Denny's Corp (DENN) 2005 Q3 法說會逐字稿

Good afternoon. My name is Shannon and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Denny's third-quarter 2005 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 session. (OPERATOR INSTRUCTIONS)

Mr. Alex Lewis, you may begin your conference.

Thank you, Shannon. Good afternoon and thank you for joining us for Denny's third-quarter 2005 conference call. This call is being broadcast simultaneously over the Internet. With me today from Management are Nelson Marchioli, Denny's President and Chief Executive Officer, and Mark Wolfinger, Denny's Chief Financial Officer.

We will begin with a business overview from Nelson. Mark will then provide a financial review of our third-quarter results. After that, Management will be available to answer questions.

One calendar note. We will be releasing our sales for the month ended October 26 after market next Thursday, November 3. Before we begin, let me remind you that 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 the 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 29, 2004, and in any subsequent quarterly reports on Form 10-Q.

With that, I will now turn the call over to Nelson Marchioli, Denny's President and CEO.

Thank you, Alex, and good afternoon, everyone. I hope you have had a chance to read the earnings report we released after the market closed today. As I stated in the release, we are pleased to have maintained our positive sales momentum in the third quarter in what has certainly been a challenging economic environment.

This period marked our eighth consecutive quarter of positive sales. Even more encouraging has been the strong sales results achieved by our franchisees. With over two-thirds of the chain operated by franchisees, their continued operational improvements and financial success are crucial to the health of the brand. Denny's has proven over the last two years that with the necessary investments in food, people, and facilities, it is a competitive restaurant brand and capable of retaking market share.

Further evidence of Denny's potential is the notable sales lift we have seen at two recently reopened units. The first was an older unit in Pensacola, Florida that was severely damaged in one of the hurricanes last year. Prior to the storm, the restaurant was generating strong sales growth in spite of its need for capital improvements. Considering the upward trend at the unit, we decided to tear down, or scrape and rebuild, the old structure and build a new facility.

Annual sales at this unit were approximately 1.5 million when it closed. We were hopeful that with a new box, the site could grow to 1.9 million. I am delighted to report that the unit reopened in mid-September and the initial results are quite positive. In fact, its current run rate puts it on pace for annual sales well above $2 million.

Another unit in Monterey, California reached the end of its lease term and the landlord was looking to sell the property. Rather than let the unit close, our development department found nearby a more visible property that we converted into a Denny's unit. The new restaurant has been open over a month now and is enjoying a sales lift of more than 30%, which puts it over 2 million as well.

Admittedly, these new units are still in the honeymoon stage after reopening, so their sales may soften a bit; but so far, they are exceeding our plan and expectations. Both restaurants utilized our latest design, which has shown a higher sales lift than our previous remodel scheme.

Seeing the impact of this design on a shiny new Denny's is even more encouraging. We are also developing a new building prototype that will utilize elements of this design. Excluding the diner reimage in the late '90s, it has been almost 20 years since the Company designed a new restaurant facility from the ground up. We expect the new prototype will have significant greater curb appeal and will certainly be more operationally efficient with less square footage. We hope to have the new prototype available for development next year.

Currently we have two Company units under construction, one in Morgan Hill, California and the other on the island of Honolulu in Hawaii. We are estimating annual sales for each unit of approximately $2 million, which is 25% above our current Company average.

As I have said before, our Company development strategy will target flagship sites in high-volume areas where we have a proven record of success. We recognize that these A grade sites will cost more to develop and will require higher sales levels to meet our return requirements.

Turning back to the core business. Despite significant macroeconomic pressures, we remain on pace to meet our operational guidance as set forth at the beginning of the year, excluding the impact of the recently disclosed legal settlement. While we are disappointed with our softened guest counts during the third quarter, we are encouraged that the trend was relatively stable.

During the summer we attributed the softnesses to reduced consumer spending and to decreased travel in reaction to higher gasoline prices. In the latter part of the quarter, the Southeast was negatively impacted by hurricanes and the nation as a whole suffered from the resulting spike in gas prices. Through those rough periods, our sales trend remained positive, which we believe is attributable to the consumer's recognition of Denny's strong value proposition.

Our abundant value product and marketing strategy is well-suited to the current price-sensitive environment. Our customer demographic is clearly feeling the pinch of gas prices and is making tough choices on discretionary spending. We are seeking to make that choice easier by providing a good quality, abundant meal for a reasonable price.

