Denny's Corp (DENN) 2006 Q2 法說會逐字稿

Good afternoon. My name is Charity, and I will be your conference operator today. At this time I would like to welcome everyone to the Denny's second-quarter 2006 earnings release. (OPERATOR INSTRUCTIONS). I will now turn the call over to Mr. Alex Lewis, Senior Director for Treasury and Investor Relations. You may begin your conference, sir.

Thank you. Good afternoon and thank you for joining us for Denny's second-quarter 2006 investor 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 a business overview from Nelson. Mark will then provide a financial review of our second-quarter results. After that, management will be available to answer your questions.

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 knows that certain matters to be discussed by members of management during this call may constitute forward-looking statements. Management urges caution in considering its current trends and any outlook on earnings provided on this call. Such statements are subject to risk, 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 28, 2005 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 Chief Executive Officer.

Thank you, Alex, and good afternoon, everyone. Thank you for joining us. Hopefully you have had a chance to read our earnings release which was published after the market closed today. We are disappointed that second-quarter results, particularly Company restaurant sales, were softer than anticipated. The impact on consumers' discretionary spending from record gas prices and rising interest rates has been well-documented and discussed by many retailers and restaurant chains. The demographic profile of Denny's core customers is typically low to middle income and, therefore, could be more susceptible to these rising costs. While we recognize these pressures on our business, we do not concede to them.

Over the past few months, we have been conducting extensive consumer research to help us better understand and be proactive in our approach to overcoming the elements impacting our customer traffic. Internal and external research confirms that a significant portion of consumers are eating more meals at home than in recent years. It appears that for the near-term value offerings will be a stimulus for consumers. The restaurants that can market and deliver a credible value are most likely to outperform.

Danny's is known for value. It is a core attribute of our brand. Given our favorable food costs and our average check, Denny's is more than capable of competing on value.

While we are always mindful of value, our market efforts are multitiered. We have stand-alone and overlapping programs that are targeted at specific dayparts -- promote new menu offerings, develop new customer trials, and encourage repeat business from current customers. All year we have placed a considerable emphasis on new product introductions. In late June we began our latest marketing module with several new menu offerings. The media campaign promotes our new Super Slam breakfast, each an exceptional value at 5.99.

I'm pleased to report that sales of these three new breakfast combinations have been very strong. Lead by the Extreme Grand Slam, these entrees are enjoying the highest product mix of any promotion here at Denny's in the past two years. We also introduced three new American dinner classics, including our grilled shrimp skewers at an incredible 6.99 price point. Also, in this module, we launched a new lineup of Denny's classic burgers. The toppings and flavor profiles of these burgers are very competitive with new offerings at many casual dining chains.

Another exciting product introduction is our signature beverage which we developed with Coca-Cola specifically for Denny's. The incident rates for these premium beverages far exceeded our expectations. And not to leave out one of Denny's core constituents, we launched a completely redesigned kid's menu as well. This menu incorporates an outerspace theme that kids really do love.

In addition to our lineup of new products, we debuted a new media campaign in late June entitled Denny's Always Works. This campaign speaks from the point of view of our customers who proclaim Denny's works for me based on their specific need or occasion. These spokespersons provide a platform to promote different dayparts as well as menu items. In this way we can continue to leverage our compelling breakfast offerings in order to benefit all of our dayparts. Two of the advertising spots are targeted specifically at our late night business which has weakened over the last 12 months.

In my earlier comments I mentioned the research that said a significant number of consumers were eating at home more. We recently commissioned Denny's specific research which revealed that 20% of our guests would visit more often if they had a coupon or similar savings. While our practice over the past few years has moved away from discounting, there are certain markets where we have made the decision over the last few months to provide modest discounting in an effort to stimulate demand. We saw encouraging results which have lead us to broaden our discounting efforts. We ran a full-page advertisement including free coupons in the Friday USA Today before Father's Day weekend. Currently we are showcasing our new classic burger lineup in a national ADVO mailer that includes six discount offers. We are very comfortable with the possibility of these and our other discounting offers. Clearly we are excited about all the new marketing initiatives we have undertaken in the past few weeks.

I'm pleased to report that we have seen a materially positive impact on our sales in July from the combination of all these programs. While our final results won't be released until next Thursday, we estimate at this time that our Company same-store sales for July well be up more than 2.5% with traffic down less than 1.5%. This represents more than a 3 percentage point increase for both sales and traffic from June. Though these results are certainly encouraging, we still anticipate a challenging second half of the year as Mark will discuss in his remarks.

