counts are actually up in all of our four day parts, breakfast, lunch, dinner, and late night. And we're looking at it earlier today. And after breakfast, late night, I think had the strongest guest count increases in last month. So we're holding our own. Obviously a lot of people going to, you know, 24-hour operation, or late-night operation going to have some impact, but I think we're holding our own.

That's great, and as you look at your strengths, is there any particular regional areas that have strength, or would you say it's across the board?

Well, I'm happy to say, actually, in contrast to maybe the middle, six months ago, where we really were seeing a lot of softness down the middle part of the country, from the Midwest down through Texas, that we're really -- you know, it's pretty much across the board right now. There's always pockets, you know, markets here or there that are a little softer, but there's no one geographical region that's sticking out the way the Midwest and Texas was last year.

Great. And final question. With these strong results, it has now been a pretty steady state, are you seeing any acceleration of your pipeline from your franchisees?

Actually we are working on that. I would like to see more, and we have very much of a focus on attracting new franchisees into our system, which we haven't had in awhile. We've added some additional staff, and some additional focus in that area, and I am also focusing on our existing franchisees, as well, that is the ability to grow. So I do see a reawakening, if you will, of Denny's, but I don't know that you're going to see it on the street, manifest itself in bricks and mortar, until the latter part of next year, is when I think you will see the benefit of the that results.

Margaret Jenkins, our Chief Marketing officer is here, and I wanted to ask her if she perhaps wanted to add something to what Andrew had to say about sales and late night across the country of what you're seeing, because I know you study it carefully.

Well, I will echo what Andrew said about the fact that we have been holding our own when it comes to all four of our day parts, and as he stated, the late night day part has been very strong for us on a comp store growth basis. It remains to be seen how much of an impact, if any, some of these extended hours that we're seeing are going to have.

In so far as our performance, it is pretty geographically spread out, which is wonderful. We do have parts of the country that are doing better than other parts of the country. Part of that I attribute to the fact that now that we are a network advertiser and have been supporting each of the DMAs across the country evenly for the past 12 months, we are starting to see areas that have accelerated growth that exceeds what we're seeing as a company, so, you know, a rising tide raises all boats, and we're doing well pretty evenly across the country.

Thank you very much, and congratulations on the quarter.

Thank you.

Thank you. Your next question comes from the line of John Thomas with Advest.

Could you comment quickly on commodity pricing, your outlook, and also your hedging strategy, if you have one?

I'm sorry, I'm going to have to ask you to repeat the question.

I'm sorry. Could you comment quickly on your commodity pricing for beef and pork, and your outlook for that, as well as your hedging strategy, if you have one.

Well, as I believe Andrew pointed out in his remarks earlier, commodities, as for everyone from the consumer to our industry and everyone else in manufacturing, commodity prices are on the rise. We have taken some positions in the area of beef and poultry at this particular time, and some in oils, to kind of buy some insurance, if you will, to protect ourselves. We still ride the market on pork, and we continue to look for opportunities in that area. It's -- it's a watch and see and hold closely.

We meet on this particular subject every single week, as it relates to our menu, as it relates to our product mix, so we are this year in particular are very much focused and attuned to commodity prices. We have not seen commodity prices behave this way in a long, long time, and so we have to be very careful to protect our margins, and, I think, we have done that extremely well thus far and plan on doing the same.

Thank you, guys.

Thank you. Your next question comes from the line of Steve [Gugimal] with Curtis Capital.

Hi, can you guys hear me okay?

Yeah.

Okay. Great. Thanks for taking the call. I just wanted to go back to that free cash flow question. I guess going back to your 8-K you be had shown guidance for the $120 million of EBITDA this year, and the expense of 800 million, and capex of 48 million, and cash taxes of 3 million, so that puts us in a funding hole of I guess $11 million. You're still standing by that guidance, right? That would be my first question?