Our new media module, which launched earlier this week, will continue to reinforce Denny's value message. If the consumer responds to this message as we expect, Denny's has the opportunity for a strong finish to this year. The holiday window from Thanksgiving until New Years is a high-volume period for Denny's, and one that we seek to build upon each and every year. With a strong media message, we hope to make Denny's a destination for new and lapsed customers as they look for a great meal and a comfortable setting after a long day of shopping or traveling at a terrific value.

As always, I thank you for your interest in Denny's and your time today. I will now turn the phone over to Mark Wolfinger, who will take you through a review of the third-quarter financials.

Thank you, Nelson. Good afternoon. Before I outline our financial results for the third quarter, I would like to begin with why I joined Denny's as its CFO. In performing my personal due diligence prior to making my decision, I identified several key strengths of the Company, the first being Denny's unusually high brand awareness. I have worked in many retail environments and know the significant advantage that a strong brand name provides.

The second strength was the obvious operational turnaround being carried out by Nelson, his management team, and our associates, both in the support center and in the field. The progress was clearly evident in the sales trends and was being validated by the financial markets.

The third strength I found was a committed organizational culture that is focused on continued brand improvement.

My initial priorities will include enhancing the cash generation of the business to fund growth and to delever the balance sheet. As Nelson talked about earlier, we are encouraged by the initial results from our new restaurant openings as well as our latest remodels. As we look to grow our business, we will focus on both increasing operational cash flow as well as employing our capital in the most efficient manner.

Increased cash flow will not only support our growth plans, but allow us to meet our deleveraging objectives. The Company completed an important financial restructuring in 2004, which greatly solidified our capital structure. At the same time, our leverage ratio remains high and we must focus on improving both the numerator and the denominator of this ratio.

Finally, we need to continue to improve our Company store operating performance and our return on assets. Even with two years of positive sales trends, we still have too many units operating at sales levels well below our Company average. This may be due to poor trade areas, competitive pressures, or inefficient operations. Simply improving these restaurants up to the chain average creates significant positive sales leverage and EBITDA improvement.

I am sure I will put more objectives on the list in the coming months, but I welcome the challenge and think we have a great team in place to lead this brand.

Turning now to our third-quarter same-store sales results, which Nelson touched on in his remarks, our positive sales trends continued in the third quarter as our Company restaurant same-store sales were up 1.5%. This increase was comprised of a 4.1% increase in average guest check and a 2.5% decrease in guest counts.

The primary driver of our guest check increase this year has been menu price increases taken to cover cost pressures from commodities, utilities, and wages. We believe the recent traffic decline has been driven more by economic pressures than a change in consumer perception or preference for Denny's. Our promotional items continue to sell well and our media awareness and consumer responses have not indicated any concerns.

Now turning to the income statement, sales at Denny's Company-owned restaurants increased approximately $1.5 million to 226 million for the third quarter, as a 1.5% increase in same-store sales offset a 7-unit reduction in Company restaurants since the same time last year.

As I am sure you have heard from other companies this quarter, we continue to experience modest cost pressures on our business. The margin analysis table in our press release summarizes these operating comparisons. First, let me note that our third-quarter Company restaurant operating margin was negatively impacted by charges totaling $5.8 million which were taken in the quarter to increase our legal settlement reserves.

4.8 million of that total is the result of a previously announced litigation settlement with the State of California's Division of Labor Standards Enforcement. The remaining $1 million was accrued for other ongoing cases. These charges are reported on our income statement as other operating expenses.

Including these charges, Company operating margin was 10.5%. Excluding the charges, store level margin for the quarter fell slightly to 13.2% from 13.5% last year.

Moving to the individual line items, product costs decreased 0.9 percentage points in the third quarter due to a higher average guest check and relatively flat commodity costs year-over-year. Payroll and benefits costs were 41.8% of sales in the third quarter, which was 0.8 percentage points higher than last year's quarter. While we continue to invest in additional crew level staffing and training, the primary contributor to the payroll increase has been wage rate pressure.

Some of the payroll increase can be tied to several states that took minimum wage hikes this year, including New York, Illinois, and, most significantly for us, Florida. In these states, we pass through the increases on a dollar-for-dollar basis, which protects our penny profit, but does negatively impact percentage margins. We have also seen wage pressures outside of these states as the labor environment has become more competitive.

Occupancy costs were 5.4% of sales in the third quarter, which was 0.3 percentage points lower than the same period last year. Our occupancy expense is composed of three major items -- rents, property taxes, and general liability insurance. Based on our latest actuarial report, we reduced our general liability insurance accrual by $1.1 million, which benefited occupancy expense by 0.5 percentage points. This offset a 0.2 percentage point increase in rents and property taxes.

