Denny's Corp (DENN) 2004 Q2 法說會逐字稿

Good afternoon. My name is Angela and I will be your conference facilitator today. At this time, I’d like to welcome everyone to the second quarter 2004 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer period. If you would like to ask a question during this time, simply press "*" then the number "1" on your telephone keypad. If you would like to withdraw your question press the "#" key. Thank you. Mr. Jones, you may begin your conference.

Thank you. Angela. Good afternoon and thank you for joining us. Speaking first today will be Nelson Marchioli, Denny’s President and CEO. Nelson will provide an update on the business, as well as, a general overview of the quarter. Andrew Green, Denny’s Chief Financial Officer will then provide a financial review of our second quarter’s results. I will then provide a liquidity and capital structure update. We will then follow that up with our standard Q&A period. 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 statements are 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 year ended December 31, 2003, and in any subsequent quarterly reports on Form 10-Q. With that I'll turn it over to Nelson Marchioli.

Thank you, Ken, and good afternoon everyone. I’m certainly pleased to be reporting such strong sales improvement in the first half of 2004. Our media messages and promotional offerings combined with improved execution in our restaurants have afforded us a level of positive momentum not seen in this brand in a long time. We fully expect to build upon that success going forward. A key ingredient in our success over the last 10 months has been a refocused marketing message which highlights two key attributes of Denny’s, breakfast and abundant value. We will not stray from these focal points over the remainder of the year.

In July we are repricing our extremely successful promotion from last fall to three complete breakfasts for 4.99. These items in aggregate peaked at over a 15% of our plate counts last fall and we are seeing similar results this month as well.

In addition to our sales growth, we are pleased to see our margins improving in a very challenging cost environment. Rising commodity costs have certainly hit our industry hard over the last few quarters, which make our flat product cost for the quarter all the more gratifying. Holding these margins has been accomplished with a lot of hard work and cooperation for many areas of our company including purchasing, marketing, finance and operations. Literally every Friday I meet with the food cost taskforce, we put together last fall to deal with rising costs and other product development issues. This team reviews weekly changes in food costs and menu mix in order to make recommendations for menu changes, price changes, promotional initiatives or other margin improvement opportunities.

We are really managing our food offerings and product costs to a level that hasn’t been achieved here before. In addition, Denny’s benefits from a diverse menu, which allows our commodity exposure to be spread more widely than many other restaurant chains.

I would like to close by once again thanking those investors who participated in our recent equity placement. Your faith in the Denny's brand and support for this management team are genuinely appreciated. Your investment is the catalyst for allowing us to significantly reduce the burden of high debt and interest expense, which this company has operated under for many years. Once we complete these efforts the company will be in a better position, very well positioned as matter of fact for growth and prosperity. As always, thank you for your support and interest in Denny's.

I'll now turn the phone over to Andrew Green, our CFO who will take you through the second quarter numbers.

Thank you, Nelson. And good afternoon, this is Andrew Green. Let me start by detailing our second quarter same-store sales results, which Nelson mentioned in his remarks. I am very pleased to report that our strong sales momentum continued through the second quarter as our company restaurant same-store sales grew 4.6%. This increase was comprised of a 3.4% increase in guest check average combined with a 1.1% increase in guest counts.

We closed the quarter with June sales up 5%, which marked our 10th consecutive months on positive sales. Importantly, our franchisees are experiencing similar sales increases; in fact franchise sales ran slightly ahead of the company at 4.8% for the second quarter.

Now turning to the P&L. Sales at Denny's company-owned restaurants increased $9 million to $218 million in the second quarter as a result of our strong same-store sale. Our sales increased in the quarter contributed heavily to a 2.7 percentage point improvement in our company operating margin, compared with last year’s second quarter. This improvement is summarized in the margin analysis table in the back of our press release.

