Denny's Corp (DENN) 2006 Q3 法說會逐字稿

Good afternoon. My name is Emily, and I will be your conference operator today. At this time I would like to welcome everyone to the Denny's third-quarter 2006 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (OPERATOR INSTRUCTIONS). Mr. Lewis, you may begin your conference.

Thank you, Emily. Good afternoon and thank you for joining us for Denny's third-quarter 2006 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 third-quarter results. After that, management will be available to answer 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. 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 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 CEO.

Thank you, Alex. Good afternoon, everyone, and thank you for joining us. Hopefully you have had a chance to read our earnings release which was published after the market closed today. This has been a challenging year for the restaurant industry due in large part to the cost pressures experienced by consumers, particularly those in low to middle income brackets. Gas prices and other energy costs have certainly impacted Denny's customer base.

In expectation of continued soft traffic trends for the industry in the third-quarter, we felt it would be beneficial to reinforce one of Denny's strong attributes, our value. We decided to add a coupon program, in addition to a new media campaign and several terrific new product offerings. These three marketing tools successfully complemented each other which made all of them particularly effective. We received a strong positive response to these promotional and product offerings in the third-quarter. Not only were our Company's sales up 4.2% but our traffic turned positive as well.

Our franchise sales were up 4.7% for the quarter. The competitive environment remained very challenging in July and August as we were not alone in our efforts to drive traffic. We saw discounting at quick service where it has been particularly common. But we also saw cross- family and casual dining the same kind of discounting. We are extremely pleased that our customers recognize Denny's value and responded so strongly throughout our campaign.

An encouraging development from the program was its effectiveness at driving trial of our new lunch and inner offerings. The coupon was designed to promote our new lineup of burgers. We used our terrific food shots from the menu as the backdrop for the coupon. Several of the offers were targeted at the burgers as well as our new dinner entrees. By steering our customers to use the coupons on lunch and dinner items, we were able to discount our higher priced items, therefore protecting our average check.

We came into this year with the goal of building our dinner business. While the traffic challenges in the industry have made growing guest counts at all day parts difficult for all, we have been successful in moving guest into dinner items as we had planned as our dinner entree mix is up 30% over the prior year.

Turning to our efforts to strengthen Denny's financial position. When I arrived at Denny's, it was clear a lot of investment was needed to cross all elements of the brand. This was a result of many years of deferred maintenance and cost-cutting. The explanation for these decisions was simple, too much debt, too much interest expense. Over my tenure, we found a way to make the necessary investments, despite our interest burden, and our operations began to improve.

These improvements provided us the opportunity to recapitalize our balance sheet two years ago and greatly reduce our interest cost. Recently through the assets sells this quarter, we have begun to materially reduce our debt. We lowered our debt balances by $80 million during the third-quarter, which results in a 15% reduction since the end of last year.

Denny's is in its strongest financial position in at least fifteen years, but we are not done. We feel we must continue to reduce debt until our interest costs no longer limit our investment opportunities and until the stigma of being a highly-leveraged company no longer haunts us. We celebrate this landmark achievement for this brand, but we must and will do more in a quality way.

My last topic is the announcement we made two weeks ago regarding several organizational changes. We believe the changes will enable us to continue to focus on operational excellence while pursuing future growth opportunities. To summarize those changes, we have established a Chief Operating Officer role. Under this position, we consolidate responsibility for both Company and franchise operations. Until we find the appropriate individual, Sam Wilensky, our current Head of Franchise Operations, will serve as acting head of all operations. Craig Herman, our former head of company operations, is retiring. We think Craig for his many contributions to the success that Denny's has achieved over the past few years. Craig has expressed an interest in becoming a Denny's franchisee. We can certainly use dedicated operators like Craig in our franchise system.

Company operations, as well as facilities, will now be led by Senior Vice President Janis Emplit who is incredibly focused on customers and employees. In addition, we elevated Mark Wolfinger to EBP growth initiatives, in addition to his CFO position. Mark's additional responsibilities will include oversight of Development and IT. Mark has and will play a key role in directing new restaurant development, as well as other strategic growth initiatives.