Approximately well, first of all, I don't know if you caught it in my remarks, this is Ken Jones, but I would say our cash interest in a non-recap environment, and that's what we have to assume at this point, is around 70 million, cash interest payments, of which we've already spent about 32 million of that, so that's -- that's already out the door. So that's one divergence from the 8-K disclosure. Capex is another one. I think we're expecting, I don't hold it to us literally, but around 40 million of capex, given our current capital structure.

So with cash taxes still then being, so 70, 40, and 3.

Taxes will be minimal this year regardless.

so you might have slightly positive to break even cash flow? Is that what you're thinking?

That's -- give or take a few million, yes.

Okay. So given that, and I guess from the -- I remember this company when it was Advantica, you know, two bankruptcies ago, why would -- and the increase in the commodity prices which can constrain, put a constraint on margins, and then given the fact if you talk about the franchisee, they would be more apt to sign up with you if you -- you know, if you showed them sort of a better balance sheet, if you will, so they had more -- you know, more comfort in that, and there's an operating advantage to that. Why wouldn't you, or why can' you kind of try to delever this thing, because it seems like it's still -- you know, the capital structure is so constrained at this point that if everything doesn't go perfect, you know, we could take a -- it could back slip from here, and why run that risk?

Well, I think as we've indicated since our third quarter Q, when we first announced the hiring of UBS through now, when we recently announced that we are still working on recapitalization alternatives, obviously we want to take any opportunity we can, and have been working at it for -- since that time.

Okay. All right. And then -- because, I mean in previous conversations with company management, you guys were talking about you wanted a debt reduction of 300 to 400 million, or all 379, that would -- you know, -- you know, issue shares for that, and now it seems like we're a hundred percent off that. It just seems like it's long-term short-sighted, isn't it?

Well, we have never confirmed a specific type of a transaction. I mean, rest assured, we are still evaluating options. It has to be a win-win for the company, the shareholders, and the bondholders, and to date we have not been able to come up with something that satisfies all of those conditions, but we're still evaluating.

So you would still be open to some sort of dilution, if that made sense, not from a debt reduction standpoint?

We're considering all options.

Thank you very much.

Thank you. Your next question comes from the line of Jeff [Kebalars]with Salmon Brother's Asset Management.

Hi, guys. Could you guys talk about your outlook for butter and eggs? You said you haven't locked those in. Can you comment about where you see those going? Do you see them staying where they are, going up from here?

I can see them going, continuing to rise, we ride the market on eggs and dairy, as most people do, but dairy, first of the all, doesn't like locking things in, and this would be the worst time to do it. Eggs are at I believe a 10-year high at the moment, and we don't see that letting up at all. So we, as I said earlier, we monitor it regularly. These are core items for us. But we feel very comfortable with our sources of supply, and our forecasts for the months ahead, as we frankly utilize the method of [inaudible] break as we go along here to make sure that we are where we need to be when we need to be there, but we're on the market.

Those two commodities in particular, you don't lock those items in. And long-term, if you can take the the highs, the lows ultimately balance out to where it's actually a better deal for us to stay on the market, in the long run. It just is uncomfortable during these periods of increased prices. For all the years that I've been doing this, you know, it always does come down, but this particular rise does seem to have some wind behind it, and it's going to be -- we're going to have to watch it very closely just as our competitors are.

And you said you put that you 2% price increase? And when was that again?

Mid-april.

Okay. And given that 2% price increase, how will that affect your gross margin?

Well, it might -- it should be slightly positive. Frankly, a lot of that was to cover commodity cost increases that we had either already experienced or were forecasting for the summer, so I think we'll have a slight margin contribution from it, but most of it is a pass through of commodities.

And lastly, you talked about your advertising. Are you promoting lunch and dinner at all now, or is it all towards the breakfast?

We'll let Margaret Jenkins, our chief Marketing Officer answer that one.

As Nelson said, it is our plan to continue with the breakfast focus between now and the end of the year. What we do is promote within stores new product items that might tie into a different day part, such as lunch and dinner. So we are exposing our customers to new items whenever they come into the restaurant, but the breakfast message will continue between now and at least the end of the year.

