Denny's Corp (DENN) 2006 Q4 法說會逐字稿

Good morning. My name is Anna and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth quarter and 2006 year-end earnings release conference call. [Operator Instructions.] Mr. Lewis, you may begin your conference.

Thank you, Anna. Good afternoon, and thank you for joining us for Denny's Fourth Quarter and Year-End 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 are changing our typical order of this call and will start with a financial review of our fourth quarter and full-year results from Mark. Nelson will then provide an overview of our business. 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 notes 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 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 risk 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'll now turn the call over to Mark Wolfinger, Denny's CFO.

Thank you, Alex, and good afternoon. I will start my comments with a quick review of our fourth quarter sales performance. As reported in our December sales release, our Company same store sales grew 1.6% in the fourth quarter of 2006. This sales increase was comprised of a 1.9% increase in average check and a 0.3% decrease in guest counts. While these sales results were below our expectations, they were comparable with or better than many of our competitors in family and casual dining.

For the full year 2006, our same store sales increased 2.5% at Company restaurants. This marked the fourth consecutive year of full year positive same store sales at Company restaurants. Franchise restaurants also continued their strong sales momentum with same store sales up 3.6% in the fourth quarter and 5.2% for the full year. In aggregate, the Denny's system reported same store sales growth of 3.2%, which continued a positive streak that has now reached 13 quarters. We are quite proud of our sales performance and that of our franchisees over the least three years, and feel that it is a clear indication of the direction and relative strength of the Denny's brand.

Turning to our income statement, fourth quarter sales at Denny's company-owned restaurants increased 2.5 million, or 1.1% from the prior year, as a 1.6% increase in same store sales offset a 22-unit net reduction in Company restaurants compared with the prior year. Most of this unit decline occurred in the fourth quarter, as I will detail later.

Turning now to the quarterly operating margin table in our press release, our Company restaurant operating margin increased $6.4 million, or 2.7 percentage points in the fourth quarter, to 15.5% of sales, from 12.8% in the prior year period. Product costs were basically flat in the quarter, as a higher average guest check offset a modest increase in food costs.

Payroll and benefits costs improved by 1.8 percentage points in the quarter, due primarily to improving experience in our workers' compensation costs. While we continue to make progress in our workers' compensation experience, approximately $3 million of the 2006 benefit is not expected to recur in 2007. Other payroll components, including team labor, management labor, taxes, and benefits improved slightly as a group in the quarter.

We do expect wage pressures to be one of our biggest cost challenges in 2007, due in large part to the minimum wage hikes already taken in many states and the pending federal action. While we have no choice but to cover these costs with price increases, the impact on our value driven consumer remains uncertain.

Moving down the P&L to occupancy costs, these costs were basically flat in the fourth quarter, as they were for all of 2006. In aggregate, our other operating costs decreased 1.1 percentage points or $2 million in the fourth quarter, though many--though there were many offsetting impacts. We reported lower utility and maintenance expenses for the quarter, along with favorable legal settlement costs.

In addition, other operating expense benefited from a $1 million business interruption insurance recovery related to losses from the hurricanes in 2005. Partially offsetting these favorable impacts were higher credit card fees, restaurant pre-opening expenses, and a decrease in other restaurant income.

On the franchise side of our business, franchise and license revenue declined $1.5 million, due to a $1.9 million decrease in franchise rental income, attributable to the sale of real estate previously leased to franchisees. The lost rental income was partially offset by a $500,000 increase in royalties, due to higher franchise sales.

Operating income in the fourth quarter increased $10.6 million to 22.7 million, due to higher company restaurant margin and lower other operating expenses. General and administrative expenses increased approximately $1.1 million from the prior year period. 600,000 of this increase was attributable to core G&A increases, primarily additional staffing costs. The remaining $500,000 resulted from an increase in share based compensation, due to the appreciation in our stock price during the fourth quarter.

Next, depreciation and amortization decreased $2 million from the prior year quarter, due primarily to the sale of real estate assets during the year. And finally, a new line item on our P&L - operating gains, losses, and other charges. And that replaces the prior year line items for gains or losses from the sale of assets, restructuring charges, exit costs, and impairment charges. These items are often interrelated as we close or sell restaurants or sell real estate. We will provide a detailed breakout of this line item in our 10-Qs and 10-Ks.