Other operating expenses were 17% of sales in the third quarter, which was 3.2 percentage points higher than last year's quarter. As I mentioned earlier, this is due primarily to the legal settlement charges, which accounted for 2.5 percentage points of the increase. In addition, utility costs were up 0.3 percentage points in the quarter. Utility costs are expected to be significantly higher over the next two quarters due to the recent escalation in natural gas prices. Our current estimate is for year-over-year increases of 0.5 percentage points to 1 full percentage point.

Also in the third quarter, we incurred $40,000 of training expenses related to the rollout of our new POS system. These costs will continue for the first half of 2006.

On the franchise side of our business, both revenue and expenses were relatively flat as same-store sales growth of 3.8% offset a 20 unit decline in franchise restaurants since the same period last year.

Turning to G&A, our third-quarter expense decreased approximately 2.1 million from last year. This quarter, and in fact all year, we have two exceptional items impacting our year-over-year G&A comparison. First, stock-based incentive compensation was 1.4 million in the second quarter, compared with 600,000 in the same period last year. Offsetting this increase was 1.5 million of recapitalization related to transaction costs incurred in the third quarter last year compared with no similar expense this year.

Excluding these two items, other G&A decreased 1.4 million as a $2.1 million reduction in incentive compensation offset increases in legal costs and staffing of approximately $700,000.

Operating income in the third quarter decreased $6.5 million compared with the same period last year, reflecting 5.8 million in legal charges, as well as increased labor and utility costs. Also, operating income in the quarter was negatively impacted by a $1 million increase in restructuring charges and exit costs, due primarily to $1.2 million in severance-related expenses. Operating income was also impacted by a $1 million reduction in asset sale gains, as we sold no surplus properties this quarter.

Regarding the bottom line, we reported a net loss for the quarter of $3.4 million, or $0.04 per share. This loss included $7 million of special charges for legal settlements and severance.

This quarter's net income benefited from a $3.6 million decrease in interest expense as a result of our recapitalization last year, which significantly lowered our borrowing costs. Interest expense is up sequentially due to increases in LIBOR, which is the index for most of our floating-rate debt. Interest on our debt is approximately 50% fixed and 50% floating, which we feel is an appropriate mix. Based on the expected rate curve, we project full-year interest expense of 55 to 56 million, with 48 to 49 million of that amount as net cash interest.

Our net loss also improved due to a $1.3 million tax benefit in the quarter. This tax benefit was determined using our effective tax rate estimated for the entire fiscal year. As we currently expect to have income for the entire fiscal year, we anticipate a full-year tax provision of 0 to $1.5 million.

Moving on to capital expenditures, our cash capital spending for the third quarter was approximately $14 million, bringing the year-to-date total to $29 million. Our capital spending has ramped up through the year, and the full-year total should range between 50 and $55 million. The run rate has picked up considerably as most of our remodels, expansions, and new unit construction is taking place in the back half of the year.

In addition to cash CapEx, over the next six months we intend to finance through a capital lease up to $10 million of hardware associated with the new POS rollout. This project is long overdue and one that we expect will contribute to improved restaurant operations.

With regard to our balance sheet, there were no significant changes during the third quarter. At quarter end, our revolver had no outstanding balance and our surplus cash totaled approximately $25 million. Subsequent to quarter end, we made an $8.8 million coupon payment on our 10% senior notes.

I want to follow up on something Nelson mentioned earlier. As a new member of the Denny's teams, I think it is important to note the strong sales performance of our franchisees, as they operate 65% of the chain. As a consumer, I did not know whether a restaurant was Company or a franchised unit. It was simply a Denny's. We need and expect the entire chain to continue achieving positive sales, which will result in driving up our average unit volumes.

Year-to-date same-store sales at franchise units are up 5.6%, while Company units are up 3.9%. Same-store sales growth over the last two years has contributed to increases in average unit volumes at Company and franchise units of 160,000 and 190,000 respectively. That said, this represents a significant opportunity, since we still trail our peer group in sales volume and believe there are no barriers preventing us from making up the difference if we continue to execute on our strategies.

In our release today, we updated our financial guidance to reflect the final third-quarter results. We are not prepared at this time to provide any guidance for 2006. We are currently in our internal budgeting process and we will be finalizing our business plan for 2006 in the coming months.