We also elevated Yvonne Wolf to a new position, Chief People Officer. Much of our futures success will depend on the ability of Yvonne and her team to hire, develop and retain high-quality, talented managers and employees in our restaurants.

To close my remarks, I want to express my confidence in the steps we are taking and the teams we are building to position Denny's for long-term growth and success. As always, I thank you for your interest in Denny's, and I will now turn the phone over to Mark Wolfinger, our CFO and EDP of growth initiatives who will take you through a review of our third-quarter financials.

Thank you, Nelson, and good afternoon. I will start my comments with a review of our third-quarter sales performance which Nelson touched on in his remarks. I am pleased to report that our Company same-store sales were solidly positive in the third-quarter at 4.2% after a slightly negative result in the second quarter. This sales increase was comprised of 3.7% increase in average check and a 0.6% increase in guest counts. These sales results were particularly encouraging, given the ongoing difficult consumer environment that persisted in the third-quarter. In fact, our sales performance exceeded most of our competitors in both the casual and family dining segments.

As Nelson discussed in his remarks, our promotional strategy in the quarter included a very successful coupon promotion. Not only were we able to drive increased guest traffic against a general weakness in the industry, we accomplished it without sacrificing average guess check. Franchise restaurants also continued their strong sales momentum, with same-store sales up 4.7% in the third quarter. An aggregate, the entire Denny's system reported sales growth of 4.5% which continued a positive streak that has now reached 12 quarters, or three full years. We are quite proud of our sales performance and that of our franchisees over the last three years and feel it is a clear indication of the direction and strength of the Denny's brand.

Turning to our income statement, third-quarter sales at Denny's company-owned restaurants increased $8.9 million from the prior year due to a 4.2% increase in same-store sales partially offset by a reduction in company restaurants versus the prior year. Our company restaurant operating margin, as summarized by the quarterly operating margin table in our press release, improved to 13.8% in the third quarter from 10.7% in the prior year period. Much of that increase is attributable to the legal settlement charges reported in the prior year period.

Our fundamental restaurant cost, food, payroll and occupancy were favorable as a group by 0.7 percentage points during the quarter. Product cost increased 0.3 percentage points in the quarter due primarily to a shift in our entree mix towards lunch and dinner items. Our commodity costs were flat year-over-year.

Payroll and benefit cost decreased by 1.1 percentage points in the quarter due primarily to improving experience in our workers compensation costs. Other components including team labor, management labor, taxes and benefits were essentially flat as a group. We do expect wage pressures to be one of our biggest cost challenges in 2007, particularly with the pending minimum wage hikes in several states most significantly California.

Other operating cost in the quarter decreased 2.4 percentage points, or $4.2 million, due primarily to a decrease in legal settlement cost of $7.2 million, or 3.2 percentage points. This decrease is attributable to $5.8 million specific legal charges in the prior year, along with a beneficial settlement in the current quarter after which we reduced our legal reserve by $1 million.

Partially offsetting the improvement in legal cost, utilities increased by 0.2 percentage points, or $1 million in the quarter due to higher energy prices year-over-year. The recent decline in energy prices, particularly natural gas, should result in favorable utility cost in the fourth quarter.

The last notable increase in other operating expenses relates to a reduction in supplemental income of $600,000 which nets into this expense line. As we explained last quarter, management made the decision to remove coin-operated game machines from our restaurants. The impact of this lost income will be less as we move forward.

On the franchise side of our business, our franchise operating margin improved 2.1 percentage points, resulting from a 4.7% increase in franchise same-store sales. In G&A, our third-quarter expense increased approximately $1.8 million from the prior year due primarily to $900,000 increase in incentive compensation and $250,000 increase in stock-based compensation. [Core] G&A cost increased $700,000, due mainly to increased corporate staffing.

Moving down to P&L, operating income increased $46.4 million compared with the prior year period, due in large part to $39 million in asset sales gains in the current period. These gains were attributable to the divestiture of 65 company-owned but franchisee-operated restaurant properties.

