Denny's Corp (DENN) 2005 Q4 法說會逐字稿

At this time I would like to welcome everyone to Denny's fourth quarter and year end 2005 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. (OPERATOR INSTRUCTIONS)

Thank you. Mr. Lewis, you may begin your conference.

Good afternoon and thank you for joining us for Denny's fourth quarter 2005 conference call. This call is being broadcast simultaneously over the Internet. With us 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 the business overview from Nelson. Mark will then provide a financial review of our fourth quarter results. After that management will be available to answer questions.

Before we begin let me remind you that in accordance with Safe Harbor provision of the Private Securities Litigation Reform Act of 1995 the Company knows 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 29, 2004 and in any subsequent quarterly report 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, and thank you for joining us today.

Hopefully you have had a chance to read our earnings release which was published after the market closed today. As I stated in the release we are pleased to have completed our second calendar year and in fact our ninth consecutive quarter of positive same-store sales despite a challenging economic environment. In 2005, same-store sales across the Denny's chain grew 4.5% which is on top of a 5.9% increase in 2004.

This yields a 2 year sales comp of greater than 10% which is a significant achievement for this brand -- candidly, any brand -- in our industry. It is clear that Denny's sales have outperformed our segment and much of the industry over the last 2 years. This success has been driven by our commitment as well as that of our franchisees to make the necessary investments in our food, our people and our facilities. While fourth quarter sales were consistent with our expectations, guest traffic was softer than expected particularly in the East and Midwest sections of the country. Many retailers reported similar weaknesses in these areas which have had softer economic trends combined with substantial job losses.

So our sales growth was reasonable in the fourth quarter. We did not meet our expectations for profits. Mark will go through the details in his remarks but I want to assure you that we are committed to increasing our operating margin.

Some of the margin pressure has been due to investments in our business including higher wages, incentive programs to promote suggested selling and increased training to improve customer service and operational execution. Other margin pressures such as energy prices and minimum wage hikes are, unfortunately, outside of our control. However, we have taken price increases to offset them.

On the labor front, we continue to work on our staffing practices to become more efficient. In the fourth quarter, guest counts declined in each successive month which is a challenge for restaurant managers when they are trying to schedule labor. We certainly want to improve our efficiency but we cannot afford to sacrifice our customer service initiatives. Our outlook for 2006 reflects a generally stable cost environment with the exception of energy prices, which continue to be a concern.

If cost pressures do stabilize, it should provide us an opportunity to leverage our sales expectations and of course improve our margins.

On the marketing front, we are optimistic about our plans for 2006. New product introductions will play a key role in our marketing programs this year and going forward. Last year we assembled a terrific new product development team that is already to begin -- is already beginning to make an impact on our menu.

Each of our marketing modules this year will feature new product introductions, including a new lineup of dinner entrees we call Denny's American Dinner Classics. We are placing renewed emphasis on dinner in 2006. Growing our dinner daypart is a significant opportunity for Denny's. Currently, lower dinner sales account for most of the disparity in average sales between Denny's and entire volume family dining peers.

While not letting our focus slip for breakfast, we will endeavor to extend our breakfast dominance to other dayparts, beginning this year with dinner. We will support our dinner promotions with television advertising for the first time in several years. The majority of our media will still promote our breakfast offerings but we will shift an appropriate balance to dinner.

For the last 2.5 years our marketing strategy has been based on the inspiration of abundant value that tastes good. Translating the success of this ideal from breakfast to our other dayparts will be a key driver of Denny's future success.

Before I close my remarks I want to discuss briefly our strong Company same-store sales in January which were up an impressive 8.4% with guest traffic up, most importantly, 1.1%. While we were certainly pleased with these results, the month had a few special circumstances that contributed to the strong results.

First we recognized that Denny's and much of our industry benefited from considerably milder weather year-over-year. We also know the weather can turn quickly as it did in the Midwest and Northeast this past weekend.

January sales also benefited from a price increase taken early in the month to offset higher utility costs and minimum wage hikes. In total, the price increase was 2.5 to 3% but varied across the country.

Additional marketing also played a role in our January results as we launched a variety of promotions in our weaker markets, particularly the Midwest and Eastern states. These programs were designed to reinforce Denny's terrific value opposition. The most predominant was a weekday morning promotion of our famous Grand Slam breakfast at a compelling $3.99 price point. We are running this campaign in about half our markets and are supporting it with morning drivetime radio advertising.

At this point, I will say that we are encouraged by our January sales but it is early in the year and we do not believe this one month result is indicative of a sustainable positive trend in guest traffic. Stay tuned.