The largest contributor to the margin improvement was a 2.9 percentage point decline in payroll and benefits costs. After the rise in our labor cost last year, we put a lot of emphasis on efficient labor scheduling and this seems to be paying off. Also we redesigned our health benefit programs for 2004, which has resulted in significantly lower expense this year.

Now, partially offsetting these cost improvements was 0.5 a percentage point increase in product costs. Attributable primarily to a $1 million non-cash deferred gain amortization in last year’s quarter with no related benefit this year. If you exclude this amortization mismatch, product costs were basically flat with last year. As higher commodity costs were mitigated by proactive menu management, as well as, selective price increases. As we mentioned last quarter, we did take a 2% price increase in April.

Franchise and licensing revenue in the second quarter was basically flat, versus last year at $22 million. As a 4.8% increase in franchise same-store sales offset a 37 unit decline in franchise restaurants. Costs of franchise revenue increased by 400,000, due primarily to the hiring of additional franchise operations managers to support our franchise partners across the system.

Our second quarter G&A expenses increased approximately 1.2 million from last year due primarily to a $2.8 million higher incentive compensation expense this year in the second quarter, which brings the year-to-date increase to $4 million. Assuming our strong results continue for the remainder of the year, our incentive compensation could be from $6-9 million higher in 2004 than in 2003 when we paid minimal bonuses.

In addition, in the second quarter we expensed approximately $600,000 in costs related to our recapitalization efforts, brining the year-to-date total to 2.5 million. These costs were partially offset by reduction in other corporate overhead costs.

Operating income in the second quarter increased $3 million compared with the same period last year, reflecting our higher sales and improved margins. Also please note that last year's second quarter benefited from 2.6 million in asset sale gains compared with only $160,000 this year.

Regarding bottom line net income, we reported a net loss of 2.9 million for the second quarter, compared with a net loss of $5.4 million in the same period last year.

Moving on to capital expenditures, our cash capital spending for the second quarter was approximately $10 million. Our full year 2004 estimate remains approximately $40 million; three quarters of this were 30 million will be directed at basic facilities capital. Most of the remaining 10 million will be set on remodels of approximately 60 company-owned restaurants.

In regard to remodels, during the second quarter, the company completed the remodel of seven units in Chicago, utilizing a new remodel design, these are test units as we look to evolve our current remodel program to a next generation featuring several new design element as well as new colors. We are currently conducting consumer research to get feedback on the new design, but early sales results are quite encouraging.

Regarding another initiative involving our portfolio of company-owned stores, we recently signed a lease to open a new restaurant on the strip in Las Vegas this will be the first new bill of a company unit in over 3 years. We currently operate 3 units on the strip in Vegas, and they average nearly $4 million a year in annual sales. The new store is targeted to open on December 1, and this is indicative of the flagship unit that the company plans to open in the coming years, as a result of our improved sales and operating results combined with a much healthier capital structure. That wraps up my review of our financials for the second quarter. as I said in my opening remarks we are certainly pleased with our sales momentum as well as our improved operating margins. Looking ahead, we are optimistic that our results for the second and the half of the year will continue to show this improvement.

I am going to turn the telephone back now to Ken Jones, our Treasurer, for an update on our capital structure.

Thank you Andrew our liquidity position increased in the second quarter due primarily to our improving operating results. At the end of June commitments under our credit facility did step down by $3 million to a $155 million as scheduled in the credit agreement.

At that time, our credit facility consisted of revolver advances of $2 million letters of credit of $35 million, as well as, $40 million in term loans leaving net availability of $78 million.

As previously announced, earlier this month which was after quarter end, the company closed a private equity placement of approximately 48 million shares of common stock, which generated gross proceeds of about $92 million. So far, this month, we have applied the proceeds from the equity placement to reduce our debt. As of today, we have repurchased approximately 35 million principal amount of our 11.25% senior notes, leaving a balance outstanding of 344 million. We have also repurchased approximately 9 million principal amount of our 12.75% senior notes leaving a balance outstanding of a 112 million of those notes. In addition, we have fully paid off the $40 million term loan under our credit facility. To add further perspective and to provide some context to all of these numbers compared with the year end 2003, I’m pleased to say that we have reduced our debt balances by approximately $100 million, from $584 million to $484 million as of today.