For the fourth quarter, asset sale gains of $9.1 million offset other charges of 4.7 million. The gains were attributable primarily to the divesture of 10 company-owned restaurant properties. The charges were related primarily to restaurant closures during the quarter. Low operating income interest expense decreased by $1.1 million to 13.3 million for the fourth quarter, due primarily to the debt pre-payments made in the third and fourth quarters of the year.

Other non-operating expense increased by $6.6 million, due primarily to the write-off of deferred financing costs associated with the extinguishment of our prior credit facility. Provision for income taxes decreased by 1.7 million in the fourth quarter. The current year expense is primarily attributable to deferred income taxes recorded as a result of the asset sales during the quarter.

Now, to the bottom line. We reported net income in the fourth quarter of $2.3 million, or $0.02 per diluted common share, an increase of 6.8 million, compared with a loss of 4.5 million in the prior year. Going forward, we will add an additional data point for review in our earnings releases, which is adjusted income or loss before taxes. We use this measure internally to evaluate our core ongoing business income before taxes. This measure, which includes operating gains, losses and other charges, share-based compensation, other non-operating expenses and income taxes, is reconciled to net income in our press release. This metric is given in addition to, not as a substitute for, operating or net income.

For the fourth quarter, our adjusted income before taxes increased by $7.9 million to 7.3 million. Regarding restaurant portfolio activity we saw a net decline of 14 units across the Denny's system during the fourth quarter. In the company portfolio, we opened two new restaurants and closed 16 restaurants. For the full year, we opened four company units while closing 26. The new company units this year included three new locations and one franchise reacquisition in core company markets in California, Florida, and Hawaii. We have been pleased with the results of our new units over the past two years, as their sales performance continues to far exceed the average for company restaurants.

Of the 26 company restaurant closures in 2006, four were formal closures of restaurants that had not reopened sine Hurricane Katrina in 2005. In the fourth quarter, we closed 16 company restaurants after determining these operations did not meet our company return expectations and they were not viable for sale to a franchisee. Some of the closures this year allowed us to unlock real estate value that exceeded the business value of a particular location. We will continue to evaluate all of our owned restaurants and may choose to monetize further properties as the financial analysis warrants. As I have said previously, we are committed to enhancing our asset returns and making sound investment decisions for our capital.

Turning to the franchise portfolio, our franchisees opened four new units during the fourth quarter, which offset four restaurant closures. For the full year, franchisees opened 17 new units, while 27 were closed and one was reacquired by the company. This was a mixed result as the new openings were below our expectations, but the number of franchise closings was the lowest in six years.

Moving on to capital expenditures, our cash capital spending for the fourth quarter was approximately 7 million, bringing our year to date capital, including software costs, to $36 million, compared with $50 million in the prior year. The reduced capital spending in 2006 resulted primarily from additional expenditures in the prior year for our new POS system, or point of sale system, along with reduced maintenance and remodel spending in 2006. We intentionally pulled back on our capital budget around midyear as we were concerned about the soft sales environment and the potential impact that it may have on our free cash flow.

Turning to our balance sheet, as we've reported throughout the year, we have made significant progress on our goals to reduce leverage and increase cash flow. 2006 was a milestone year for Denny's as we paid down over $100 million in debt, or more than 18% of our outstanding indebtedness. Denny's operational improvements, combined with a focus on asset returns and cash generation, position us to complete a very successful refinancing in the fourth quarter. This process began with credit rating upgrades from both Moody's and S&P. The agencies provide a tough independent examination of our business and we were pleased to have our progress recognized.

With the ratings upgrades and our proven commitment to de-leveraging, we were able to extend our maturities and significantly reduce our interest costs. Based on current interest rates, the refinancing is expected to save us approximately $5.5 million per year in cash interest expense. Our balance sheet is stronger than it has been for more than 15 years. We ended 2005 with a leverage ratio of 4.9x using a net debt to adjusted EBITDA calculation. Our goal for 2006 was to move below 4x. I am very pleased to report that we far exceeded that goal and ended the year with a net debt leverage ratio of approximately 3.6x. We are committed to further de-leveraging and expect to have this ratio closer to 3.0x by the end of 2008.