Before turning to Mark, I just want to reiterate that I am pleased with our progress but we still have much work left to do. 2006 will be a year of transition for Denny's as we seek to improve our operations, increase our sales volumes and improve our margins. The real value in Denny's will be realized over the next few years as we are able to leverage our enhanced infrastructure and capitalize on our significant capacity for sales growth and restaurant development for this terrific brand.

As always, thank you for your interest in Denny's. I will now turn the phone over to Mark Wolfinger, our CFO, who will take you through a review of the fourth quarter financials.

Thank you, Nelson. Good afternoon. This is Mark Wolfinger.

I will start my comments with our fourth quarter sales results which Nelson touched on in his remarks. Our positive trend continued in the fourth quarter as our Company restaurant same-store sales grew 1.7% comprised of a 5.4% increase in average guest check and a 3.5% decrease in guest counts. The increase in our average guest counts resulted from a combination of price increases and menu mix shifts. Of the 5.4% increase in check I would estimate that 3 percentage points came from price increases taken during the year to offset cost pressure. The remaining 2.4 percentage points resulted from a mix shift, the higher price entrees, increased incidence rates for beverages and desserts and a reduction in discounting compared with the prior year.

We believe the traffic decline in the fourth quarter was driven more by economic pressure than a change in consumer perception or preference for Denny's.

Our customer demographic was certainly impacted by rising gasoline and other energy prices, particularly in the eastern U.S. where gas prices were at historic highs. We also experienced a widening variance in performance between our strongest regions, primarily on the West Coast and our softer regions in the Midwest and Northeast. In the first quarter 2005, the same-store sales variance between our top three regions and our bottom three was approximately 1.5 percentage points.

In the fourth quarter, this variance had increased to 4.5 percentage points. As Nelson mentioned we are targeting these softer markets with a variety of promotions in order to reinforce Denny's terrific value proposition.

Turning to our income statement fourth quarter total sales at Denny's Company owned restaurants were basically flat compared with the prior year, as a 1.7% increase in same-store sales offset a 10 unit reduction in Company restaurants. In addition Company restaurant sales were reduced by approximately $1 million due to restaurant closures in the wake of Hurricane Wilma in South Florida. This is a heavily concentrated area for Denny's and it took a few weeks for the electricity to be completely restored.

As I expect you have heard from other companies we continue to experience cost pressures on our business in the fourth quarter. The quarterly operating margin table in our press release summarizes these year-over-year operating comparisons. In the fourth quarter our Company restaurant operating margin declined by 7/10 of a point to 12.8% of sales.

Moving to the individual line items, product costs were up 24% of sales in the fourth quarter. This improvement of .9 percentage points -- 0.9 percentage points -- was attributable to accommodation of higher average guest check and relatively flat commodity costs year over year. Payroll and benefit costs were 42.4% of sales in the fourth quarter which was 0.7 percentage points higher than the prior year quarter. This increase is due to a combination of factors including wage rate pressures, incremental training, and incentive compensation.

We did see wage rate pressures in 2005, particularly in states that enacted minimum wage increases. The increase in training dollars resulted in part from our renewed emphasis on dinner in 2006, and the necessity to prepare our staff ahead of time for the January dinner promotion.

We also tested a new crew incentive program in the fourth quarter in an effort to drive additional beverage appetizer and asserts sales.

Occupancy costs were 5.8% of sales in the fourth quarter which was .04 of a point higher than the same period last year. Our expense in the fourth quarter last year benefited from a reduction to our general liability accrual of $900,000. Other operating expenses were 14% of sales in the fourth quarter, which was a half a point higher than the prior year.

The primary driver of this increase was utility costs which were up $1.7 million or .08 of a point over last year. In aggregate, the remaining components of other operating expenses were slightly favorable.

On the franchise side of our business our franchise operating margin declined 1.2 percentage points, due to a slight decrease in franchise revenue and a slight increase in franchise expense. Royalties and associated revenues were up as same-store sales growth of 4% offset a 15 unit decline in franchise restaurants. However, rental income decreased due to the closure of restaurants that we leased to franchisees.

The cost set of our franchise business experienced an increase, due to a monetary incentive we offered our franchisees to improve their operations as reflected in our quarterly inspections force or what we call HQH. We believe this money was well-spent, as a number of franchise restaurants achieving our 4 Diamond status level increased from 30% in the first quarter to 45% in the fourth quarter. Obviously, these operational achievements are of benefit to the particular franchisee, but as importantly they contribute to the perception of the Denny's brand as a whole.

Turning to G&A, our fourth quarter expense decreased approximately 4.7 million from last year. The stock-based incentive compensation was 1.7 million, a decrease of 3.5 million compared with the same period last year. In addition, incentive compensation was 0.9 million, a decrease of 1.5 million compared to the prior year.