So, Margaret, are you saying that you promote in store for lunch and dinner, and then you advertise over the media for breakfast.

That's correct. We have other breakfast specials that are within the store, as well, but we make sure that when the customer comes in, let's say they come in for a breakfast special that they've seen on television, that when they come in the restaurant through point of sale materials or messages in the menu, they are exposed to other items that may fit in a different day part.

The opportunity there is to expose people to item us that, you know, might turn into a dinner the following week, or a lunch the next day. So it's important, I think, to continually refresh the items that fit into the other day parts, but the connection that we've made with the consumer on television has been around breakfast.

Thanks, Margaret.

Thank you.

Thank you. Your next question comes from the line of Ruth Upton, with [inaudible] Asset Management

Hi, my questions have been answered. Thank you.

Your next question comes from the line of Steven Daien with HMC New York.

Hi, it's Tony Reiner. First thing, congratulations you guys on a great month, great quarter. Just want to ask if you see the typical seasonality that was shown the last few years, as far as numbers and everything?

I would tell you that is what I'm seeing is assuming no terrorist events, the economy continues to move up and to the right as it is, and understanding that it is an election year, I believe that we are going to have a great season. I think as a country, as a brand, and as an industry. I think the bogey is going to be, will we have to deal with some unknown, and that's my greatest concern for the country and our business and the industry as a whole. So I'm looking forward to an excellent 2004 for everyone involved. It's just a matter of, will we be surprised by some uncontrollable event.

From the seasonality standpoint, you know, I'm very encouraged that the summer should be very strong, as it traditionally is. It our strongest period of the year. But the numbers I've seen is that Americans are out traveling, especially within the United States, which means that they're in cars, and you know the summer season is seasonally our highest of the year.

By far, absolutely.

So I don't see any reason that won't be the case again this year, if not more so.

Fantastic. We're off to a fantastic start. Thanks very much.

Thank you. Your next question comes from the line of with Jefferies and Company.

Good afternoon.

Hello.

Hi.

Hello? Hello? We're here.

Okay. The $2 million figure that's included in the G&A?

Yes.

Can you give us -- can you give us some color on, you know, what your expectation on where that number is going to end up in total this year, and, you know, just give us some color on that?

You know, we really don't know. Obviously, as we said earlier, we are continuing to explore alternatives. We're anxious to try to get something done or resolved, I should say, as soon as we can. And, frankly, reduce those costs that you're talking about. But it's just I can't predict when that will be. And the other thing, you know, we do have a credit facility maturing at the end of the year, so I think, as Ken had said, we are also looking at what our alternatives are there, as well.

Okay. Second thing is the -- you know, going back to this 2 million, and then the one point -- I think it was 1.2 that's included in the G&A on incentives, when you guys put out that 8-K, which had the forecast, and I think in the footnote you had adjusted EBITDA estimate of 120.8 for '04. Was that included for these types of -- these two items, were they included in that number? And when I say "these two items,", I mean these two categories.

Those two categories were certainly included, but I don't know whether the numbers match exactly. The thing that you have to be cautious with the 8-K, which I think was in the write up that went with the K, is that these are numbers that were provided as part of an exploration of recapitalization alternatives, and that they anticipated, they gave effect to the implementation of that recapitalization.

So as you read the front part, before the numbers, you know, it says, and it's obviously in the numbers, that you have the effect of a recapitalization. So there are a a lot of elements of that -- of those numbers, that are not -- you know, that are very special situation. So I would just be cautious as we try to warn many, many times, please be cautious as you use those numbers.

Sure. I mean, you know, since it's EBITDA, it shouldn't really -- you know, the capital structure shouldn't have any impact on EBITDA, though, is that correct?

Not really, no.

Okay. I just wanted to make sure. Thank you.

Thank you. Your next question comes from the line of Robert [Gotch], with Miller, Tabic, Robert.

Good afternoon. I assume on the store unit managers and their incentives, that would be -- I guess in the way you were discussing it, that would be in G&A?

No, that's in payroll and benefits.