In addition, under the new credit facility, we have further increased our liquidity to over $73 million, comprised at year end of approximately 26 million in cash and approximately $47 million available under our new revolver.

EBITDA, or more specifically, adjusted EBITDA, is the measure we used for earnings guidance last year. I am pleased to report that we ended the year with adjusted EBITDA of $125 million, which exceeded our guidance. Please do note in the press release, adjusted EBITDA is reported at 119.5 million, which is lower than the $125 million figure I just quoted. This is due to a change in the definition of adjusted EBITDA in our new credit facility. We now deduct the cash portion of certain add-back P&L items, namely, restructuring charges, exit costs, and share-based compensation, from our EBITDA figure.

Turning now to our outlook for 2007. As noted in today's earnings release, our revenue outlook for this year is uncertain. Like many in the restaurant industry, we expected restaurant traffic to improve significantly in the fourth quarter with the easing of gasoline and natural gas prices. Our fourth quarter traffic trends were not as strong as we would like to have had it. However, they were consistent with results across the family in casual dining segments.

While the recent impact of harsh winter weather plays into our estimates, our full year guidance is based more on guest count trends for Denny's in our segment over the last six to 12 months. And therefore, we expect guest traffic may run negative for much of the year.

Moving to our specific financial guidance, we expect same store sales for company restaurants to range this year between up 1% and down 1%. Our franchise partners have been running somewhat ahead of the company and we expect that trend to continue. Regarding new restaurant development, we continue to expect the majority of new Denny's units will be franchisee developed.

For 2007, we expect new restaurant openings to increase for both company and franchise operations, as our development process matures and our pipeline builds. New unit development has not progressed as quickly as we would like to have had, but we are pleased with the results that our disciplined approach has generated. Sales for new restaurants, both company and franchise, continue to exceed the average unit volumes of our base business. Our next company unit is scheduled to open in March in Las Vegas, and we are excited about its potential.

The other side of our restaurant portfolio assumptions is unit closures, which is always more difficult to predict. On the company side, our closures in the fourth quarter of 2006 were part of a portfolio optimization process that is ongoing. Because of the fourth quarter restaurant closures, we expect only nominal company closures in the near term, primarily related to lease expirations or an occasional closure to monetize superior real estate value. However, we complete a detailed financial analysis prior to every lease renewal, remodel, or other significant capital outlay to ensure that the investment meets our return expectations. Where proper return is not expected, then we will find an alternative solution.

On the franchise side it is more difficult to project closures, as we can only provide an estimate similar to last year, which was 27. Based on our same store sales and portfolio assumptions, we expect total operating revenue to be in the range of $968 million to $987 million. This total is comprised of company restaurant sales of 884 million to 902 million and franchise revenue of 84 to 85 million.

Outside of same store sales, the biggest negative impact on company revenues is the fourth quarter restaurant closures, which results in 15 fewer equivalent units year over year. On the franchise revenue line, the biggest impact is the loss of approximately $5 million in franchise rental income year over year, due to the sale of leased real estate. As we anticipate continued volatility in our net income, due to asset sales and possible restaurant closures, we are offering income guidance based on our internal measurement, adjusted income before taxes.

This metric eliminates many of the difficult to predict line items relating to asset sales in restaurant closures. This measure also eliminates our complicated, but highly beneficial tax position. We feel this measure most accurately represents our ongoing business income. There is an historical reconciliation of net income to adjusted income before taxes available for your review in the tables attached to the earnings release.

As noted in the release, we estimate a range for adjusted income before taxes of zero to $10 million. This figure is lower than our 2006 results, based on an assumption of lower revenue and certain cost pressures, most notably, payroll and benefits.

As a benefit to income, our interest expense is expected to decrease by approximately $11 million as a result of our debt pre-payments and the lower rates obtained in the credit facility refinancing.

Our final guidance item is cash capital expenditures, which we anticipate will increase by approximately $9 million to $45 million in 2007. Most of the additional capital is budgeted for the development of new company restaurants.