The decline in G&A expenses contributed to a $1.7 million increase in operating income for the quarter. Below operating income, interest expense increased by $1.4 million to $14.4 million for the fourth quarter as a result of increases in the interest rates underlying our floating rate credit facility. LIBOR -- which is the most commonly used index -- increased more than 200 basis points last year which translate to approximately 5.4 million in additional borrowing costs annually. Our long-term debt is approximately 50% floating rate and 50% fixed.

Moving to income taxes, we recorded a tax provision of approximately 2.4 million in the fourth quarter. This represents the amount necessary to adjust our actual tax provision versus the expected effective rate used to record taxes in the first three quarters.

Now to the bottom line. We reported a net loss for the quarter of 4.5 million or $0.05 per share. While this does not meet our expectations, it was an improvement of 9.7 million over the fourth quarter last year.

Moving onto capital expenditures, our cash capital spending for the fourth quarter was approximately $19 million, bringing the full year total to approximately $47 million. This was below our guidance due in part to the decision to finance a portion of our new POS project to a capital lease.

With regard to our balance sheet, there were no significant changes during the fourth quarter. At quarter end, our $75 million revolver had 32 million of availability after recovering approximately $43 million in letters of credit. Our cash and cash equivalents totaled $28 million which reflected $13 million in positive net cash flow during the year.

Turning now from 2005 to 2006, we issued financial guidance in our press release today, outlining our current expectations for 2006. As I stated in the release we are optimistic about the year but we remain cautious with regard to the economic pressures currently facing our customers. We are particularly guarded about guest count trends and will keep a close eye on the price and volatility of energy in gasoline throughout the year. These costs played a pivotal role in our customers' spending habits in the second half of 2005 and will likely do so again this year.

Moving to our specific financial guidance, we expect same-store sales for Company restaurants to increase 2 to 3% this year. This growth will likely be driven by higher average guess check rather than guest traffic. At this time, we expect moderately negative to flat guest counts for the full year. We also believe our franchisees will continue to perform about one percentage point higher than the Company restaurants as they benefit from catching up on remodels and other investments.

Regarding new restaurant development, we continue to expect the majority of new Denny's will be franchisee-developed. Our franchisees opened 12 new units in 2004, 19 in 2005, and we expect 25 or more in 2006. The strong sales and operational gains being achieved by our franchisees is contributing to continued growth and enthusiasm in our franchise pipeline.

On the Company side we opened a new restaurant in Morgan Hill, California late in December and we have another new unit set to open later this month in Hawaii. We are now in the final stages of building our developing team and finalizing our Company expansion strategy.

This should allow us to begin moderate but consistent Company development by the end of this year. As we have stated before Company restaurant development will be focused on flagship locations in core Denny's markets.

The other side of our restaurant portfolio assumptions is unit closures which is always more difficult to predict. On the Company side we would anticipate a similar number of closures to last year, which was 12. We are currently taking a more stringent look at the 100 or so Company units we elect to remodel. Many of these will justify the remodel and continue on as new restaurants. Some may be a target for refranchising due to their location in franchise-dominated markets. And a few may ultimately be closed after evaluating their real estate value or lease terms.

On a franchise side it is more difficult to project so we can only project a number of closures similar to last year, which was 34. Based on our same-store sales and portfolio assumptions, we expect total operating revenues to be in the range of $990 million to a little over $1 billion. As we are still in a transitional period with regard to EPS, we believe at this time EBITDA is a more appropriate measure of our operational performance.

As noted in our release we estimate a range for reported EBITDA of $117 to $121 million in 2006. That figure includes approximately $7 million of stock-based compensation expense and other non-cash and non-operating items. We adjust these items for financial covenant purposes as well as internal performance measures.

Excluding these items, adjusted EBITDA should range between 124 and 128 million in 2006. The historical reconciliation reported an adjusted EBITDA is available for review on the EBITDA reconciliation page in our earnings release.

As I mentioned earlier, interest expense has increased with rising interest rates. For 2006, we expect $58 to $60 million of net interest expense comprised of 51 to 53 million of net cash interest and approximately 7 million of non-cash interest. On the income tax line, we anticipate a provision of 1.5 to $2 million but this will fluctuate each quarter because of the variability and the timing of our book income.

We have provided an earnings per share range of $0.02 to $0.06 for the year. I want to caution you that because of our seasonal sales patterns our quarterly EPS could vary significantly.

As for cash capital spending, we anticipate approximately $45 to $50 million. The details behind this capital projection include 29 to 34 million for facilities capital including remodels, $7 million for new restaurant construction in building expansions, $5 million for information technology and corporate capital needs and approximately $4 million in cash expenditures to complete the POS project.

There will also be another $6 million in POS expenditures, financed through a capital lease. We have now completed installation of the new POS system in over 400 of our cavity restaurants and expect to complete the project in late March or April.