Below operating income, interest expense increased by $1 million to $15 million for the third quarter as a result of increases in the interest rate underlying our floating rate credit facility. Other nonoperating expense increased $1.6 million due to the write-off of pro rata portion of a deferred financing cost associated with the $80 million prepayment of our first lien term loan debt.

The provision for income taxes increased $14.9 million in the third quarter due primarily to a $12.8 million change in deferred income taxes and $300,000 in current income taxes recorded as a result of significant asset sales this quarter. The deferred income taxes relate primarily to the utilization of deferred income tax assets which we previously recorded by utilizing certain tax planning strategies. We still expect that cash taxes related to these asset sales will be minimal.

Now to the bottom line, we reported net income in the third-quarter of $25.5 million, or $0.26 per diluted common share, an increase of $28.9 million compared with the prior year. Excluding asset sale gains and income taxes from the calculation, net income increased $4.9 million in the quarter. Regarding restaurant portfolio activity, we saw a net decline of seven units across the entire Denny's system during the quarter. In the Company portfolio, we closed eight restaurants. Four of these restaurants were closed last September as the result of Hurricane Katrina but were not removed from the unit count pending the decision on whether to reopen the restaurants. At this time we have determined that these locations will not reopen in the near future, if at all. The other four company closures were underperforming restaurants.

Year-to-date, we have opened one new company restaurant in Hawaii and we reopened one unit acquired from a franchisee in South Florida. We expect to open two more company units this year, one in Orlando, Florida and one in Fresno, California. In the franchise restaurant portfolio, our franchisees opened six new units during the quarter while closing five. Year-to-date franchisees have opened 13 new units, while closing 23.

Moving on to capital expenditures, our cash capital spending for the third quarter was approximately $7 million, bringing our year-to-date capital spend to $26 million compared to $29 million in the prior year. With regard to our balance sheet, our cash balance decreased approximately $10 million in the quarter due to prepayments on our credit facility. Our liquidity at quarter-end remains strong at $59 million, comprised of $26 million in cash and $33 million in availability under our revolver.

That wraps up my analysis of our third-quarter results. Now let me review our progress on one of Denny's key objectives for this year and going forward which is debt reduction. During the third-quarter, we sold 65 noncore real estate assets for gross proceeds of $67 million. We then applied the net proceeds from these transactions, along with surplus cash to prepay $80 million of our first lien term loan. This is a significant step in our effort to reduce our leverage and the associated interest cost. Based on today's rates, this prepayment will save Denny's approximately $7 million in interest expense annually. While we're pleased with our progress, further debt reduction is a key component of our strategic plan.

We will continue to fund this deleveraging through asset sales as well as a firm mandate to increase our organic cash flow. As for further asset sales, we had 21 real estate properties at the quarter-end that we are marketing for sale, 19 of which were franchisee-operated and the other two company-operated. We expect to sell the majority of these properties over the next 12 months and that the proceeds per unit will be similar to the recent sales, around $1 million per unit.

With regard to organic free cash flow, we're committed to improving the cash generation of our operations, whether that is driving top line sales growth, more efficient management of restaurant cost or stringent standards on capital spending. We must improve the cash flow from our restaurants not only to reduce debt but also to fund the necessary investments in our facilities and to facilitate the development of new flagship company restaurants.

While it is our intent to improve cash flow at every restaurant, there remain in our portfolio a limited number of underperforming units that are not meeting our profitability requirements and do not warrant continued capital investment. We are undertaking an analysis of our marginal units based on cash flow, lease terms, land value and capital requirements. Pursuant to this analysis, we may decide to accelerate the closure of any underperforming restaurants.

In order to further optimize our Company portfolio, we are establishing programs to sell certain company restaurants to current or new franchisees. We have previously discussed our intentions to both optimize our company unit geography and to see development of new franchise units through a refranchising program. We expect to begin these sales in 2007 and will provide more details on our plans, along with our 2007 financial guidance early next year.