As I stated in our press release, Denny's strategic plan is built upon three core objectives - improving the organic cash flow of our company restaurants, growing the Denny's system, both the number of units and the average unit volumes, and continuing to strengthen our balance sheet. We believe that by executing on these objectives, we can best enhance shareholder value.

We have made significant progress towards these goals, including increases in the profitability of our restaurants, but it has been the result of considerable effort and investment. We do not expect the business or the competition to get any easier, and there are still many investments to be made. We have also struggled to reignite the growth engine at Denny's. There are many reasons for this, but moving past them is our focus.

In an effort to facilitate system growth and to strengthen our organic cash flow, we are beginning a program that we call our franchise growth initiative, or FGI. This program is designed to seed franchise development through the sale of certain company restaurants, which we have pooled into geographic clusters outside of our core company markets. We expect many of our current franchisees will have an interest in acquiring company restaurants, but we also hope to identify new franchisees that may be attracted by the availability of a cluster of restaurants.

I want to emphasize that the primary goal of this program is to promote unit growth across the Denny's system, and as such, most sales will be subject to a binding development agreement for new site openings based on the growth potential of each individual market. While we have completed several months of analytical work on this initiative, the execution of the program will take several years, and the ultimate outcome will be determined by the success of the program as it progresses. We are not committed to selling a predetermined number of units, but we would like to rationalize our company portfolio in a meaningful way.

While we are committed to this initiative, we believe the external expectations for the program may be far ahead of its execution [because of] the complicated processes that are subject to many restaurant by restaurant specifics that affect the deal terms, and consequently, the financial analysis. First, I will assure you that the restaurants in these types of programs did not sell for the same cash flow multiples as you see for restaurant companies in the market. Many other factors must be considered in the financial calculations, including remodel and maintenance capital requirements, remaining term of property control, new development requirements, and the availability and terms of financing.

As we did with the real estate sales last year, we will provide progress reports each quarter on the FGI program. It will take considerable time and effort to execute this plan successfully and meet our objectives of growing the Denny's system and optimizing our company store base.

We are not under a deadline and do not need the proceeds from these sales to meet any financial maturity. We are beginning this program because we are committed to building a bigger and stronger Denny's.

That wraps up the portion of my prepared comments. I will now turn the call over to Nelson Marchioli, Denny's President and CEO.

Thank you, Mark, and good afternoon, everyone. Thank you for joining us. Mark took you through our financial results in detail. But he left me the opportunity to praise what was a record earnings year for Denny's. 2006 was a difficult year for much of the restaurant industry, but by whichever measure you choose - net income, adjusted income, or adjusted EBITDA, this was Denny's most profitable year. We owe that success to our restaurant operators, company and franchise, our support staff here in Spartanburg, and the millions of customers that choose Denny's each and every week.

While we certainly appreciate our successes in 2006, we also recognize that we have much more to do and much more to accomplish. Denny's is far from reaching its true potential. Our sales growth in 2006 was less consistent than we would have liked. But I do feel we reacted well to a choppy consumer environment. Looking at the sales trends for the year clearly indicates that restaurant patrons ate out less, but when they did, they were more concerned than ever with value. Our successes during the year were from delivering new promotional offerings and new menu items that reinforced Denny's strong value proposition.

Going back a few years, a soft sales environment such as this may have presented a bigger barrier to our success here at Denny's. This Management Team, however, proved its ability to control costs and react to change. Through timely and reliable financial analysis and information, we have developed a disciplined operational review process that allows us to react quickly and decisively to change in our business or our operating costs.

Also, we now have a balance sheet that supports our business, rather than restricting it as in years past. We have ample liquidity and capital resources, which allows us to execute our business plan and focus on long-term strategic growth initiatives. The opportunities at Denny's far outweigh the challenges. How we identify and execute these opportunities will ultimately determine our success. We are fortunate to be able to leverage this iconic brand that is almost universally recognized. One of our core attributes with consumers is value, and that is a clear differentiator in today's sales environment.

We also have size and scale that allows us to somewhat mitigate regional dynamics, such as economics or weather. We continue to focus on de-levering--excuse me. We will continue to focus on delivering attractive new menu offerings, such as our current Mega Breakfast. I know I told you last quarter that our Super Slams were our most popular breakfast promotion in two years. Well, so far in our current promotional period, the sales mix of our Mega Breakfasts is even higher.