We hope that this guidance will be helpful as you look out over the coming year. While it is not our practice to give quarterly guidance, we would like to note a significant calendar shift in 2006.

Easter will move out of the first quarter and into the second. The Easter holiday and the accompanying spring break travel are high-volume events for Denny's. This shift is likely to reduce first quarter sales in EBITDA by 1.1 million and 0.5 million, respectively, and similarly benefit the second quarter. This shift will also lower first quarter same-store sales and raise second quarter same-store sales by approximately 0.5 percentage points. We expect this Easter mismatch combine the significantly higher utility expense and the snowstorm last week will make for difficult year-over-year sales and income comparisons in the first quarter.

During 2006 and through the next few years, our core focus will be to enhance the cash generation of our business in order to fund growth and delever our balance sheet. This cash flow will come first through increased operational discipline and greater scrutiny of capital expenditures. We have worked diligently over the last few years to improve our reference facility and are now at a place where we can be stricter in our capital investment return analysis.

The second lever for cash generation is new restaurant development. We are expecting 25 or more franchise restaurant openings this year, which is double the number from just 2 years ago. We also believe that this number will continue to grow, given the enthusiasm for the brand and the strong sales results being generated by our franchisees.

The third driver of cash will be the potential sale of Company-owned real estate and/or Company restaurant operations primarily as a component of our franchise growth initiative. Under this initiative, we may decide to sell the restaurant real estate which we own to the franchisee that operates at that location. This may be used as an incentive for the franchisees to develop a new restaurant. Similarly we may choose to sell a Company restaurant operation to a franchisee, in order to seed growth in a market where the Company does not have a majority presence. We refer to this as D&A rationalization. We are still in the planning stages for this project and expect whatever plans we develop would take a few years to execute.

That wraps up my review of our financials for the fourth quarter of 2005 and our guidance for 2006. I will now turn the call back to the operator to begin the Q&A portion of our program.

(OPERATOR INSTRUCTIONS) Eric Wold.

Thinking about the closure guidance for the franchisees trying to see or say it's comparable to or should be comparable to '05 at about 34 so I looked back at the closure patterns in '05. You closed 15 in the first quarter, nine in the second and then five in each of the third and fourth. Is there anything we should think about that would make '06 comparable to '05? Was the trend in lower closures throughout the year something that should happen in '06? Is Q1 always higher? You have any kind of visibility in the closures right now?

Hard to predict, Eric, but I will tell you last year in the first quarter in I recall we had one particular franchisee that had some issues in the state of Florida that caused higher than normal closure rate in the first quarter because of an allegation of his organization not paying sales tax as you may recall. There were a number of restaurants that escalated. There were 13 restaurants specifically affected by that. So we saw the first quarter being higher than normal last year.

Following upon that, what would make you think that this year would be similar to last year if it was an anomaly of one big closure and in recent quarters you have been closing about five a quarter?

It's difficult for us to predict. As you know us we are conservative. I do think that franchisees are doing better at Denny's than they ever have. But at the same time, 75% of our -- all our restaurants have been remodeled and now work to the lower volume restaurants where franchisees have to make the tough decisions just like we do with operators as to whether or not they're going to invest a couple hundred thousand dollars in these low performing restaurants. They may or they may not, it's their decision.

Moving to real estate it's obviously been about 2.5 years since you last got your real estate holdings appraised. Do you have any indication or any kind of guidance on what that land could be worth now 3.5 years later?

We don't at this point in time and clearly we are doing a lot of due diligence along those lines. But you are right. That's a number that's about 3.5 years old. So we don't really have any refresh on that but just in reference to that on average those sites were valued at about $1 million a piece.

One P&L and I'll hop back into queue. On Q4 big uptick in depreciation versus Q3. Give me guidance on what depreciation should look like in '06 for the full year?

That was a bit of an anomaly. It was some catch-up and high amortization of some things in sort of for a year-end wrapup stuff. I'd say we are probably looking at the run rate to be somewhere in between the third and fourth quarter. So I would say 58, 59 million for the year. Something like that probably. Again a lot of that depends a little bit on restaurant closures and some of those things that happened during the year, what the Company assets are there, franchise properties that close etc. So it can move around a little bit.

Tony Brenner with Roth Capital Partners.

Thank you. I appreciate your conservativism and your guidance. I think that the recent sharp decline in natural gas prices has not tempered that conservatism with respect to your outlook. Right?

No it hasn't. We are hopeful but as we provide guidance, we don't want to overpromise and underdeliver. Energy costs, Tony, are probably one of our biggest concerns that along with some other things we don't control but clearly the energy side of this is concerning. And as you and I have talked before we do depend on natural gas as most of our industry does.

Is it fair to say that most or all of the stores that are being closed have negative cash flows or at least negative operating income?