All of the initiatives I've just reviewed are directed at increasing cash flow, improving returns and strengthening our financial position. We feel there's a great opportunity at Denny's to optimize our restaurant portfolio over the next few years by closing underperforming units, refranchising a meaningful number of company units and developing new high-volume flagship restaurants.

Finally I will close with a brief comment on our previously issued guidance. It has been our practice to issue annual financial guidance and to update that guidance only if management's outlook has materially changed. While we acknowledge that third-quarter sales results were higher than previously expected, we remain cautious in our sales outlook for the fourth quarter based on an uncertain macroeconomic environment and the difficulty that presents when forecasting revenues.

Given an improved outlook for full year sales, along with certain operating cost pressures, we would expect adjusted EBITDA at the upper end of our previous guidance range, from $113 million to $118 million. As additional clarification, the earnings per share guidance management previously provided is no longer relevant due to the asset sale gains, restructuring and impairment charges, non-operating expenses and provision for income taxes recorded in the third-quarter.

The expectation of further gains, charges in non-operating expenses along with potential debt refinancing transaction, could cause fourth quarter and 2006 earnings to vary materially. Frankly, we expect these line items will continue to somewhat cloud our earnings per share numbers both positively and negatively over the next few years as we sell real estate and restaurants.

Thus, we believe one of the best ways to measure our progress going forward will continue to be adjusted EBITDA, which we provide in our press release tables or free cash flow which we defined as adjusted EBITDA, less cash interest and cash capital expenditures.

As I stated last quarter, we are committed to protecting and growing our free cash flow. As our EBITDA expectations decreased over the year, we have pulled back on our capital spend to compensate. We now expect capital spending for the full year of $38 million to $40 million. The other significant component of our free cash flow is interest expense. As I mentioned earlier, the recent debt prepayment will lower our cash interest by approximately $7 million per year. We have recently begun the process to refinance our credit facility through which we expect to achieve further interest savings due to a reduction in our borrowing spreads. We expect to complete this process in the fourth quarter. 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) Reza Vahabzadeh, Lehman Brothers.

As far as the labor cost issue that you touched on, how do you think that will play into operating margins, if at all, and what would be the offsetting factors in dealing with labor cost?

It's Nelson. As we have done in the past and is common practice in the industry, when we are faced with these kinds of statewide minimum wage increases, typically the industry, as we do, passes it through through menu pricing effective at that particular time. We would anticipate that that's what we would do at this time as well as everyone else in the industry, be it California or the other five states or so that are imposing that minimum increase.

What portion --

We lost you. Hello?

Operator, did we lose him? Operator?

Reza, Your line is open.

Hello?

You had started your follow-up question, but we did not get it.

Thank you. What portion of your employee base are sort of close to or tied to the minimum wage levels, directly or indirectly?

I guess the answer, the majority would probably suffice, of 30,000 employees. I would say maybe 25% are management and the other 75% are minimum waged. That is an estimate, but probably not far off.

You know how it works. It is not just the minimum wage folks that get the increase. That sort of creeps up for others as well, so it has an implication across the wage scale. And it really is impactful, depending on which state you are in. If it is a tip-credit state or not, say California for example, the waitresses out there in two years will be making $8, plus tips.

What is for outlook for food costs next year?

We are in the midst of those negotiations at this time, and it is too early to call. It's too early to call. We've seen some things are -- as usual, some things are up, some things are down. But that is a good question to ask on the next call, though.

We will probably talk a little bit further about that obviously when we talk about next year's guidance.

Then, do you have just a basic initial ballpark view of CapEx for next year?

I think again -- it's Mark -- I would like to come back to you on that when we do our call next quarter and we talk more about 2007 in total.

Got it. Thank you much.

Michael Gallo, CL King.