I have covered a lot of our marketing initiatives intended to drive sales growth, but it will take more than strong marketing to attain and hold sales increases. It is going to require us to take better care of our customers. Not all our challenges are value or product-driven. Our customers continue to tell us we need to increase speed of service and improve hospitality. These are characteristics we can and will improve regardless of the economic environment. We are putting considerable focus on our hiring and employment practices in order to acquire the best staff and deliver the best guest experience possible.

With regards to new unit development, we are encouraged by our site acquisition efforts for company restaurants. We opened our first new company unit this year in February in Hawaii. This restaurant is located more for residential traffic than tourists but is currently trending towards $3 million or more in annual revenue. Also earlier this year we had the opportunity to purchase a franchise restaurant in South Florida. That restaurant is being remodeled, and we expect to open it this quarter. Later this year we expect to open two new units, one in Southern California and one in central Florida. These are both core markets for our company operations, and we have high expectations for these restaurants. In fact, we have identified many perspective sites for Company development that will provide us the kinds of returns that you and we are looking for, and we will be working over the next few months to finalize the opening calendar for 2007.

Regarding franchise development, our franchisee opened three new units in the second quarter, bringing the first half 2006 total to seven. In July an additional three restaurants were opened, bringing the year-to-date total through today to 10. Our original guidance for full-year franchise openings was 25 or more, though we have revised that down by a few openings that have slipped from fourth quarter into early '07. We still expect 22 to 24 franchise restaurants to open this year and have a strong pipeline for development in 2007.

Our interest from existing franchisees and new franchisee candidates is more robust than seen in quite a long time. We are optimistic about the future of Denny's. While the sales environment is challenging, it certainly is not dire. The fundamentals of our business have not changed. As Mark will detail, there are few soft spots in our P&L, but most of our fundamental restaurant costs are being managed very effectively. We will be competitive on the sales front, and we will protect our cash flow in order to reach our goals for deleveraging.

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

Thank you, Nelson, and good afternoon. I will start by concurring with Nelson's statement that our sales results in the second quarter were below our expectations.

That said, I am optimistic that our new marketing initiatives will provide the appeal and value that consumers require when making their dining decisions in the current economic environment. Unfortunately our streak of 10 consecutive quarters of positive same-store sales at Company restaurant came to an end in the second quarter with our sales down a slight 0.4%. Given the estimate Nelson provided for July of plus 2.5%, we certainly hope our Company restaurants are beginning a new positive streak, but we remain cautious in our outlook.

Our Company same-store sales were comprised at a 4% increase in average guest check and a 4.2% decrease in guest counts. The increase in our average guest check resulted primarily from price increases taken earlier this year and last year to offset rising utility and wage costs.

In addition, check average continues to benefit from positive menu mix shifts. Our second-quarter average check increase did drop in the first quarter as we rolled over pricing taken in April of the prior year.

Same-store sales for our franchisees were up 1.4% in the second quarter, which contributed to a positive sales result across the Denny's system of 0.7%. The system streak remains intact at 11 consecutive quarters of positive same-store sales.

Turning to our income statement, the second-quarter sales at Denny's company-owned restaurants decreased $3 million from the prior year due to the 0.4% decrease in same-store sales and a five-year reduction in Company restaurants. Our operating margins as summarized by the quarterly operating margin table in our press release were softer than anticipated. Our fundamental restaurant costs such as food, payroll and occupancy were favorable as a group during the quarter led by a 0.4 percentage point improvement in product cost. Our other operating costs were not as favorable during the quarter. In fact, they increased $4.5 million or 2.2 percentage points.

The first line item in this category is utilities, which continue to be unfavorable year-over-year. For the second quarter, utilities were up $1 million or .5 percentage point as both natural gas and electric rates were higher. Legal settlement charges of $3.2 million where another contributed to higher costs in the quarter as we increased our litigation reserve relating to certain developing cases. Approximately .5 million of this expense was paid in cash during the quarter. Compared with the prior year, legal expense increased $2 million or 0.9 percentage points.

The last notable increase in other operating expenses relates to a reduction in supplemental income of approximately $700,000 or 0.3 percentage points, which nets into this expense line. Management made the decision to remove coin operated game machines from our restaurants based on consumer feedback in brand imaging. Less than half of our Company restaurants still have these machines, and those will be removed as we remodel those units in our current vision's redesign.

On the franchise side of our business, our franchise operating margin improved slightly based on a lower franchise administrative cost. Our franchise business consistently provides $15 million in income each quarter on which to leverage the greater upside of our Company operations.