With the closing of the equity offering and the de-leveraging it provided Denny’s credit profile has certainly enhanced. In order to further strengthen our capital structure, we are moving forward with refinancing our credit facility as well as evaluating a refinancing of some or all of our remaining senior notes. We believe these efforts, if successful will enable us to significantly lower our interest cost, providing additional cash flow for investment in the rest

Additional cash flow for investment in new restaurants free models and other growth initiatives. We are moving as fast as we can in evaluating our various financing options, as we speak, we are evaluating various proposals to refinance our credit facility as well as other options with their senior notes. I cannot, at this time, disclose any thing specific. We will certainly update or recap process as appropriate and when they are some thing more definitive to report we will make those developments public through a press release or SEC filing. With that I will ask the operator to begin the Q&A portion of the program. Angela?

At this time I would like to remind every one, if you would like to ask a question please press "*" then the number "1" on your telephone keypad. Participants wishing to ask a question will be limited to one question and one follow-up question. If you have additional questions, you may reenter in the queue. Also if you are utilizing a speakerphone during today’s conference please pick up the handset before asking your questions.

Again if you would like to ask a question please press "*", then the number "1" on your telephone keypad. We’ll pause for just a moment to compile the Q&A roster. Your first question comes from Ken Bann with Jefferies and Company.

Good afternoon and congratulations on the good result.

Thank you.

Could you talk about the increase in incentive compensation payments for the second half of the year. What is that based on, is it based on improvement sales or increased EBITDA?

It’s actually based on both; we have several components of our incentive compensation program. We’ve done it based on same-store sales, same-store guest counts and EBITDA as the key financial measure. We also have some other non financial objectives that all of our people are tied too as well.

So, if the payments do you expect in the second half that would presume that EBITDA will be higher in the second half than last year, is that a fair assumption?

I don’t know that I expect the -- bonus expense to increase in the second half. I think it's being rounded about this level for the second half of the year. Frankly, last year, we paid virtually no bonus, so incrementally it's also, you know an increase.

Okay. Also on your product cost, you've done a good job in holding it down -- could you just talk about what specific areas you have seen increases in and what kind of product, is it A, is it B and what your outlook is for some of those costs in the second half? And, you know, two years you were under 24% of sales and we expect it to get back down to that level any time soon?

Let me answer the last question and I am going to ask Nelson to speak more specifically. You are referencing I think 2002 where we were under 24% at sale. But frankly, that was all time lows in a lot of different commodity costs. So, I think that if you look historically, that was a unusually low year and I think some thing, you know, closer to 24, 25, it's probably the correct ongoing range.

I would add to that Andrew, that during that particular time we were making a lot of changes to our product line as it relates to quality and taste of food, and so there was a significant investment in 2002, in addition to the lowest commodity prices that any of us have seen We made a significant effort to improve the quality and taste of our food for our customers and that I think further confirms what Andrew just said as to what your expectations should be going forward, as it relates to food cost. So it relates to commodity cost currently. We are seeing some relief, other markets are pretty firm, odd things, over the last several months we have seen eggs go up to a 10 year high as high as above 20 a dozen, I believe last week they were at 58.5 cents a dozen, why -- well it appears to us at the grocery store not so much on the foodservice side and this is true about a lot of things that I will talk about today.