Good afternoon. A very good third quarter. A couple of questions or actually just one question. I guess as you start to look at going out the next two to three years, you've certainly done a terrific job of deleveraging the Company substantially and improving the operations. Obviously with the creation of the news COO role, I assume you're going into more of a beginning to grow the brand type role. I wanted you to talk about kind of your strategy as you look forward of balancing the combination of growing the brand, continuing to deleverage the balance sheet and what you might do on the refranchising of company units to further deleverage the balance sheet and improve the operating margins and free cash flow of the business? Thank you.

That is the whole strat plan there, Michael. Thanks.

We are focused on growing again. We've put a new structure in place to address that directly. The Chief Operating Officer will obviously help us remain focused on same-store sales, on the existing portfolio, as well as opening flagship restaurants. But as we have always said, we expect about a 14% return on margins on our restaurants as we benchmark in the industry. We've literally talked about that in every conference investor or banking that we have been to. And we will look at our existing restaurant portfolio although the vast majority, the handful that aren't cash positive but frankly because of leases that I can't get out of and unfavorable situations. But for the most part we will look at those restaurants that are below that level of operating margin return and look for opportunities to either increase their profitability or to look for franchisees that are very interested in those kinds of properties that want to grow. So that is something that Alex referred to, it is part of our strat plan and it will take several years for us to maximize that.

I guess just taking that a step further, as you look at the portfolio, obviously there's probably some markets that you can use as a catalyst to grow in terms of sale of Company-operated units. Have you determined at this point how many Company-operated units you think you ultimately need to have skin in the game? Clearly with 500 plus, I don't know that that is the right number. Obviously it is something less than zero, but it would seem to me that you can use that as a catalyst to see new market development as well as improve the free cash flow of the business by franchising markets that may be Denny's corporate is not going to grow and substantially, but that another franchisees might be interested in.

I think you must be reading our notes. I think you captured directionally where we are going. I wish I could tell you a precise number. Everything you ever want to sell and every area you ever want to grow, you need two things. You need a motivated seller and you need a qualified buyer, someone beyond just being able to write a check.

I can't say it better than you did. I am going to leave it at that, but we are going to pursue opportunities to grow the brand. We have some lucrative areas that candidly the Company is not going to grow in. And we have franchisees both new and existing that have expressed initially a lot of interest. I expect Denny's will always operate hundreds of restaurants. Today I can't tell you how many that is, as the brand continues to improve in its own performance as well as franchisees that are anxious to develop.

Okay, great. Thanks and congratulations on a very good third quarter.

Thank you.

Eric Wold, Merriman Curhan Ford.

I don't want to get into '07 guidance. I'm trying to word this right. I know I want to get a sense on as you look into the unit growth for next year and kind of where the franchisees will go, so excluding openings, kind of give us your sense on where we are on the closing process. Have we seen -- I know you that you said there's about eight or so Company stores which you may accelerate the closing of. Where are the franchisees and their plans, or better your plans to close the franchisees? Are certain stores kind of underperforming? Have we seen the bulk of those done, or reached a level where it is kind of a normalized annual run rate, or is there still a fair amount left that need to be cleaned up?

We probably can't expand too much on what you just said and then what we have already said on the Company side of that. The franchise side is even more complex because it is not our decision. I would tell you this that we have closed less restaurants today on the franchise side than I thought we would have by now for the very reasons that you talked about.

As I look forward, it is hard for us to predict. Franchisees typically give restaurants more time than we do because of our desire to make an appropriate return and to lift the brand. They are more willing to stay with what they have until some either unexpected expense or some remodel expense comes upon them and then they have to make a tough decision. I know that is not the answer you were looking for, Eric, but it is a tough one.

Is there a point in time where they do or do not have to pull the trigger on remodels kind of basically almost force that decision on them?

We do force that decision on them ultimately. We try and work with them very closely and we have been successful doing that, but there have been a handful over the last few years as we have required them to remodel, that they have actually had to close. But it just takes them a little longer time. They also like to see their leases expire so they don't have any obligations on a go forward basis. Of course we know for the most part when those expire. But they have closed less than I had anticipated. And I will tell you they are enjoying sales that they have not seen before and frankly enjoying a rebirth of this terrific brand that I don't think they anticipated a few years ago.