Turning to G&A, our second-quarter expense decreased approximately 600,000 from last year, resulting primarily from an $800,000 decrease in stock-based compensation and a $1 million decrease in incentive compensation. Underlying G&A costs were up $1.2 million due primarily to additional staffing necessary to achieve our plans for sales growth and restaurant development.

Moving down the P&L, operating income increased $1.3 million or 8.2% compared with the prior year period, due in large part to increased gains on the sale of assets. Asset sale gains for the quarter of $7.1 million were attributable primarily to the divestiture of six real estate assets. Those were five owned properties and one leased buy-out for approximately $8.6 million. The $6.2 million increase in gains from prior year was partially offset by $1.1 million increase in restructuring and exit costs, $900,000 of which were related to severance costs with the remainder due to closed store costs. Below operating income, interest expense increased by $1.2 million to 14.8 million for the second quarter as a result of increases in the interest rates underlying our floating-rate credit facility. Our long-term debt is approximately 50% floating-rate and 50% fixed.

Now to the bottom line. We reported net income in the second quarter of $1.9 million or $0.02 per share, basically flat with last year at $2.1 million or $0.02 per share.

Moving onto capital expenditures, our cash capital spending for the second quarter was approximately $11 million, bringing our year-to-date spend to $19 million.

With regard to our balance sheet, our cash balance increased $6 million in the quarter, inclusive of an $8.8 million semiannual interest payment on our 10% senior notes. Our liquidity at quarter-end was quite solid at $73 million, made up of 36 million in cash and $37 million in availability under our revolver.

Regarding portfolio activity, we saw a net decline of nine restaurants during the quarter. In the Company portfolio, we closed two restaurants, one of which was a lucrative lease buyout. Our franchisees opened three new units during the quarter and closed 10. As Nelson mentioned, three additional franchise restaurants have opened so far in July.

That wraps up my comments on the second-quarter results. I will now address the updated financial guidance we provided in today's earnings release.

Based on our year-to-date results and our expectations for the remainder of the year, we have lowered our revenue and earnings estimates. Frankly, most of the revision is based off of concerns for topline sales. We have lowered our same-store sales assumption for the year by 1.5 percentage points, which in turn reduces total operating revenue by 15 to $20 million. Consequently we lowered our guidance for adjusted EBITDA by $10 to $11 million.

If you eliminate $3 million in legal settlement charges year-to-date, our adjusted EBITDA revision is 7 to $8 million lower than our original guidance. The 7 to $8 million decline in EBITDA on a 15 to $20 million decline in revenue seems reasonable. A 45% flow-through, in this case negative, is about the level we would expect based on changes in guest traffic. Since EBITDA has been reduced, it will also impact our cash generation goals and thereby our ability to reduce debt.

With our focus on free cash flow and ROIC, we're pulling back on our capital spend to compensate. We have selectively reduced our CapEx budget for the full year by 3 to $6 million, depending on emergency capital and the timing of new unit development costs. This should offset about half of our EBITDA loss.

Regarding our EPS guidance, please keep in mind that this measure could vary greatly depending on the amount and timing of asset sales. The provided estimate of $14 million in full-year asset sale gains includes only those properties currently under a definitive contract. We believe that additional sales are likely during the year but have not included them here.

This brings me to our real estate sale process. We are executing on the plans we announced earlier this year in a coordinated manner. We believe from the first announcement that divesting all of our franchisee operating properties would be a 12 to 18 month process. We are now six months into that plan and are beginning to generate proceeds. There have been many steps in the process that needed be completed before we could even begin to close deals. We obtained brokers at paying the value on all our real estate, both Company and franchise operated. We're not going to reveal those valuations while we are in the sales process, but they confirm the range of proceeds we are expecting.

While obtaining our supporting valuations, we reached out to the franchisees on these respective properties to provide them the first opportunity to purchase. As we got a better feel for the level of franchisee interest, we began to entertain offers from outside third-party buyers. And just recently on July 17, we obtained amendments to our credit agreements, which allows us to sell 84 specified properties, which we were previously unable to sell due to limitations on asset sales in those agreements. Clearly there has been a lot of work going on here to further this process.

We have received many questions regarding the specifics of our real estate for sale and how the potential sales will impact our financials. It is very important to realize that the real estate value of the franchisee operated restaurants is not the primary valuation metric. For a franchisee to determine whether to buy the property, they must compare the rent terms with the current market price for the property. In many cases the rents being paid to Denny's are below the market, which is a disincentive to purchase the property at market.