I would say that if they're flat, these are -- we have done most of the culling out of those kinds of restaurants. These are restaurants that don't meet what we believe should be our criteria on margin returns on a go forward basis. They may still be cash flow positive and profitable candidly but possibly more likely to be franchise candidates than not. The ones that will continue to be negative cash flow -- few though they may be -- are those that were locked into unfavorable leases that don't provide an exit at this time.

And may I ask what the assumption is in your EBITDA guidance for gains on the disposition of assets in 2006?

Tony, as you've seen, our normal reconciliation from reported to adjusted EBITDA we only gave the 7 million in stock-based comp. That is because basically the other things that we sort of modeled out wash and that is sort of gains offset by restructuring impairment and some of those other line items. So we do not have a -- if we were to going to the real estate portfolio we do not have big assumptions in here for real estate portfolio. That is an analysis we are still working on.

So we have fairly limited limited gains offset by restructuring impairments on these other lines.

I guessed what I'm getting at is the intention to dispose of some franchised properties while you're still evaluating it, I have thought would begin this year and I also have believe that whatever proceeds you realized from that would be used for debt reduction. It looks like there is no assumption for proceeds and no assumption for debt reduction. Is that a realistic view?

There is some assumptions for proceeds but again that -- not a dramatic increase from the real estate portfolio. Which is sort of our standard course of property that we already had in place to be solved not anything new I'd say under our new program. But we also do anticipate debt reduction during the year.

That's not in that -- your guidance? It doesn't look like, is it?

We didn't give any guidance specifically on that.

But you gave it for interest expense.

It will be late in the year if it happens. Right now we got cash in the bank, as we've talked about before. But it's our low volume cash flow period. We deal with cash during the summer so we will continue to pay out cash, we'll have our note payment early in April and then after April we will start building cash. So if we do a paydown it is more likely to come in the second half of the year.

Karen Eltrich with Goldman Sachs.

Couple questions. First we've been in your stores quite a bit for the past four weeks and very impressed with the new menu. It does like some other breakfast items are permanent additions at a higher price point than you traditionally promoted them. What gave you the confidence to do that? Is that -- such as like the Breakfast Bull. Is that because once it went off promotion you still got a pretty hold by the customer?

The short answer would be yes. We had to find a way to, in addition to that, we did have to find a way to pass on the natural price increases that we've had to deal with on energy and increased minimum wage cost but we have found, with Margaret's leadership, that we've been able to increase those prices and promote them and still get a good participation and a good incidents level.

Did any of that element contribute to the strong January comp store sales?

I'm sure that it did. We took price of about 2.5 to 3%. We did go out with a promotion at $5.99. We are traditionally year-over-year we were out with a $4.99. So I'm sure we got some benefit from that.

And last noted, there are several dinner promotions that you are -- and when I talked to [Al Satori] he said you were testing different things to see what resonates with the consumer. What are you finding that does? Is it the single price points? Is it the three free entrees or I should say three courses? Are you finding any one works particularly? Is there a plan to do national advertising for that? Do you plan to have a national price point or will it vary by region?

I'm going to let Margaret Jenkins is with us, Karen. You know Margaret as our Chief Marketing Officer and I will let her speak to that.

Yes, Karen, we do have a national price point for the item that is featured in our national advertising and it's $7.99 and is consistent with our abundant value that tastes great positioning. Throughout the year we are going to be looking at different types of offerings. We are very aggressively in markets now, testing different items and the -- whether or not they make it to the national menu and on national television is going to depend on their test market performance.

The other thing we noticed in the stores, which a lot of them were franchisees, was how consistent the actual experience was. Literally from when we were asked for what beverage we want to have, they took the order and just everything. I'm curious to know, you keep mentioning investments and labor. For you and the franchisees, it's clearly paying off. What else are you doing that and has Denny's University contributed at all to this consistency?

-- Operations and training that are interesting execution and consistency and it continues to be something that we work on. We have improved but as you often hear me say, we still have a lot of work to do. And we have improved our what we call HQH inspection process that every restaurant four times a year experiences on a quarterly basis and we find a significant improvement. As those scores go up in those restaurants we see a significant improvement in sales performance and with a 40 or 50% flow through franchisees, as well as Company personnel, are motivated to have cleaner, more effective restaurant operations. And that's the bottom line. It's pretty basic fundamentals, even five years later, Karen.

Final question. Can you refresh for us what the economic (indiscernible) franchisees is opening a new unit because as I saw in a presentation you did in January, the average unit volume for your new stores is significantly higher than the system average. So what is the initial investment and what kind of payback can they expect based on these new average unit volumes?