Then lastly on the marketing, walk us through the plans for the fourth-quarter marketing with the couponing, how those will be focused in terms of product mix? Are they also focused on your lunch and dinner day parts and then when will those fall?

In fact, our current Super Slam promotion has an incidence level that's literally unrivaled by anything that has been introduced here. It has just been incredibly well received by our guests. So this next effort that will take place will encompass all of the things you just said, plus the continuation of our Super Slam offering through the holidays. So it will cover -- literally it will for all day parts.

Okay, perfect. Thanks, guys.

Tony Brenner, Roth Capital Partners.

Let me be the next one to take a crack at the system-wide restaurant.

Thank you, Tony.

It appears that at least for the next year or two, the number of Company operated restaurants will subside as you both close some stores and sell others to franchisees. Those sales will satisfy some of the demand for increased franchise units and you will be closing units as well. Is it therefore fair to conclude at this point that over at least the next two or three years the number of system-wide restaurants will be flat to down?

I have said before, and I am going to continue to maintain, that we are hopeful that we will see overall system net unit growth in '07 and certainly in '08.

Fair enough.

There are growth requirements attached, Tony, to when we sell some portion of these Company restaurants. Outstanding restaurants that offer an opportunity and markets the Company isn't going to grow in that I expect growth from. And there are severe penalties if they don't grow. There are other restaurants that frankly are in my mind, I can't afford to continue to invest good capital in that franchisees are willing to because they're willing to either accept a different kind of return, a lower return, or they are in a wealth-creation activity that includes real estate for their families and their partners.

This is probably a little more involved growth plan than most people undertake, but I am not in a fire sale. I am in a very different situation than we were half a dozen years ago. We want to grow in a quality way. We want to grow first with our existing franchisees and we do have quite a few outsiders that want to participate that are willing to grow in a quality way. So I am somewhat optimistic that we will see net growth next year, but certainly if we don't see it next year, we will see it in '08.

Fair enough. Another question, would you discuss the prospects for being able to renegotiate a portion of your debt at the end of the year with the coupon --?

Refinancing.

Tony, it's Mark. Are you asking about the refinancing process?

Yes.

I think, as I mentioned in my comments, we are focused on that during the fourth quarter. Clearly the $80 million debt paydown has put us in a much better situation from a capital structure standpoint, and we believe there's an opportunity in the marketplace to additionally reduce some of our borrowing cost.

But you don't want to quantify that at this point?

No.

No, we'd have to get out of the market before we can do that.

You can always be a little more specific with your questions and maybe we could help you, but you would have to be more specific than that, Tony.

I will let the next guy do it.

Mark Smith, Sidoti.

Maybe I'll pick up where Tony left off then on the refi. As we look at this, we plan on just rolling those term loans up together. Is that kind of the plan and then seeing what you can knock off on the premium over LIBOR there?

Yes, I think that is clearly what we're going to go out and attempt to do and I think the market will support that. I don't feel we need to have the second lien any longer with the paydown. If you think about it, we paid down $80 million now. By agreement, we had to pay that on the first lien, but if you took it off the second lien, that'd only leave you $40 million on that. So I think it is likely that we will be able to roll that into a one-lien transaction.

Can you give us -- I don't know -- any insight on maybe what you are hoping you can get on kind of your term --?

No, we can't do that going into a transaction.

As much as we can.

Absolutely.

I know that you are being cautious on kind of the outlook here in the fourth quarter, but if we revisit your comp guidance that you gave on the last call, it would seem to me that comp guidance would need to come up. Is there any comment on that?

It is Mark. I think as I mentioned in my comments, clearly we were pleased with the third quarter. We are obviously focused on some of the macroeconomic pressures in the fourth-quarter. As I mentioned in my comments as well, we talked about the guidance range of $113 to $118 million of adjusted EBITDA and I think we have indicated -- focused more towards the top end of that range.