Any third-party buyer will be bound by the current lease, so their offer will be predicated by the expected rents and the credit profile of the franchisee tenant. There were 84 properties for sale at the end of the second quarter, two of which were Company properties and two were sold in July. The remaining 80 franchisee operated properties generated approximately $7 million in base plus percentage of rent income. When and if all 80 properties are sold, our franchise revenue and consequently our EBITDA would decline by approximately $7 million on a full-year pro forma basis.

To determine the market value of these leases to a third-party buyer, you would need to apply your own estimated capitalization rate. Because of the wide variety of properties and tenants in the pool, we expect to receive offers at cap rates between 7.5 and 9.5, which equates to 75 to 95 million in proceeds for the 80 properties. The most likely outcome is somewhere in the middle. I assure you that the sale of this real estate is a top priority to our management team, but it is also a process we're being very deliberate and cautious about. We would like to use the proceeds to delever sooner rather than later, but we're committed to getting the best value we can for these assets.

As I mentioned earlier, our liquidity is stronger than it has been in many years, so the focus here is to execute sound transactions not necessarily quick ones. We feel comfortable that we can sell the majority of these properties within the next 12 months, which matches our original timeline. If it happens sooner, we will be sure to advise the market.

Before I conclude my remarks, I want to reconfirm our focus on cash generation and debt reduction. These potential asset sales are a big part in that process. We're also being very strict on our capital expenditure allocations to be sure that we are getting the best returns on our investments. All of these actions will allow us to continue building cash prior to the anniversary dates of our credit facility in late September and at that time reduce our outstanding indebtedness. As we have commented previously, we believe that credit spreads on our bank agreements are higher than could be achieved in the market today. While there can be no assurances that we can access these markets or that the rates will remain favorable, it is our expectation that we will be able to improve our interest costs. Due to scheduled reductions and prepayment penalties, prepayment or refinancing of our facility becomes considerably more economical after the September anniversary.

That wraps up my portion of our prepared comments. I will now turn the call back to the operator to begin the Q&A portion of our program.

(OPERATOR INSTRUCTIONS). Eric Wold, Merriman Curhan Ford.

On the topic of the discounting with the coupons and the drops, can you comment a little bit on the discount levels, kind of the range they are offered there and the profitability of those versus a nondiscounted purchase?

First, on the profitability piece, we're not going to comment, and obviously until we see the analytics come back, it will split. But clearly we've done a lot of advanced work on those offers. Those offers range from dollars off on the burgers to dollars off on the total ticket. Those kinds of offers an an additional offer of complementary dessert if you order an entree, those kinds of offers. But obviously the featured product on the Advo is the new burger introduction that Nelson mentioned.

I don't know if you mentioned it at the beginning, do you say how many stores or how many markets these in total would affect?

Actually all of the markets were affected by the offer. There was a phased-in approach there. I believe about three-quarters of the stores received those offers early last week and the balance early this week.

Okay. And then just lastly, is the intention -- what is right now the expiration on those offers or kind of what is the anticipated time when they will either stop or --?

Right, the offers all expire in the early to mid-September timeframe.

Okay. Perfect.

Reza Vahabzadeh, Lehman Brothers.

On the same-store sales trend that you indicated for July, how should we think about that? Is that sustainable, or is that affected by your new advertising and the couponing? Is that something that you think is going to carry on, or is that a one month thing? Any color would be appreciated.

Well, the comment I would make -- this is Nelson -- would be typically when you drop coupons like this, what you're trying to do is to get people who have used Denny's but perhaps have become lapsed users to come in and try us again. And that has proved to be extremely effective over the last week or so.

What you want to do so you don't have to have a steady stream of discounting, although that does seem to be what the American consumer, particularly our consumer is looking for -- they are looking for value. Your operations folks have to execute effectively, and then under the best of circumstances, half those people will come back. But it has everything to do with execution at the restaurant level as to whether they will come back without a discount. It is clearly a way to induce trial, and obviously the marketing team has put together a terrific program here to induce the trial. We will soon find out if operations executed at a level that will encourage people to come back.

Right. The July same-store sales trends that you have seen so far is not an exact apples-to-apples comparison because of the coupon drop.

Last year (multiple speakers) not exact, but last year we were running a 4.99 special on television too. We're running a 5.99 this year. So each year you look for different levers to drive consumers into the restaurants.

I would just point back to our guidance. I mean clearly today at the same time we're announcing the July number we were also announcing our guidance for the second half of the year. And we -- (technical difficulty). So clearly we're very encouraged by July, but we are not going to extrapolate at this point in time. Though I will say we have been positive before the coupons hit as well in the month. So you know we will stick to our guidance.