The month of December is a pivotal month for Denny's every year, but given the uncertainty in the economy at this time, we feel it prudent to wait for those results prior to determining our expectations for next year.

That wraps up my review of our financials for the third quarter. I will now turn the call back to the operator to begin the Q&A portion of our program.

(OPERATOR INSTRUCTIONS) Reza Vahabzadeh, Lehman Brothers.

Do you have an early read for CapEx for next year?

As we said, we are not prepared to give any guidance for 2006 at this point. We will be finalizing our plans over the next couple of months and we will get back to you on that, at the beginning of the year, likely.

Okay, and then on occupancy expense cost increase, is that going to be just a next two quarters' events or is that something that one should expect for the foreseeable future?

On the occupancy, the general liability reversal? Is that what you're referring to?

Sorry - you're talking about the rent and taxes piece?

Yes, exactly.

That obviously trailed against -- from the standpoint of revenue change as well. So clearly that reflects that as well as the property value increases across the country.

Okay. And then lastly, what is your outlook for food costs in the fourth quarter?

I see a continuation of current performance. We've seen a softening in the commodity markets and we have been in a position to take advantage of that for next year, as well as the balance of this year.

Alexis Gold, UBS.

Just a couple things. You talked about some of the macrotrends in the environment and clearly appear to continue as gas prices remain high, etc. Can you give us a sense for the competitive environment within that and how you expect to drive traffic versus continued promotions at your competitors?

I really don't -- here at Denny's, I really don't have us focused on competition. The opportunity for Denny's, in my view, against our peer group is such that the opportunities really are for Denny's to drive traffic. And our value and abundance strategy has worked for two years and our expectation is, based on current consumer confidence and the economic environment and the value we continue to promote and deliver in our restaurants, that that will be our vehicle.

Okay. And just on the legal settlement charges, is this higher than you had expected? And can you give us a sense for the timing of the ongoing litigation in California?

We did a filing with the SEC about a month or so ago, and that really does get into a lot of detail about that and allows Alex to answer any questions you might have on a go-forward basis. But this call probably would not be long enough to get into all that detail.

I will say that I think we came out in a good place with the State of California and it was the right thing to do. But the filing, I think, describes pretty clearly where we are on all that.

Thanks very much.

Dean Haskell, JMP Securities.

Good quarter, gentlemen. My question pertains to your competitive set as well. IHOP this morning reported very good comps -- I think in the 3 to 4% range. My question really is, do you see their franchisees -- of course they're 100%franchised -- do you see them taking prices up pretty aggressively?

Their franchisees or ours -- I'm sorry.?

Their franchisees.

I don't know. They are an excellent competitor. They did release, I think, a very nice report this morning, to your point. We are going to continue to focus on what we can do and how we can improve. There are a lot of good competitors in the marketplace, particularly in our segment. They had a good quarter. My congratulations to them.

But I would ask you as well as others to look at our year-to-date performance compared to all our competitors and look at our two-year comp in particular as you value the Denny's portfolio.

Okay. And my second question is to Mark's point about raising cash. Is there an opportunity to do another sale leaseback and pay off some of the mortgage debt?

Well, as we have talked about before, sales leaseback is just another way of financing, but I'll let Mark address that.

My view on the sale leaseback side is that is obviously an alternative that comes up pretty frequently in a multiunit environment. It is not something that I think is certainly in the top set of priorities. We do have, obviously, a lot of real estate that is under our control that has value and we understand that.

At the same time, as I said in my opening comments, as far as cash generation, I would like to see us generate more cash out of what I would term to be organic part of the business.

Okay, excellent. Thank you, Mark.

Eric Wold, Merriman Curhan Ford.

First of all, looking at obviously your enthusiasm towards the end of the year with the marketing campaign and the holiday season being the strong period for sales, you guys are obviously forecasting positive comps. What are your thoughts on getting back to positive traffic now that you have in November and December much easier year-over-year comparisons for traffic?

Well, we had a good fourth quarter last year. We expect a good fourth quarter this year. Sales -- my view of sales on a go-forward basis for this year are that they will remain positive. As you have heard me speak before, I am always concerned about guest counts. We are very open about where our guest counts are. I'm confident with the value message that we have for the balance of this year and the first part of January that our message with the same media weight that we had last year is going to deliver the kind of relevant message our consumer wants to hear.

And I know we will hit positive guest counts sometime during the fourth quarter. I can't predict whether it will get us to positive or not, but there will be weeks where we are positive year-over-year. I don't know if it will be sufficient enough to overcome the negative that we experienced in the third quarter.