Really that's sort of where we are coming out as a management team and just as a reminder obviously, after what was a very difficult second quarter, not just for us but for a lot of other players in our industry, we obviously had to adjust our original annual guidance downward. So again we are reiterating our guidance and with some specifics on the EBITDA number and I think a little bit more specific on the CapEx numbers is what I also gave.

Mark, can you just walk us through real quickly the tax situation and what we may be looking at going forward? I know it is difficult with the asset sales and what may happen in the fourth quarter in '07, but any kind of guidance or help that you give us on that?

Mark, this is Alex. We have been pretty consistent on that. The charge that was recorded this quarter, again as we said, was primarily non-tax, so from a tax -- non-cash, sorry, so from a tax basis, I don't think our position has changed much. We don't anticipate in the near-term material cash taxes. But obviously that can change depending on some of the asset sales and the bottom line net income. But at this point in time we are comfortable we are going to continue to have relatively small cash taxes.

Okay, great. Thank you.

Melissa [Ford], Bank of America.

Yes, my question has been asked. Thank you.

Alexis Gold, UBS.

This is Andie Davis for Alexis. It sounds like you saw some higher cost due (indiscernible) dinner menu, but are you seeing any benefit to the top line?

It is Mark. I think as Nelson mentioned in his opening comments, our mix in dinner has shifted dramatically in the positive fashion. I believe Nelson mentioned it was up 30% as far as choice of dinner entrees. So, yes, we have seen a significant positive impact on our dinner business.

Then you also discussed success with your coupon promotion. I may have missed that, but can you talk about any new promotions we should see in the coming months?

We continue with our national advertising with our media, and we have a program currently ongoing that was launched here several weeks ago with a company by the name of [SBS] that focuses on employers where we send coupons through this group to employers that distributed among their employees. And we have used that for approximately three years several years ago with good success. And that is currently in the marketplace today. It generally has a lunch and dinner focus which obviously we've talked about before. We also have a coupon or a drop that is going to address all day parts in the back end of the year here.

Okay, thank you.

Daniel Wang, [Kenyan] Capital.

My question has been answered. Sorry, thanks.

[Sanjay Farmakreshna], ING Clarion.

Thanks for taking my call. In particular, looking at the pro forma full- year effect of the two dates divestitures, could you please tell me what the hits to the franchise and license revenue line would be? Before I think you had said it would be in the area of $5 million to $7 million? Is that correct?

Yes, I think that is correct. I think if you add up all of the -- all the transactions so far year-to-date, which really even go back into the second quarter, it's probably around 6 million or so. And we still have some more to go, so those will roll off and that probably takes you to 7 million or so when you are ultimately done.

Sure. Looking at the other restaurants that are currently expected to be marketed, you said that would be a twelve-month time horizon. Looking at the fact that you got these sales done earlier than many may have expected, what is your visibility in terms of getting those sales done within the next two quarters?

I think that it will clearly just be the same thing. We feel like it will take twelve months to sell the majority of them and I think there is even a couple that we feel like will take longer than that.

Finally, just going back to this possible refinancing the credit facility, just during the current quarter, you said you would look at doing maybe a first lien term loan structure. Would you look at putting on a revolver with that or perhaps lowering the amount of commitment you would be taking on versus what you had with the two-lien structure you had before?

We will definitely continue to have the revolver. The discussion earlier was, well, we have a first and a second lien and we will likely pursue a first lien only type structure. We will definitely still have the revolver; there is no doubt about that. That revolver, while it has been undrawn, does support about $43 million right now and letters of credit primarily to back workers compensation programs. So we will definitely have to keep that liquidity and rainy day liquidity as well.

Finally, have you been in contact or discussions with the rating agencies considering the amount of credit positive actions you have had over the last quarter?

That is usually part of our refinancing process.

Great, thank you very much.

Reza Vahabzadeh, Lehman Brothers.

This is actually Christian Hoffman. A question on your legal settlements last year. It looks like you had a $2.4 million charge. This year it looks like that has actually been reversed. Is that a gain? Can you give a little more color on that?

I'm sorry. I didn't hear that last part.