Okay. And just quickly as far as wage costs and benefit costs, do you anticipate any pressures or not?

We certainly anticipate pressures next year. I don't anticipate pressure for the remainder of the year.

And the next year pressure is coming from --?

Regulations.

Regulations?

Yes, sir.

It is an election year.

It is an election year, and lots of people are talking about living wage, and that will be a much much bigger issue next year for everyone than minimum wage will I assure you.

Much obliged.

Kevin Starke, Weeden & Company.

I'm trying to figure out how to phrase this question. Is there any possibility of a financial buyer stepping as landlord of some or all of the 80 remaining properties, or is it more likely to proceed as a piecemeal sale?

As I said in my comments, clearly we have looked two different avenues. One obviously is is the franchisee avenue who is obviously the operator of that location. We're also looking at third-party buyers.

I don't want to comment any further on whether there will be a financial buyer or some other form of buyer at this point in time. Obviously we are in certain stages here.

You are lowering your EBITDA guidance today. I'm wondering if you could tell us at what EBITDA level would you start running into trouble with your bank -- with your credit facility covenants?

At this time we have still got what we feel is a pretty ample cushion on those covenants. Much more -- 10 million plus on an annualized basis from the levels you see there. So we are (multiple speakers)

10 million above the levels where you would start to run into trouble is what you're saying?

Yes, I mean again we feel pretty comfortable with where we are with regard to covenants at this time.

Okay. That matches my math. Your franchisees are not exactly your best PR people right now. And speaking of them, some of them understood there was some pushback to removing the coin-operated vending machines from some of the restaurants. I was wondering if you could comment on that at all.

This is Nelson. I would tell you that the coin-operated machines provided a flow of revenue. And when we did research with our consumers, which we rely on, one in five customers found those machines placed in our restaurants to be unacceptable. And as we look at our negative customer counts, in my view we have no choice but to listen to 20% of our customers when they tell us they would prefer not to dine with us as a result of those machines being on premise. I know it is painful to remove them, but in the long run and we do manage this business for the long run, it is clear our customers in a family restaurant environment don't expect that equipment to be in the restaurants. That is not the business we are in. We're in the business of serving customers great tasting food at great prices with great service.

Tony Brenner, Roth Capital Partners.

I am wondering with the three new dinners that you have introduced, as well as the earlier efforts at dinner that you've made with some advertising being pushed in that direction and correct me if I'm wrong, but I assume some of your coupons also aimed at building the dinner business. Two things. Whether that has change as a percent of your mix, and whether just in absolute traffic or revenue terms your dinner business is building?

It is Nelson. I'm pleased with the growth of our dinner business with all the efforts that you have already articulated. I continue to be pleased in our breakfast daypart. It is our late night daypart that is of most concern to me. Not that all of the dayparts operate in concert, but we have lost a considerable amount of business in our late night business, and we are addressing that in a variety of ways.

But I have been pleased with our dinner performance as we grow that business. Obviously we are known for breakfast, and the majority of our advertising is about breakfast. This ADVO had a nice mix of lunch and dinner items, and it is performing extremely well. So I'm comfortable with where we are.

Could you -- again as long as you raised the problem, could you address what the problem is with late night?

Well, late night -- blame it on macroeconomics, blame it on competition on fast food operators, but our late night business is down, and we are taking initiatives to advertise on late night network television to provide an opportunity and an invitation to those customers to come back and enjoy Denny's for those late night experiences they had rather than spending them in the back of a car. But be it that less people are staying out late, that there are less clubs, the bottom line is that business is not what it was, and it is a very profitable business for us, and we're focused on getting it back.

Mark Smith, Sidoti.

A couple of questions. Your franchisee pipeline, I don't know if you can quantify that anymore kind of what you might be looking for even over the next five to 10 years. Also, if you to give us a sort of an idea what percent of these might be current franchisees compared to new franchises?

I will answer the second part first. The second part is every good franchise organization depends on its existing franchisees to produce the majority of your franchise growth over whatever period of time you look at. We certainly are recruiting new franchisees from outside the system, and as I said in my remarks, we are very encouraged by existing franchisees and new franchises that are interested and are signing up.

It is difficult for me at this point in time to share with you what our expectations are and what our beliefs are for next year, let alone our three-year plan or beyond. Because that would be in the form of guidance for '07 and '08, and we plan on providing that, but it would be the latter part of this year, the first of next year.

All right. Just then some housekeeping items. Your earnings guidance, I think it is $0.01 loss to $0.03. That includes the 14 million in asset sales?

Yes, it does.

Great. And then last piece for housekeeping. Can you just repeat the July comp estimates that you have at this point?