We really haven't talked a lot about that. We have talked about developing a new prototype this year on our costs for the franchisees. So we haven't gone down that road, but we are very excited about new volumes sales volumes that they are seeing. And in that presentation you referenced, the average franchisee has seen about 1.4 million in volume today and our new unit openings over the past year or so are coming in are 1.6 million so they definitely are seeing better and as we work through our new prototype to have some better numbers to give you on calls, we will be happy to do so later in the year.

And I would add we're going through our UFO seed process too between now and the end of March. And we still have a lot of disclosures to do via that process before we are going to go too far out in explaining that.

Mark Smith with Sidoti.

One quick question. Can you give us any insight after refinancing here a year and a half or so ago, if we can look for one of those you'd refinance this debt anytime in the near future?

I think you have heard me say before and probably on a previous conference call as well, we are obviously very focused on the level of debt that we have. We have $550 million some odd in debt and although the financial restructuring that was done was marvelous restructuring a year and a half or so ago, clearly, we are not satisfied where we stand from of the leverage ratios standpoint. So if I go back to the comments that were in my script, clearly, cash generation through a variety of different ways is a focus for us. Clearly that is a focus toward the debt paydown and ultimately, yes, we would like to recapitalize our balance sheet. But I am not going to place a specific timeframe on that yet, Mark.

Michael Gallo.

Couple of questions if I may first I was wondering given the recent decline in utility costs whether you would look at or looking at locking in some of your utility costs for the year, if possible? And then I also had another question after that.

We have in fact locked in or where we can where regulations allow us to. We have locked in our natural gas through November as I recall. And where we could, we've locked in our electric power as well. But looking at the Company portfolio it's probably somewhere between 20 and 25% of the 550 odd restaurants that we have. So it isn't a huge amount but where regulatory regulations allow us to, we have.

Second question, I guess question for Mark. I was wondering how much deferred maintenance CapEx is still flowing through that you expect to still flow through the P&L this year and when do you think some of the deferred maintenance should start weighing its way off?

You talking about in the 2006 we are giving you for CapEx?

Yes, in terms of how much I guess how much do you expect to flow through the P&L?

Let me go to the P&L side of the question as opposed to the capital side of the question. We run approximately 2% of revenues in our Company operations for what I would say normal repair and maintenance. And clearly that can jump around once a month or quarter to quarter depending upon what the requirements are. But it's pretty consistent around 2%.

Then on top of that, we have spent on average probably $40,000 a restaurant for what I would say is ongoing capital expenditures in our restaurants. But, again, from our perspective, I think if I go back to my capital investment comment, we are going to make sure that we've put a much stricter investment return analysis on how we spend capital.

This is a follow-up to that. As we get a look at 2007 it seems like there's been some catch up so to speak in terms of on the deferred maintenance CapEx side. I'd think we should start to see some of that weighting off. I would suspect when we are doing a lot of these remodels that may be you found things in other units that maybe weren't quite up to the way you thought that they should be and cost a little bit of a incremental deferred maintenance CapEx. Is that a good assumption?

Let me go back and just tweak what you're question was. Overall from of a maintenance CapEx standpoint probably 2006 it's going to be $5 to $6 million. Something in that range.

Lower than it was the prior year.

Lower than it was the prior year. But just sort of as a reminder if you go back and look at the amount of capital that we spent on our Company operations over the last four years it's a number that's probably $175 to $185 million. So clearly whether it was remodel, as capital is called or it was maintenance capital per ses, we have spent a great deal of money on our facility. I think Nelson referenced that in his comments as well. So again I go back to my initial comment. We're obviously still going to maintain our facilities up to the proper standards. We are just going to put tighter controls on how the capital spent from the return standpoint.

Final question for Nelson. As you begin to focus in on dinner, I was wondering how you make sure that you don't take your eye off the ball at breakfast? Obviously the chain has had a history where at different times dinner has been a focal point and in some cases the eye did drop off the ball at breakfast. How do you make sure that doesn't happen again?

We continue the focus. There's a much greater discipline here today than there was five years ago, on execution. And an understanding among management as to how important breakfast is and how we have to talk about it all the time and focus on it all the time. It is in fact who brought us to the dance.

But we see an opportunity in dinner that we want to take advantage of to close that gap as I referred to in my remarks against our family dining peers, just to get to the average if you will. Not outperform. Just get to the average in this particular segment. So and we have various incentives and measures in place to look at it.

Remember the last time we did focus on dinner, we focused on it singly on barbecue. And it was six months without any breakfast media. That is not the approach we are taking now. We still have a majority of our media on national network, focused on breakfast. It is, as I said, it is who brought us to the dance. So but at the same time we want to begin to candidly walk and chew gum at the same time. And we have got to build that dinner business to take us to where I think this brand has every right to be.

So it is every day, every customer, every day part we have incredible focus on both of those dayparts now with our people. And they all understand how important it is and it's -- we just have better metrics today and better ways to measure more frequently various performance and various parts of the country at the same time.