On the foodservice side as an industry we have a pretty constant flow and a demand, because we all have our menus if you will. But in the supermarket, the individual consumer can say, you know what I am not paying a $1.20 for eggs, I am just not -- I am just going to wait or I will eat something else. That has happened with cheese, it’s happened with milk, it’s happened with ice cream. Unfortunately we haven’t seen it happen with pork or beef yet. But we have some pretty good positions on those two products currently and we are watching it very closely. On the other hand, chicken breasts, in the market this past week, and on seasonally high inventory run up in cold storage, which has caused prices to drop. So the market is behaving a little differently than it has in the past. We just monitor it literally, daily to weekly depending on the volatility. But the supermarket retail consumer frankly has done more for us than anything else and I am sure other restaurant companies in the industry are experiencing the same thing.

Okay. And finally could you give us any indication about July, same-store sales, are they trending similar to what you saw in the second quarter?

Somehow, I knew this question would come up. I would tell you, our month ends today, so the numbers that I will share with you are estimates. We believe our sales will be somewhere north of 9% and our customers counts will be somewhere between 5% and 6%. We will send out a press release obviously when we get all our numbers in but that's my best estimate at this point -- one day on the final day of the month.

And your new marketing last year didn’t begin till the end of August right wasn’t it around the last week of August that you --

It occurred mid August, last week of August, in that neighborhood. You are pretty close.

Okay. All right. Thank you.

Thank you.

Your next question comes from Andrew Ebersole with KDP Investments.

Good afternoon. I was hoping you could talk a little bit about your second half outlook for your payroll and benefits line. I'm just wondering whether or not the initiatives that you guys are putting in place with respect to labor scheduling, do you expect those things to continue to bear fruits or is that a number that is somewhat changeable?

Andrew I think that's going to run about a level that they are running now, the year-over-year there you will some difference because we really put these initiatives in the place in the third quarter of last year and we started to see our labor costs come down then, and then in the first quarter with the benefits costs. So we will start in the third quarter, rolling over some of the improvements we started in the third quarter last year. But as far as the run rate level I'm pretty comfortable that we should run about where we have the first half.

Okay and you mentioned the rollout of the new prototype in Chicago, can you talk about the cost of that prototype versus the cost of the pre-existing prototype?

What we've actually done is we done among the seven units almost three different levels of remodel, sort of testing different elements, to ascertain if -- frankly the customer gives us credit for it. And that’s why we are actually in the stores right now with consumer research, assessing to [inaudible] bank from [inaudible] based on the results we've seen so far I think we are going to end up sort of in our middle range which is pretty comparable to what we're spending now which is sort of in the 150 to 170 range. So I suspect we'll end up with pretty comparable cost.

That was helpful and what were your July comps a year ago?

Negative 4.9 I believe.

Great. Thank you.

Bye.

Your next question comes from Karen Eltrich with Goldman Sachs.

Hi. I'm a -- Ken on the remodel program if you could kind of talk about some of the elements that these new -- how they compared to the existing remodels? What elements are you excited about? And, you know, how long do you feel you need to test them before you start rolling these out across the system?

Karen you broke up a bit but I think I heard what you were saying, as far as the element we're really doing the same elements that we were previously which is you know, its mostly dining rooms and the exterior so its -- outside its painting, and landscaping, and signage, inside it's booth packages, tables and chairs, and carpet, you know, new laminate, things like that. The real change is frankly in the way it's designed and the colors more so than we have changed the elements. And that’s why the cost should come in fairly comparably. Now there is the little more brand signage in the restaurant than we had previously. So, there's been some tweaking. Nelson, do you want to add to this.

Andrew, I would add -- that there is -- Karen, there is some subtle elements of quality and comfort, that are introduced and a more consistent scene as it relates to style and color, and more contemporary. Not nearly as a sterile if you will, or antiseptic or cafeteria like -- there is -- it provides a very nice change and it's important as it is for our customers. I would have to tell you, I think, one of the reasons why we have enjoyed such success in Chicago, with these -- all these restaurants that we have done, is the fact that the employees have embraced us and just appreciate so much the difference. And so, we are getting a lift in their morale and attitude, therefore their execution on the service side. So, it really has worked for us on both sides of the equation, but I think, as Andrew mentioned, we are waiting until the end of this month to review the consumer research, Margaret and I, as you well know, rely on consumer research and we’ll make those decision appropriately at that time and at that point, is when we will make our decision go no go, as far as the test period is concerned. I do think, we are still in the honeymoon period on the numbers and I think we’ll continue to be in the honeymoon period probably through November, December, before I get a real good feel as to what the real positive financial impact is going to be as a result of this.