Okay, fair enough. Looking at the number of closures on the franchise side, obviously it is slowing down. You had 15 closures in Q1, 9 in Q2 and 5 in Q3. Do you think we are getting now to a time where you have more normalized closures going forward, you've kind of passed the big cleanup of the unit base?

You know, we're coming to the end of our remodel requirements on that first 7-year cycle, Eric. We have about 25% of the Company stores to remodel and 25% of the franchise stores to get done. And our franchisees, just as we are, are looking very hard at the kind of returns these restaurants deliver.

We certainly on the Company side don't have any negative cash flow issues, but the franchisees are still having to go through that rationalization. So I would not want to make any predictions on closures at this point, beyond what I've said before, and that is expect this year what you saw last year.

Okay. One last question. You talked about G&A year-over-year, the changes that Q3 of last year versus Q3 of this year. What were the major differences that took it from the 16 and change million dollar range in Q1 and Q2 to 14.5 in Q3 and what should we expect as a more normalized run rate going forward?

Eric, I think the one piece that we identified that was different -- all year long we have had the variation in stock-based compensation as well as the transaction cost. The other piece this quarter, frankly, was a lower incentive compensation accrual, which is performance-based.

That was the only thing really different between the first half this year and Q3?

Yes.

Okay, perfect. Thanks, guys.

Tony Brenner, Roth Capital Partners.

I heard there was a storm in Florida.

Yes, so did we.

And that large parts of the state remain without electricity. So I'm wondering, A, how many Denny's stores remain closed, how long they will be closed, and in those stores that are open, what impact there has been on that business.

Well, normally, you don't hear me talk about hurricanes very much. But in this particular case, we have 15 restaurants approximately on the Company side the remain closed and 35 franchised. The ones that have reopened -- and there have been many -- as power comes back on -- and power is the issue. We cannot operate without power. And South Florida, as you have seen in the news reports, is suffering from their power infrastructure.

As power comes back on, I'm confident we'll get most of our stores back online very quickly. Those that are currently operating are just having great sales results at the moment, as we always do after a hurricane and why we work so hard to get open quickly after a hurricane.

So the net effect, assuming that the closed stores come on within the next week, let's say, the net effect of all of this is roughly a wash or a negative or --?

I think is just too early to tell. It is really going to depend on these things are closed. If you're talking about a week's lost sales, we expect to be very positive on the back end. We are a good place for people and have always done well after these incidents as they look for a good environment for just a good meal.

But you have also weak sales in some of these stores and it could be more than that. So that is a little hard to overcome (multiple speakers).

Any impact there is not reflected in any guidance that you've provided, I presume, at this point.

That is correct.

Second question then is, as you intend to emphasize the value proposition in your marketing efforts in the fourth quarter, I believe it has also been your intention to tilt some of that marketing towards more of a dinner and lunch day part message, which have higher price points. I'm wondering if that remains your intention or if, given the environment, you might choose to postpone that shift until the economy is a little healthier.

Well, as you've heard me say before, that is probably more about next year. This fourth quarter we will be focusing on breakfast with the current promotions that went on-air, I think, this past Monday, with the big fruit-filled French toast -- and that will con -- peach and cinnamon raisin, actually. Delicious. I hope you've gotten a chance to try it. But bottom line is we will do both next year and we will do it carefully, but we're not prepared to reveal too much of that at this time.

Okay, thank you very much.

Bryan Hunt, Wachovia Securities.

I was wondering if you can essentially give us any indication of any additional space where you see, one, wage pressure, not only from a tightness in the labor pool, but also from potential legislation that you see coming down the pipe?

You know, there are about four states that have announced that they are going to increase minimum wage. So our intentions, as we always do, we will pass those increases over dollar-for-dollar on a go-forward basis. There's several other states talking about doing something. Typically something usually happens in these state legislatures during the month of December. We are very attuned to all that. But beyond that, I really can't tell you a whole lot.

Okay, and then along the lines of raw materials, you mentioned that you have taken advantage of some of the lower costs. Looking at your raw material base, what commodities have you taken positions on and how far out are you hedged?

Well, we contract -- and I would tell you that for the things that we are going to contract on, we're probably 75% committed for next year, and I think we are in a good place. That's why I can be so confident about commodity costs next year. We still have a couple out there that we are working, and I would suspect we will be done with. Some of them, I have only taken out to the end of June because I see some of the markets softening a bit more. Our purchasing team is just very astute, and from seasonality negotiations.