Reza Vahabzadeh with Lehman Brothers.

On the operating margins (indiscernible) for 2006, how do you think the product costs and occupancy and other incentives will track year-over-year?

We are not going to give line item guidance as it's just too tough to do, too tough to predict, but I think on the product cost side Nelson could talk to that. I think we feel like there's opportunities to gain margin there. Occupancy I mean, that's going to vary. It's going to be tied to the number of units that are open and it doesn't move that much. The only thing that moves really is, as we had in the prior year fourth quarter, a reduction in our general liability accrual. But other than that, that one tracked fairly steady. But, Nelson, you want to talk about product costs?

I'm not concerned about product costs, food costs, specifically or paper costs at this time. We are locked on a good amount of our requirements. What I'm extremely concerned about is energy costs and the effect on our distributors and our producers because all these agreements that we have have escalator clauses or fuel surcharge capabilities. So that's the concern on how it will affect food costs. I actually think this is going to be a good year for the entire industry as you look at food costs. That is not going to be the issue this year from what we can tell.

And occupancy cost obviously rose in the fourth quarter as labor cost -- would one assume a similar rate of increase in terms of basis points give or take six or is there going to be an acceleration or deceleration? Correctional.

We are just not going to go to that level of detail today.

But I mean would your comparison suggest that the year-to-year increase would increase or would -- ?

If our sales go up it will increase because we have percentage rent. So it will definitely go up just due to percentage rent. Whether or not that does as a percentage that stays the same theoretically. So I think that's about all we know at this time.

On the labor cost.

Reza? We lost you.

I can hear you. On the labor cost front do you see any other states raising minimum wages?

I think we are up to eight states now and we are on most distribution of most information from the various states. We keep track of it. Last year I think it was 17 states. We've got about eight states so far so stay tuned.

Lastly a housekeeping item. How many units did you remodel in the Company operating stores in 2005 and how many did franchisees remodel?

Company I think a little over 150 and the franchisees about 125.

[Alexis Bough] with UBS.

Just a couple of of things. You mentioned for '06, you're looking at moderate to negative guest counts for the year. Obviously the traffic was actually up in January. Just trying to get a sense of whether or not you are just being conservative there? Is it just consumer spending? (inaudible).

I think we tried to say a lot of items that we think contributed in January. Clearly the whether contributed to January year-over-year. We saw this in our business and frankly we saw it in a lot of other restaurant businesses. So that was one factor. We also just -- we ran some marketing we feel good about so that's helping but clearly we are not ready to go and extrapolate that out for the full year at this point.

Do you think you're just being conservative there or it's -- ?

Guest counts trends were negative for six months and turned for one month. We're very excited; we're very encouraged but we're not going to extrapolate that number.

And I don't think we're being conservative at all on what we said about February and March. Easter is going to be in a different quarter. This past weekend, the weather was awful in the Northeast and every retailer in America including us suffered from it. We are all hoping we have a good weekend for this Presidents' Day weekend coming up, so we can recover some of that. I don't think we're being conservative at all about the first quarter.

What percentage of your stores were actually impacted by the snowstorms?

We don't now have an exact number.

I think that you said in the past you typically experienced two menus or so a year and then I'm assuming that the recent price increase, I know the recent price increases are reflected on the new menus but just as we look at the rest of the year, do you feel pretty comfortable with those prices or do you think the price increases you've taken are enough to really offset the price increases that you've seen, given that the (indiscernible) for a while at this point?

Our plan at this point in time, depending on economic pressures, is that we should have taken sufficient price in the first menu. However we have another menu planned for just upgrading an improvement with new menu items and that does allow us the opportunity to take price and if in fact something did go sideways in the pricing commodity area for us, we [can] get another menu out of here in six to seven weeks. We have that flexibility. This brand has in fact printed and during my time here as many as four times in a given year. I'm hopeful that isn't going to happen and I'm also hopeful that we don't have to take additional price.

[Zapar Azim] with J.P. Morgan.

I was wondering if you can tell us where your average check stands right now?

I think that's around $7.50 right now.

And if you can give us some idea about how is your revenue (indiscernible) breakfast, lunch, and dinner? How is that in '05?

It maintains the same ratio that we've had for a while. It hasn't changed materially. Basically if you look at our day the four day parts -- breakfast, lunch, dinner, and late-night -- account for plus or minus a few points within a quarter each. So at breakfast your check is a little lower so you have more guest count. Dinner your check is higher so you have a little less guest counts but as Nelson likes to say, it's a marathon at Denny's. So we are pretty even throughout the day.

About 55% of what we sell at this particular time or we sold in 2005 were breakfast items 24 hours a day.