Great. And with the positive comp trends, for you and your franchisees, are you seeing a more receptive level to remodeling from the -- at the franchisee level, have they picked up the pace?

Karen, I didn’t -- I wasn’t able to pick up that question.

Okay can you hear me now.

Yes that’s better.

Okay. At the franchisee level are you seeing them pickup their pace of remodeling with the string of positive comps that you've had, do you get the sense of more confidence in the brand?

It’s the same Karen. We are -- as you might remember, two years ago this brand did not enforce the remodel requirements and we have gotten good response from our franchisees since we have begun that emphasis and that focus and -- but we have not seen an uptick. We have certainly seen a higher level of interest in franchising from them and more questions about opening new stores. But we really haven’t seen an increase in remodel activity yet. I don’t think they really know yet what the true impact is. Most franchisees are going to wait for corporate, whoever corporate might be in what ever brand, to wait a while and see if the results are long lasting, because everyone can remodel and get a lift, the questions is how long do you hold the lift and at what level.

Great and final question in light of your [top] comp and the pre announcements that have come from other restaurants. You got the sense that you are gaining share right now?

I am going to let Margaret Jenkins answer that question.

Karen I am sorry I didn’t understand your questions; you broke up a little bit.

Sorry. In light of your positive comps and some of the pre-announcements we've seen from other family dining, do you get the sense that you are gaining share at this point?

Yes, I do get that sense.

All right. Thank you very much.

Your next question comes from Sneha Patel (phonetic) with Deutsche Bank.

Hi, good afternoon guys. Congratulations on a great quarter.

Thank you.

Just a couple of questions. I am wondering if you would like to give us some guidance in terms of what we should expect for the second half of the year in terms of -- the store count and what that might look like between -- I am assuming company will be relatively flat, but on the franchise side. And then also if you could may be explain why you have such a large store closing on the franchise side? That sort of surprised me a bit.

Your questions are really around portfolio. You know, what you've seen in the first half of the year this year is that the company store base has really settled down. We were very aggressive back in 2001 and 2002. You know, when Nelson and I really started looking at any stores that were negative cash, we started putting capital into the stores and then they had to meet our thresholds or we were willing to close them and as you know we closed over a 100 company stores. That's pretty much over now. We still have our watch list and we keep our eye on it and we closed I think 5 or 6 stores so far this year. And -- so I consider that a normal run rate for any brand that's been around as long as we have. So, I consider that normal. Now, as you've noted the higher activity has been on the franchise side and we really get a little bit back to Nelson's comment that franchisees follow what the company does and lets the company go first. So, there has been sort of that same careful look at their portfolio by our franchisees, as they look to remodel and invest more money in the stores, and as a result frankly some of the lower volume stores that are in very poor condition and frankly in our opinion not very good representatives of the brand, are closing. And you know, we’ve had said there is probably still little more shake out to come, from the franchise side, while obviously, you know, it hurts our royalty stream and we hate to see that happen to the extent that they are low volume stores that may be on in the best condition, we believed in the long run the brand is still going to be better off. So I guess I would answer your question by saying I think you are going to see some continuation of some franchise store closures as they sort through this as the company has.

Okay great thank you. And my other -- two other questions. Can you give us an idea of what advertising had looked like for the first half of this year, versus last year and I know that last time or obviously you had switched and I think it was late July, beginning of August onto the breakfast scene again. But what I was trying to get a gauge of is how much your increase in advertising spends has been thus far this year versus last year. [With respect] of obviously it was also helping drive your same-store sales growth, and I am trying to understand the magnitude between those.