The Company operated comp that Nelson mentioned?

Yes.

Over 2.5% positive.

Over 2.5% total comp. (multiple speakers). Great. Thank you.

Yes. That is the Company operations.

[Alexi] Gold, UBS.

Just a few questions. You started off your commentary just talking about the customer in general, and I think we all know that there is weakness in consumer. But can you give us a sense for what you are seeing just in terms of trends? I mean we have heard for commentary from certain restaurant companies of people charging their meals on two credit cards. Is that sort of an overreaction? Is that the kind of thing you are seeing, or can we sort of rest a little bit more easily than that?

It is Mark. I have not heard anything coming out of our restaurants about people charging meals on two different credit cards. We have seen our credit card use go up slightly over the last two years. I don't think that is uncommon with any casual diner or family dining segment player at all. So I have not heard about that piece, but obviously there is a number of macroeconomic issues and other global issues that I think we are all quite aware of. There is obviously a lot of pressure on the consumer right now. But I think as Nelson said in his comments, from our standpoint we continue to be very focused and very positive on what this brand can be.

As we look at this, are there basically any geographic areas that you are sort of outperforming versus your expectations?

No, I would tell you to build on what Mark just said and our new campaign I think highlights it -- Denny's is a solution, and we're providing solutions. And whether people are using one credit card or two credit cards or where they live in the country, last year you would have gotten me to respond to this question by saying yes, we do see pockets of different levels of performance. I have to tell you this year I do not. It is everywhere. Everywhere we do business in 49 states consumers are responding in a similar way. It is not confined to the Midwest as you would have heard me say last year. It is everywhere. Therefore, I believe they will respond to value everywhere by the way, which Denny's stands for.

I know you talk about being pretty pleased with both dinner and with breakfast, and it sounds like a lot of your advertising is actually focused on dinner. I know for the last couple quarters you actually have spoken about that focus. It seems like you are seeing some real pickup there. Is that performing better than your expectations?

I'm confused, or you asking about breakfast or dinner?

You said dinner was strong and breakfast was strong, but I'm asking specifically about dinner and whether that is performing better than you had initially expected? I know it has been a focus for a couple of quarters now.

It is performing as well as I expected. It is positive. But obviously most of our business does come from breakfast, and we're focusing on that in particular. And you will probably see more ads currently running about breakfast than you do dinner.

[Reshi Plarek], KBC Financial.

One quick housekeeping question. Can you give me the actual interest rate on the revolver and the actual rate on the loan second quarter?

Well, I cannot tell you what the different buckets were. I can tell you what the spreads are. You'll have to pull your own (indiscernible). I mean the spread on the revolver is 350 which is undrawn. The spread on the first lien is 325, and the spread on the second lien is [598]. But they are in buckets that roll over consistently through the year, so we are not at any one particular rating on all those dollars at any time.

Ken Bann, Jefferies & Co.

I was just wondering how quickly you're going to plan to pay down debt? You have 35 million of cash on the balance sheet, which is a lot more cash than you used to operate with. I remember when you operated with less than 5 million on the balance sheet. (multiple speakers) -- generate some cash.

I remember those days too.

Yes, well -- (multiple speakers)

With regard to that, as we said in the remarks, there are prepayment penalties that are involved in our credit facility that expire within 60 days. So that will be the timeline we will be looking to pay down at.

And then as you sell properties, will you have more prepayment penalties, or will you be able to (multiple speakers)

The sale of assets do not require prepayment penalties.

[Adam Liscall], CRT Capital Group.

I have questions for you on the asset sales. When you said 12 to 18 months to sell, is that to sell the 84 properties that you are marketing, or does that include essentially 140 company-owned units?

This is Mark. All along we said our initial focus is on the franchise operating properties under which we obviously control our real estate, so the 12 to 18 months timeframe that was in my comments is on those franchised properties, approximately 80 properties.

Okay, approximately 80. And just to get a better handle on the level of secured debt reduction that could take place if you are successful in selling these 80 properties? Just the macro number.

Well, every dollar that we would sell them for will be used to pay down our credit facility.

I see. I know we have a 2002 or 2001 evaluation of about a million a pop. Do you -- (multiple speakers)

We talked about valuation earlier in the call.

Yes, exactly.

In the prepared remarks. But we are not prepared to put a stake in the ground at this point in time. But we did give you some cap rates to work with.

Okay. So we could work with those rates and apply some reductions -- (multiple speakers)

Right, we talked about it. We discussed cap rates, as well as range of proceeds.

I got that. Okay. That is it for me.