While breakfast will remain our core focus, we will continue to develop new menu offerings and marketing to support our other day parts. We're pleased with the success of our dinner promotions in 2006. In fact, we sold over 30% more dinner entrees during our dinner hours than in the previous year. Additionally, we drove positive guest traffic in our dinner day part despite an overall decline in guest counts for the year. While we are pleased with our successes, we recognize our challenges.

In general, sales at quick service restaurants have held up better through this past year than many full service restaurants. Those restaurants have been able to better meet the needs of customers and have been rewarded for that. Where we have been most impacted is in our weekday business and at late night. We believe the reasons for this encroachment into family and casual dining include value, convenience, and portability. We are looking at ways to better provide these same attributes. On value, Denny's is very competitive against its direct competitors, but may not as well against quick service.

With the--with today's busy lifestyles, weekday dine-in breakfasts are hard to find time for. We believe Denny's has an opportunity to leverage its core attribute - breakfast - in order to provide a competitive alternative on weekdays. To do this, we will have to develop new products that are more portable and that can be prepared ahead of order, but that retain the quality we demand. We also believe we can improve our delivery method to make Denny's a more quick and convenient breakfast choice.

We feel we can leverage some of these same attributes of value, convenience, and portability at late night, while also differentiating Denny's from the drive-through alternative now available. This year we are rolling out new appetizers and entrees targeted specifically at our late night customers. We just introduced our new Sweet and Tangy Barbecue Trio, which includes buffalo wings, chicken strips, and shrimp in our new barbecue sauce.

To remain competitive at late night, we are offering craveable products and we know our menu development team will deliver a compelling lineup on an ongoing basis. Denny's is know for late night almost as much as breakfast, and we will reinforce that strength with a better customer experience supported by specific late night marketing.

To close my remarks, I will add my thoughts to Mark's with regard to the FGI program - the franchise growth initiative. Through a very diligent, analytical process, and after much discussion among Management and our Board, we are undertaking a plan which we believe will position Denny's for long-term growth and success. The decision to sell any company restaurant is difficult, as our operators and our support staffs put their all into getting the best out of each and every one of our restaurants.

What we have determined is that the Denny's system as a whole could be bigger and stronger if we tightened our company operated footprint and focus our capital investments in core company markets. At this point we are encouraged about the potential of this program, but of course, we cannot predict its success.

As always, thank you for your interest in Denny's. I will now turn the call back to Alex.

Thank you, Nelson. Well, that wraps up our prepared comments. So at this time, I would like to ask the operator to prepare the call for question and answers.

[Operator Instructions.] Your first question comes from Eric Wold with Merriman Curran Ford.

Hey, good afternoon, guys.

Hi, Eric.

Can you delve a little bit further--more into the growth of the franchisees - the 20 to 25 units? You mentioned that growth is obviously not progressing maybe as fast as you guys wanted. What do you feel is the one or number of things that are holding back franchisee growth ramping up further? And then, two, with maybe as much as 27 closures a year, you could have another year of contraction in the number of franchise units. At what point now do you think we can get to the point where it actually breaks even and start growing the franchise base?

Well, Eric, that's a good question, or a good observation. We obviously are focused on franchise growth. The last couple of years, as Mark mentioned in his remarks, we have struggled to get it started. I was the one that stopped growth for all intents and purposes when I first arrived because I didn't feel that we were doing what we needed to do operationally.

My view at this point is it's just taking longer than we expected and that we'd like to build the pipeline as people learn about the opportunities at Denny's and we are becoming more aggressive. We are very much looking forward to when we can announce net positive growth, but it has taken longer. We are focused and we are adding resources in the growth area to deliver--.

--I'm not going to--one quick follow-up. I'm not going to try to get an '08 number out of you guys, but if you look at kind of maybe step a year back from where we are now at the beginning of '06, and kind of look at what the pipeline looked like through '06 and '07 and kind of compare it to where we are now, you look at the pipeline through '07 into '08, is the pipeline looking much better--looking better going into next year?