We’ll let Margaret Jenkins, our Chief Marketing Officer; answer that.

The advertising spend is proportionate to the sales, meaning that as --because we worked off, we work off a percentage of sales as contributed both by our franchisees and what we the company put into the fund as the sales grow then the advertising fund grows proportionately, so you ask what is 2005 going to look like it really is going to be a reflection of our business plan, as its developed, so what we do is we work off our projections and then, of course, we have the year laid out.

So sales are up you know, 5 plus percentage here than our ad fund is up, you know, 5%. I think the bigger change frankly has been how the marketing department has spent that money and allocated that and we have through their good work, out of many more weeks on TV this year than we have even though the dollars are only slightly higher.

Great and then my last question is on the -- remind me on how you guys are set up in terms of contracts and if those are more stock pricing based on things like Chicken beef and what the larger commodity exposure might be?

I apologize, I don’t know whether it’s a problem with our system here, you broke up and we could not hear the question?

Sure, can you hear me now?

Yes, that's better.

Okay. Great. What I was wondering about is that you could just remind me on your cost side, that the commodity with your commodity exposure, how you guys are set up, whether it was contracts and whether it was fixed pricing or if it was based on comp pricing and then also what your largest exposure was, was it chicken beef, I don’t know if its eggs, cheese, so you just [inaudible] some of the components there that would be great.

The simple answer to your question would be yes to everything you just said. I'll try and go back and be specific, but obviously we're known for breakfast so those items that -- it seemed to popular on the Atkins type of diet, eggs, cheese, those kinds of things the pork products, all breakfast components have seen sometime during the year some unprecedented increases; however, on eggs and cheese it almost impossible to buy those anything but on market with the exception of our liquidate products that we use. Those you can project and contract annually literally for more stability. Cheese is controlled pretty much by the various dairy co-ops and you just can’t we can get them to agree to governmental formulas but you really can’t do too much forward buying as it relates to that, I think the real opportunity for Denny’s going forward will be in the pork area we haven’t in the past gotten that involved in contract buying, and my view is we will be doing more of that as we see the market normalize a bit and that typically happens certainly on bacon and sausage after Labor Day Ham continues -- frankly will escalate because of the holidays, but what we know all this, so we will manage those commodities appropriately. And be quite careful about it, I hope that answers your question but some of our stuff is on contract, some of it is annualized, some of its on quarterly, some of its on the market. Where they are just as not a better way to buy it and you just deal with those fluctuations.

Okay great thanks so much.

Your next question comes from Leah Hartman with CRT Capital.

Hi gentlemen. Again my congratulations to you, as well. Just some items that I think are embedded on the cost side this year and last, you gave us the $1 million non-cash deferred gain, that was in Q2 ‘03 was that roughly then $2 million for the 6-month period?

Yes. I think, that is about right. I don’t have the number in front of me. But, that would be about right.

Okay. And then, advisory fees that you have been incurring with respect to the refinancing, where would you have those embedded and how much were they in Q2 and then the 6 months period for ‘04?

Yeah. I think, I mentioned $600,000 in Q2 and $2.5 million year-to-date.

Okay.

And they actually fall within our G&A line.

Okay. That’s right, where they were. Okay. And any guidance, you know, in those numbers for the second half.

No.

Okay. Alright. Thank you. Good luck this quarter.

Thank you.

Your next question comes from Bruce Karton (phonetic).

Hi. Congratulations on a job well done. I wanted to ask you a couple of questions on the franchise operations. The same-store sales performance has exceeded those of company-owned stores for a couple of quarters now, and I’m just wondering if that trend is likely to accelerate, given I guess, what’s going on, what’s causing -- one thing that’s causing that, is that more of the underperforming stores are being taken out of the franchise store base at this point, which should cause that trend to become increasingly divergent for the next couple of quarters is that kind of a correct analysis

I am not sure the – taking out the lower performing stores in total is necessarily pushing the difference. It certainly contributes you are right. I really think it’s more about our marketing and 499 product promotions, which has just really resonated with the consumer. And I would certainly like to think that, that should continue. We have been – scratched our heads a little bit, as many people have in regards to some of our competitors that have actually been experiencing negative sales. So I certainly hope that trend will continue.