Can you tell us what utilities cost increase assumption have you taken for '06 in your guidance?

We really don't want to get that specific. It clearly as I mentioned in my comments in the fourth quarter alone utility expense was obviously almost $2 million -- was a little bit less than $2 million increase year-over-year in the fourth quarter alone. We realize there is obviously volatility to those energy costs but, again, that was prior to winter really setting in. And we just want to make sure we're conservative on the price. That's without predicting what kind of hurricane season we're going to have.

I guess finally -- I don't know if you can comment on this or not, can you tell us what your total ad spend in '05 and if you expect the number to be somewhat similar for '06 as well?

We traditionally spend about 3% of sales so that's consistent. Our sales expectation for next year will be 3% of sales there as well.

Jonathan Silberman with SBZ Select Investments.

Most of my questions have been answered but just wanted you to perhaps amplify the comments that you've made about the real estate earlier. I guess the two questions were one, does the real estate initiative include a specific side-by-side appraisal? And, second, seems to me that given the corner location and acreage of similar locations especially in California and Florida that perhaps the highest and best use isn't as a restaurant but as perhaps as residential or commercial property. Just wondering if you have any thoughts in that regard?

Just let me just step back a minute to sort of set the stage. We -- the real estate that we own or the dirt as I always like to say is about 230 of these properties in the U.S. and I can tell you that geographically they are spread all over the country. So I would like to say there is a heavy concentration in California or Florida but that is not the case. To your point about alternative use, my view on the real estate portfolio is, obviously, it's a cash on cash return type of analysis. And it's highest and best use type of analysis and we will make sure that we do our analytical work and diligence work along those lines. How that turns out honestly it's a longer-term plan as I mentioned in my script. I think you asked about 'appraisals'. Is that right?

Yes where they were (inaudible).

I think there was an earlier question about as far as the last time we had a valuation on that and that was more like probably a broker's opinion as opposed to appraisal; but that valuation was done in October 2002. That's about 3.5 years ago. We are looking at what is the best approach to make sure that we get some form of updated refresh value on that. But at this point we've not done those further analytics or hired an outside expert to do that yet for us but we're looking obviously how we want to best approach that.

Just one follow-up question in that regard. I think you have been asked in the past about sale leaseback and I think your response has been you view that as another form of debt. Just curious if that was still your current view? And it's our observation that cap rates are at all-time lows and wonder if that changes your view?

I would say that we get asked about sale leaseback pretty frequently and we probably get inquiries on those once a week here on our headquarters sale leaseback. By the way of the 230 some odd properties about 2/3 of those properties are Company-operated. The other third approximately 80 are franchise-operated. So the sale leaseback side probably is something that would be more of a common tendency to look at on the Company side. We have heard the same comments from a number of players about cap rates. Those cap rates can vary, based on where those stores are located geographically.

We could have a long debate on the phone about how the rating agencies view a sale leaseback transaction versus is that another form of debt but ultimately we are going to make what we believe is the best financial decision. And initially, as we start out of it, as I mentioned in my script, the 80 properties that we control the dirt on or own the dirt on and our franchisees operate on, we would like to start there in looking at what kind of attraction would be for some of those franchisees to purchase the real estate from us. And again we still have a lot more work to do on this but those are our initial thoughts.

At this time Sir, I am as showing. It is one minute before six and there are four participants left in queue. Would you like to take those participants or give your closing remarks?

We will take one more question.

Stuart Kwan with Vander Capital.

Just a few questions. What is the share count you are assuming for next year?

The same share count we had at year-end. Was $91 million. 91 million shares.

You said book taxes will be 1.5 million to 2 million?

That's correct.

Do you mind just repeating the openings and closings on the Company-owned and the franchises?

Well the openings are in the press release and you can read that. And on the closures we said, we don't know, but we can't come away from anything other than what we did this year which was 12 on the Company side and 34 on the franchise side.

And what part -- you said you locked in all your natural gas through November of '06?

No, what I said was where our regulations allowed us to which amounts to about 25% of our Company stores and 25% of 540 we locked in through November.

So 25% of it --

Of the 540.

You've locked in your natural gas costs through November of '06?

That is correct.

And what price is that?

I don't recall.

(indiscernible) that we give out.

There was an opportunity all of us saw in the markets and I'm sure you were aware of it when the market dropped and we moved appropriately.

Can you say how long ago that was?

No, Stuart. That's way too granular.

Final question here. Interest expense guidance of 58 to 60 million? Just looking at the debt outstanding right now. Is it fair to assume that you factored in putting material increase in LIBOR close to the tune of 150 basis points?

We use whatever current yield curve is so we get that from our investment bankers.

So you haven't factored any increases for '06?

We factored in the yield curve as I had it on 12/31. Thanks, everyone, for joining us.

This concludes today's conference.