[Andre Gardner], [Argos Mangement].

I'm curious if you sell off the roughly 80 properties and then apply the proceeds to the debt, can you give us a ballpark figure of how much interest savings you will have? What the pickup will be is what I'm saying, versus the income you had versus the expense that you will reduce.

Well, I meant we talked about what our spreads to LIBOR were just a minute ago, and those dollars will be going towards the first lien debt which is LIBOR plus 3.25. So that is the trade-off at this point in time.

Okay. And the litigation reserves that you're setting up, are those related to franchise activities?

This is Mark. Like any public company environment, we are not going to discuss anything further on the litigation reserves. But clearly we go through those reserves each quarter with our outside auditors, but that is just the comments I would like to make on that.

Okay. And how about ballpark numbers for when you sell a franchise, what is the estimated income annually for a franchisee, and where can we get a copy of the disclosure document?

We don't give guidance to our franchisees or to anyone else really on their sales. We will provide an average sales band, but we don't get into projecting that. Now I will say the restaurants that have opened recently have opened closer to the Company average of about 1.6 million, but again that is going to be very dependent on the location the franchisee chooses.

But I mean if it does 1.6 million, what is the income to the --?

You definitely cannot provide that number to a franchisee because (multiple speakers).

I mean everyone has a disclosure document. What do they pay in franchise fee?

That is exactly what you cannot put. That is not what you asked.

That is what I asked.

Are you asking what the franchisee pays us?

Yes.

As far as upfront fee and royalty?

And continuing franchise fee.

The standard upfront fee is 40,000 for a newer restaurant opening, and it is a 4% royalty rate.

Okay. And where can we obtain a disclosure document?

This is Alex. You can contact IR, and we will get it for you.

Eric Wold, Merriman Curhan Ford.

Just a quick follow-up on the post the prepayment penalty expiring in September. Is this that something you could see doing in a two-step process where you would not wait to sell a bunch of properties and get a bunch more cash to pay down the debt and refinance it, but you would be comfortable refinancing it as it is and then after that fact, if proceeds come in, then you have to pay it down afterwards?

I don't think we want to go too far down the road of what we expect because it is just until you get out in the marketplace, you cannot really tell what is going to be available to you. But we will refinance as soon as we feel the terms are right and it is economical, and we will pay down as soon as we can. So it will be both.

Okay. Fair enough.

We are not going to wait on proceeds.

Okay. That is all I wanted to find out.

Reza Vahabzadeh, Lehman Brothers.

This is a follow-up. Food costs have been helping your margins by 40 or 60 basis points the last few months. Is that something that you anticipate continuing for the balance of this year at the same rate?

Yes, I do. This is Nelson.

Okay. And is that because you are hedged, or is that because commodity costs are moving in your favor?

Because we're good at what we do.

Right and you have got the price increase?

Right.

And then on the asset sale, I'm assuming those cap rates that you mentioned, Mark or Alex, did not include your potential taxes, right. Those cap rates are pre any tax payments, right?

Are you talking about taxes on the gain?

Yes.

Those would be what I call standard real estate cap rates. Obviously because of our tax position with the operating losses we have, we feel the cash taxes on any transaction or transactions would be pretty minimal.

[David Bernstein], [Cinaca].

A quick question just on the housekeeping. On the real estate, I just want to make sure I understand you sold some real estate assets before the close of the quarter and some after?

That is correct.

Can you just walk me through because I am just unclear what you sold before and what came after the close?

In the press release, we mentioned the fact that we sold in the quarter six real estate assets.

Right.

Proceeds of 8.6 million.

Right. Was that all -- was that part of the 84? Is that surplus or separate?

It happened in the second quarter, it was before the 84. The 84 was a quarter-end calc number.

So nothing -- that 6 is not in the 84?

That is correct.

Got you. That is what I did not understand. So of the -- so when you talk about 80 now, that is because (multiple speakers)

There were two sold in July, and there is two of those that are Company property. So the the discussion of leases are not really relevant to the discussion. We are down to 80 franchise properties and two company properties.

Right, okay, that is helpful. And finally just as a sort of a big picture question, as you talked to me, it seems like your franchisees are doing very well in this very challenging environment. And as you discuss with them the real estate transactions, is there any -- I know you have mentioned this in other presentations and conferences -- are you discussing at all the idea of sort of selling two and buying two as part of your franchise plan? Anymore discussions in the next 12 months about refranchising some of these restaurants, the actual businesses as opposed to (multiple speakers)

(multiple speakers) -- reselling our company operating assets per se, is that right? This is Mark, sorry. (indiscernible) on refranchising?