And I guess holding up on the comments that Nelson made in response to Karen’s question on the franchisees doing more remodeling and I guess your response was not necessarily but they are inquiring about new opportunities to open stores and I was wondering if you could comment on more specifically on that. Did his enquiries cut off, has they begun the pick up just since you received more capital; we’re headed kind of a steady all year as the trends have been favorable. And I guess kind of secondarily to that, how will the improvement in your capital base play in to allowing franchisees to get the financing they need to open new stores?

Hi Bruce, I am going to let Andrew answer the second part of your question, as it relates to the capital market and how – whether or not it will be easier for them to finance I think is what your are asking, but I’ll let Andrew speculate on that. As far as the franchising piece is concerned, franchisees over the last 60 days have become far more active in making there increase known as it relates to franchising and I think that's because not of the equity infusion, although I do think in the long run that will help us do more franchising. The real benefit that they are beginning to realize in their pockets is the increase in sales and customer accounts. They actually are performing slightly above the company most of the time by a few tens, that is a very unusual for this brand, typically the franchise organization here historically for many, many years it was at least a 4% or more behind us as the company operator. And so they are beginning to not only see that the new focus and the new level of expectations that we have it really does work, but it's long lasting. I think they have played a wait and see game, many of them, and I think some of them still are. They want to see if this is real or not. After 10 months there is no doubt in my mind that is real, but, you know, franchisees typically invest because they are somewhat risk of ours. They want to make sure whatever it is we ask them to do, whatever we are doing does work before they go out and, frankly, you know, mortgage their homes and their families and everything else that they have to do to get into additional franchise units. So, -- but it's been about the sales and about the resiliency of the Denny's brand versus some of our competitors in the market. But I am going to flip it over to Andrew about the financing piece and the equity piece.

Yes, but before I would speak to that the other comment I would add in terms of the franchising side. Yes, we are seeing significantly more leads and interest, but as I am sure you realize it's a long lead time to open a restaurant. So, as the interest builds they will start looking for sites and then after they gets sites, then go through permitting and so it’s a slow build. I wouldn’t expect to see anything, for example next quarter or even the quarter after. It takes time to build it up. As far as the financing as the franchise or I think it helps the whole brand that our capital structure is in better shape and healthier. With that said, we do not provide financing to our franchisees. So, as direct improvement in our capital structure will not have any direct impact on their ability to borrow money, because they won't be borrowing it from us. With that said, I think the lenders out there looked to the overall health of the brand and they looked to the health of the franchisor. Because they want to know that it’s a brand that is going to be a healthy one. So I do think there is an indirect benefit of our capital structure improving and I think lenders will view it that way. With that said, loaning money directly to a franchisee or a franchise company and they are still going to qualify on their own. So I do think that their ability to borrow will also improve.

Your next question comes from Andrew Ebersole with KDP Investments.

A quick follow-up. I was hoping you could discuss your view on, what the key drivers were behind the really strong July comps that you talked about. Was there anything in -- was there any about promotional cadence or any counter that, that contributed to those results or is it basically you guys just continuing to execute well and revamp your marketing?

Well as someone asked about last years July comps -- same-store sales, which I indicated were down 4.9%. Obviously, we are rolling over that I think that the promotion getting back, I hate to beat a dead horse here but the 4.99 promotions are just extremely affective. This time last year we had not yet started that promotion, it really started in mid-August or so. So I do think that promotion is really working we also as I mentioned marketing has put more, not necessarily spend a lot more dollars but given us more weeks of advertising this year and that is benefiting as well.