So I think we are in a very good place. I think everybody in the industry is going to benefit from softening commodity prices. As I think I have said on prior calls, you're not going to see what we saw in 2002, but I do think we're going to enjoy what we saw midpoint 2003 on the go-forward basis as far as commodity prices are concerned.

We still have to be concerned about fuel prices, and utilities is where we are concerned. Just like everyone else, that is an area that is going to see a lot of cost pressure in '06.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Reza Vahabzadeh.

Can you just dig down a little bit deeper into the general liability reserve reversal -- just how that came about?

Yes, it was just our normal course of review of our actuarial report.

This is Mark. We go through and look at, obviously, general liability insurance. We look at worker's comp. We do it obviously every quarter and simply reviewing the reserves and moving forward in that manner.

But can that move around backward as well, go higher and go lower at the same dollar amount?

It is Mark again. Again, historically I'm sure it has. I don't have that information in front of me.

It is all based on actuarial results, Reza, and that guides us, both past, present and on a go-forward basis. So we stick pretty close --.

Fair enough. And then in terms of same-store sales, I don't know if you could elaborate on any particular regions that were stronger or weaker than the overall average.

As I have said in prior calls, we still see -- the entire country is beginning to respond positively this quarter, which I'm delighted to report. But we still see the West far stronger than the East. I think the energy price impact on the folks as a result of Hurricane Katrina that knocked out so much oil production in the Gulf caused prices to reach levels, frankly, people on the East Coast have not seen before. As well as natural gas prices that are forecast for the heating season, if you will.

So the West continues to perform extremely well, and we are delighted with their results. But we are seeing a rebound on the East as well, but they are having to deal with higher energy prices that they have not seen before.

Thank you.

Ken Bann, Jefferies & Co.

About potential franchisees, are you getting many inquiries from people looking to establish new franchises or franchisees looking to --?

I can tell you that we are getting greater interest in the Denny's franchise for ground-up opportunities than we ever have, probably in the history of the brand. Very robust interest at this time, both from existing franchisees, which is very important, as well as new franchisees from out of the system.

How long will that take to develop into the actual building of new units?

Well, it depends on where in the country they're located. East of the Mississippi, it is probably 1 year, 1.5 years. In California and in some other areas, it can take up to 3 years. So it kind of depends on where you are. But we are confident that we're going to hit our guidance this year and next year will be better.

Todd (indiscernible), Goldman Sachs.

Actually it's Karen Eltrich. A couple questions. First, the bank loan market has been pretty robust. You have done very well since you've come to market. Has there been any thought to refinance that to get a better rate?

Karen, we're always very mindful of how the markets are and we will keep looking at our opportunities. We don't have anything at this time that we are working on.

Secondly, in terms of for the new franchisees as you build that pipeline, we are hearing increasing complaints about higher building costs just from raw materials as well as real estate. Has this been a hindrance for you guys at all?

We haven't seen it on the franchise side. On the Company side, of course, we are very careful about that. It is one of the motivators for us to develop a new prototype that I see being 500 square feet less and having actually more seats in it, because we have not done it in so long.

So we have not seen any reduction in franchisee interest at this time and we are getting more efficient on the Company side as we get more into the growing mode.

Finally, congratulations on your association with the Professional Bowlers. What opportunities do you see coming from that? What was the process in getting that? Did you beat anyone else out or was it just coming from the existing relationship that you had with them?

We have an outstanding leader in Margaret Jenkins, who I know you have met, that leads us. And she has a great relationship with publicists and a great team that supports her. And when you are good, you are good. I'm just delighted that she and her team were here and were able to convince the Pro Bowler Tour that we were the right match. And we think it is a very exciting opportunity for us.

And I hope you tune in at 1:00 Eastern time to ESPN to see the first game this Sunday, Karen.

I will definitely do that. Congratulations.

Dean Haskell, JMP Securities.

Back to the GL question, you referred to actuarial reports. I assume that is a third party. And then what areas of liability does that cover? Is it general? Is it worker's comp? Is it health and injury, etc. etc.?

The general liability piece -- this is Mark -- first of all, it is reviewed by a third party; obviously reviewed by our auditors as well. But it is only the general liability piece; it is not worker's comp or I think mentioned health -- health was the other question you had.

We have separate actuarials for that.

Separate pieces for that, obviously.

Thank you very much.

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

No, we just thank everyone for joining us and you'll see you again on the next call. Thank you.

This concludes today's Denny's Corporation third-quarter 2005 earnings release conference call. You may now disconnect.