Yes, as you talked to me about the real -- one thing that is very obvious to me is your franchisees are performing very very well.

Right. One of the things that we have said in our external presentations and obviously some of the meetings we have been to is the fact that we are looking at our DMAs and the term we have used called DMA rationalization, and obviously that means refranchising market by market where it makes sense. And that certainly is an activity that we will begin (indiscernible) something that is probably not on the next quarter six-month horizon, but I think it is a 2007 type of action.

Okay. So you could envision that maybe when you give -- as Nelson was saying, as you talk about 2007 guidance at the end of this calendar year, you might have something more to say about the DMAs and refranchising?

We might, yes.

Mark Churchill, Piper Jaffray.

I just wanted to confirm that 75 to 95, that was the expectation for total proceeds, including the 14 million that has been brought in if you sold everything?

No, that is the remaining 80. And again, we are just throwing a range out there (multiple speakers) we see in the market. What we get for -- they can all be 9.5s, and boy, I wish they would all be 7.5s. But we're just going to have to see.

Okay, that is it. I just wanted to know.

Karen Eltrich, Goldman Sachs.

I just wanted to check-in for new franchisees and for these properties that you are selling. What is the financing market like? Are you still seeing it pretty healthy, or you getting the sense that creditors are pulling it?

Sorry, it is Mark. You are asking about the external financing on those kind of properties?

Yes.

We have not certainly in the discussions within the last 90 days have not seen those financing markets shut off or close out or be limited by any measure.

Nor have we seen any hesitancy on our existing franchisees or new franchisees to get it or to be put off by the rates that are being charged. We see it as a very robust environment at the moment.

Great. That is good to hear. And second question, as we enter hurricane season, you guys have obviously done a great job managing through this for the past couple of years. What have you learned in that, and what are you kind of doing to prepare yourself for this season besides having your fingers crossed?

Well, we're hoping it continues to be as good as it has been over the last couple of months. But we have as always and we even have better crisis plans in place. Wilma actually was the worst hurricane experience we had last year because of the power loss in South Florida where we have such a concentration of restaurants. That was the biggest issue. We are exploring more utilization of generators, but of course, the safety of our employees and getting our employees back to work is probably our largest challenge when we face these situations.

But we have very good plans. We also have a culture here that is compelled to get back open to serve the communities where we serve, and we financially have done that very successfully, except for Wilma last year that put everybody out of power for weeks with Florida Power and Light. So those contingencies are difficult, but we have made some plans for portable generation that obviously is not very portable because it comes on the back of a huge truck. But we're prepared and hopeful with our fingers crossed.

[Zafar Nazem], JPMorgan.

The 2.5% July comp that you just mentioned, I wonder you can provide us the breakup between traffic and check in this?

That is just an estimate at this point in time. We will have the final details next Thursday.

Okay. And then the second-half expectation of corporate (indiscernible) sales of negative 1% to 1%, what is your traffic assumption in this estimation?

Yes, I mean we don't really break that out on a guidance basis, but you can look at what our check has been running and probably come up with as good an answer as we can.

Okay. And then I guess finally, the other operating expense line, which it jumped by $4 million or so, $4.5 million, is that all we should expect in the remainder of this year, or should that line moderate?

It is Mark. We have not obviously given line by line guidance for the balance of the year, and as I mentioned in my comments, there were certain items, specific items I went through there, but we have not provided specific line item guidance for the balance of the year.

Okay. We're running out on time, so I think this will be our last caller, please.

[Sanja Ramarchrishono], ING Clarion Capital.

Just a quick housekeeping. You said that potentially selling these locations would lead to a 7 million EBITDA? Is that what you say?

Right. I think as I mentioned in my comments that our total rental flow currently off those properties, those franchise properties, is about $7 million. So if all of the balance of the properties, all eight properties were sold, that would be the impact from a rental flow standpoint on a pro forma basis.

Got it. And in terms of lowering the guidance today, the net reduction in EBITDA is 10 to $11 million, correct?

That is correct. That is right. Including 3 million year-to-date of impact from legal charges.

And then finally, on the cap rates, I believe you said about a 7.5 to 9.5 would be the range that you anticipate?

Well, I mean yes, we expect to see ranges within that, but again we are not trying to give guidance on that. That is gong to be a tough thing to nail down.

We thought we would provide some kind of general range before someone asked the question.

You certainly have. Well, thank you very much.

Thank you, everybody.

Thank you all for joining us. I hope you have a great day, and when you get a chance, dine at Denny's.

This concludes today's conference call. You may now disconnect.