I just wanted a little more color on legal settlements. It looks like that was actually a gain.

It wasn't a gain. I think as we said in this script, we had a favorable settlement of a case that we were probably over-accrued on, so we were able to lower that reserve due to a favorable settlement.

That was separate from last year?

Yes, if you go back to the second quarter, there were some charges we took in the second quarter and those numbers, the case was settled and we reserved them, taken some reversal.

And also what looks like franchise and license revenue declined this quarter. Is there any reason for that?

Didn't decline year-over-year. In fact, it was up $600,000.

I'm sorry, the costs of franchise and license revenue.

That does move around a little bit depending on programs and incentives that go to the franchisees, so it will move around a little bit. I think it was only a couple hundred thousand different.

Okay, thank you.

Kevin Starke, Weeden & Starke.

Gentlemen, I think you gave this before, but I might have missed it. Can you give me the amount of income taxes you applied to get the $100,000 pro forma net income figure?

We just eliminated it from both columns, just eliminated the tax line and eliminated the gain line from both years, with the total amount that was there in both years.

So to get the pro forma tax, there is basically zero --?

We typically have $800,000, $1 million something like that in taxes. We just did some quick math.

You addressed this before, but I'm not sure you gave a number. I'm not sure you are prepared to give a number. How many marginal units are there?

No, we did not give a number and we obviously continue to look at it. I will position it this way. It's not a significant number, but we want to make sure obviously we pour through the analysis before we comment further.

Not a significant number?

No, it is not. Not material and frankly the units that we would contemplate probably don't contribute anything to our EBITDA and less to net income. So it certainly won't have a material impact on the bottom-line.

Have you been able to gauge the impact of your recent national advertising campaign in any way that you could share with us?

The positive sales that both Mark and I mentioned, up 4.2 for Company and 4.7 for the quarter. We were positive guest count with literally no effect on our GCA, so I would tell you the national advertising and the focus I think I mentioned in my remarks that three things working together, one, the national advertising, the new campaign and the coupon drop all successfully working together made this past quarter quite successful for us.

The other thing I would add that I thought was pretty noteworthy. As Nelson had said in his remarks, we have had three years of positive system wide same-store sales, which very closely matches the time we have been doing national network TV advertising, so you can take from that what you will.

Lastly, are there any legal situations, be it the recent EEOC class action complaint or other lawsuits out there that you think that investors should be mindful of?

Yes, anything like that that we think material is always reserved for or disclosed in our Q, so I'll just point you to those.

Thank you.

Mark Smith, Sidoti & Company.

Just one follow-up, a real general question, just if you can give us your opinion on kind of the consumer, now that we have seen gas prices come down, you've got a pretty good comp trend here that has been getting better every month for the last four months. Can you just comment on what you are seeing in October and any more insight on going forward?

We are pleased with what we see. I really can't say much more than that. We will be releasing our sales numbers for October next week, but we are still -- actually today is our last day for the month. But I wouldn't want to tell you anything other than we are pleased with what we see. I am concerned about the rest of the year as to how gasoline prices will affect the consumer's spending habits and their desire to eat out. The good news is the entire industry is benefiting from the lower gas prices at this point. All of us are seeing an influx in traffic and that is great news for the industry.

Thank you.

Karru Martinson, CIBC World Markets.

I was just wondering in terms of a competitive response to the promotions that you have been running, have you been seeing anything in your markets from your competitors.

Nothing, per se. We typically don't discount through coupons because of, as I said in my remarks, because of Denny's is always being known for value, we wanted to remind our customers and the consumer, in general, since we have a 99% brand awareness with Denny's that we really still stood for value, but our industry coupons candidly all the time something or another. We typically try and stay away from it. We only use it in local marketing efforts where we have specific issues that we are trying to address, but I can't point to any competitive response specifically to what we have done.

Thank you very much.

Thank you.

Emily, we are out of time, but we want to thank everybody for being on the call today and if you have any follow-up questions, feel free to give me a call. We will talk to you next quarter.

Thank you, everyone.

Thank you.

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