Thank you.

Your next question comes from Hansen Baird (phonetic).

Good afternoon. I join everybody else, I think you are doing a great job running the company, and I apologize I missed you conference call, I hear it by replay on the financing, but I have got some questions, it relate to that, if I could?

Yes.

Specifically the private equity placement, I would like to get a little understanding as to how you decided that the size of that issue as high as 90 million? number one. Number two, you went to select group of investors, as opposed to doing a standby rights on offering. I would like to understand the logic behind that? And then the select group of investors you went to, how many of them were there and were there any new investors or the existing large shareholders.

Could you repeat the questions please.

Mr. [Marchioli], it's a three part question. The one is, and I guess I am addressing this to Ken, John, talked about the capital structure.

Sure.

I need some help on the thought process as per going out and raising specifically $90 million and then once that decision was made that’s a trade off between dilution and price obviously. Once you decided that why did not go to an underwriter and do a standby rights offering so all your existing shareholders had an opportunity to prevent their dilution and when you decided to go third parties you decided not to do that, I'll hear -- be interested in your answer, and having decided to go to a select group of investors, I'm curious as to how many there were and whether any of them were new investors to the company or were they just existing large shareholders like Mellon which is a well advertise make a shareholder of yours?

Let me try to answer the third question first the as it relates to the mix of investors it was a combination of existing shareholders as well as new investors, and we had -- they're predominantly institutional investors which we will call sophisticated investors. I cannot I don’t want to get into how many and the number and specific in who they were.

I don’t care who they were. That's okay.

But that’s generally the mix. As it relates [92] million, we did have a limited number of shares available to issue under the private placement and that did floor the amount we could raise just based on that sheer volume of shares that we had, we since going out with a proxy -- within the last -- or we will go out with the proxy solicitation to increase those number of shares we used up everyone -- every last share in the private placement. We thought that the private placement and based on feedback from some of the investors that did participate in some of the general shareholder base that, that was the appropriate way, that the appropriate amount of an offering and we feel like it will be a good catalyst for us to be able to effect a pretty meaningful recapitalization of the balance sheet.

And so far it certainly has been a positive I think, not only for the new investors, but also for all of our existing investors at the time. So, we clearly had their interest in mind as well.

Why didn’t you do a standby rates offering, I think, it's slightly different, I’m not trying to pick an argument here, but before your offering, I owned a little over, 1.6% of your company, and now I own just over 0.7%, now I know, the company is in better shape today, than in was before the financing, but I certainly would have liked to have the opportunity to buy stock as 190, and I was never contacted by anybody?

We just felt like the private placement was the most efficient way to raise the most capital at the time. And to allow us to do what we need to do on our recapitalization.

Okay. Thank you.

You are welcome.

Your next question comes from Van Handrick (phonetic) with Trafele (phonetic)

Hi guys. I wanted to add my congratulations on the quarter and also on the fact that you hit the ground running in terms of buying back some of the [inaudible]. In any case, my question relates to EBITDA comparison this year versus last. I guess, if you view back out some of the one-time charges this year, and [start at] last year you have a improvement of about 6.4 million in EBITDA on approximately $9.7 million increase in revenues, and is that the right way of thinking about it? Because that’s an impressive flow through.

Yeah that’s the right way to think about it and its – the beauty of the operating leverage of this company, when you get strong sales increases, if you are executing well with the restaurant level it flows through at wonderful returns.

So given that you were able to get the similar flow through in Q1 and Q2, we can expect that you can put up similar kind of results going forward?

Well from a flow through standpoint, As sales go up I think we will -- we are executing well at the restaurant level and that if we can keep the sales momentum going, I have no doubt that it will flow through .

Great. Thanks again.

Bye, Bye.

At this time, there are no further question. Mr. Jones do you have any closing remarks.

Just thank you for joining us and we look forward to a successful second half of the year.

This concludes today’s Denny’s conference call, you may now disconnect.