Okay. So did you -- did you discuss the unusual in G&A with respect to that? Maybe it was in your release and I missed it, or you said it on the call, in terms of store level managers incurring more incentive bonus?

Yes, we did go over that, and I indicated that --

Okay. I can go -- I can go back.

Okay. No, we didn't -- you're telling me -- okay. That was corporate?

What is your question?

I didn't know if it was discussed or not, once you said it was, I can just go back in my notes, but if it wasn't discussed, could you discuss the impact on payroll of store level managers' incentive bonus?

Yeah, okay, I'm sorry. In payroll and benefits are the in-restaurant management incentives that I think Nelson referred to, but he didn't talk numbers, I don't think. And they are certainly up dramatically from last year, because our results are obviously up dramatically. So that's another element of the change in the payroll and benefits line on our P&L, which is, of course, down 1.9 percentage points, so what that's saying is, team labor is down a little bit, just in in terms of the number of hours we're spending in terms of labor. Health benefits, which are in that line, are down, as I indicated previously, and then you have management -- or not -- you know, in-restaurant management bonuses going up.

Could you quantify that? And then just lastly, you mentioned the five metrics that store level management incentives were based on. Could you give any color on which ones they were -- you know, which ones in general they are performing well on?

The incentives for the first quarter were 2 to 2.5 million higher than last year in restaurants.

Uh-hmm.

Which ones are they performing best on? They're performing well, actually, on all of them. Sales are up very significantly. Profit flow through at the restaurant level was very good in the first quarter. Our customer satisfaction scores, which we get from an 800 number that prints out on our receipts, you know, we have a call-in system like you see at a variety of retailers, have increased significantly this year. Customer count is a component, so that's up.

Okay. And the 6 to $9 million that it was in G&A, if you anticipate the rest of the year unfolding like the first quarter, could you give -- from that 2.5 million, which is in payroll, could you give a number on that, as well?

I don't really have anything in front of me, so I'm hesitant to throw something out to you, to be honest.

Right. So in other words the payroll number is after the $2.5 million increase it was a very nice line item performance?

Yeah, that is correct, it is.

Okay, thank you very much.

Next you have a follow-up question from Andrew Ebersole, with KDP Investment Advisors.

Good afternoon again. You had mentioned, which I also acknowledged, that your projections provided in the 8-K were in the context of a recapitalization plan, and maybe this years results or EBITDA would not be that dramatically impacted by your lack of execution on that plan, but can you put in perspective, those longer term projections, and the -- the impact on your outlook for the company from an operating standpoint absent a recapitalization plan?

Not really, Andy. It's hard to say where we're going to end up on the whole capital structure issue, and obviously there's different possibilities here in terms of something getting done. Or in this case, you're asking about something not getting done. So to start projecting beyond '04. And as you noted, and I agree with your statement that the '04 numbers probably aren't too dramatically impacted by recapitalization, and it is the out years that are, but I don't know, I can't really comment on what the impact of status quo would be.

Can you talk at least about the differential between the projected capex for 2004 of about 50, and the actual number that you think you're going to do at about 40?

More remodels, I think, was the major difference there.

And the reason that maybe that differential exists is because you possibly will not be pursuing -- or that the 40 million presumes there's no recap. Had you done a recap. Then maybe you would have a little bit more free cash flow to be a little more aggressive on the remodeling side?

This is Ken. Let's just be clear. We're not projecting a recap or no recap. We're not projecting either one. The 120 the in the capex that we laid out for guidance to 40, I think we fell for prudence sake has to exclude any kind of a recap that we can't predict at this time.

Right. I didn't mean to miss interpret that. I'm just suggesting that the difference is basically the anticipated advantage under a recap of having a little bit more free cash flow so you could pursue more aggressive capex.

That is a fair statement.

Okay. Thank you.

At this time, there are no further questions. Mr. Jones, are there any closing remarks?

No, we would just like to thank everyone for joining us this quarter. We look forward for a successful 2004. Thank you.

This concludes today's Denny's Corporation first quarter 2004 earnings release conference call. You may now disconnect.