It does look more promising, but the pipeline last year at this time looked very good and it just didn't materialize because of franchisees. We didn't have a system in place that really held a franchisee accountable to open, honest specific dates. It's more about when they can get it done. Now, with this FGI, the franchise growth initiative, and we also have another program called MGIP, which is a marketing growth initiative program, it does put parameters around franchisees with financial rewards and incentives to open when they say they're going to open, and then the quantity they said they were going to open.

So I think as we get more experienced with our franchises in growing, I think you'll see us become more predictable in that area. But that will be for discussion a year from now.

Perfect. Thank you, guys.

Thanks.

Your next question comes from Mark Smith with Sidoti and Company.

Hi, guys. Just a couple of quick questions for you. First, in your guidance on your interest expense of about 47 million, is that counting in any additional debt repayments with strong cash flow or sales from real estate?

No, that's really as--sort of as of today and mandated maturity, so you have a little bit of kind of mandated maturity--that would include that. But not any voluntary repayments.

Okay. Secondly, of the 20 to 25 franchise unit openings you're expecting, and I don't want to harp too much on the pipeline here, but how many of these would you expect to be coming from existing franchisees compared to new people entering the Denny's system?

Well, I think the majority--as I'll hear Nelson say a lot - I mean in any business, the majority of your openings come from your existing franchisees. I think, as Nelson mentioned, we're really encouraged about these two new programs that we've been able to put out. The FGI program certainly has potential to help with growth. And the market based program as well we think is something that franchisees would be looking for to sort of protect their areas. And we'll also keep them on a schedule of opening, which is not something we've had in the past.

And then, I think lastly, if you can just talk about kind of your use of cash as we look into '07. You guys have paid down a ton of debt. Is that still the primary emphasis of what you're going to do with your cash, or are we getting to a point where we can start looking at share repurchases or another use?

Mark, it's Mark Wolfinger. I mean, de-leveraging still is a focus. It's one of our priorities, I think as I mentioned in my comments. And I talked about that target in the lower three range basically by the end of 2008 on a net debt leveraged ratio calculation. But at the same time, if you look at our capital expenditure number, obviously, that is up I think about 20% or more year over year. And clearly, most of that increase in CapEx is towards the growth capital of the business. So it's really--to me it's a balance between, again, stimulating growth and the targeted company markets, but at the same time, obliviously, keeping our eyes on the balance sheet.

Great, thank you.

Your next question comes from Brian Hunt with Wachovia.

Thank you. I was wondering if you could give us some type of guidance and quantify what the minimum wage pressures might be on the company in 2007.

Brian, it's Mark Wolfinger. I would tell you that if I could summarize that, I would say it's extensive pressure to the tune of millions of dollars, obviously. And I don't think my comments would be any different than a number of other brands or chains out there and the kind of pressure they're feeling. Go ahead.

No, no, you go ahead. I'm sorry.

And obviously, we--25% of our restaurants are located in California, so we obviously are looking at that state and what's going on there as well. So that puts a little bit of extra pressure, but it is significant overall.

all right. And then, the next question, and keeping with costs, or my follow up, if you will. The freeze in California, combined with the pressure that we're seeing on grains, across all farm commodities, if you will, from ethanol should lead in our opinion to material higher dairy costs and protein costs. Could you reveal to us how far you are contracted out on key products in dairies and proteins? And if these cost pressures do come through, like you are in minimum wage, what do you feel like the maximum price increase you can put through to your customers is without violating that value positioning in the market?

Well, this is Nelson, Brian. I'll go backwards on that question. I hope I don't have to take another price increase this year. But we'll have to gauge that as we understand what the pressure points are. But let me talk a little bit about the commodity side. Overall, I think we're in a pretty good place. We are in a situation with corn like everyone else is because of ethanol and the markets. We certainly are paying far more for corn than we had anticipated. But I would also tell you we're seeing ironically brakes on the protein side.

So there--as in any market, you have ups and you have downs. So I really don't see anything yet that is unmanageable. So I'm not too concerned about commodity costs at this point. Orange juice continues to be a primary focus for us, as corn is. We continue to look at natural gas. But when it comes to the proteins, we're pretty well wrapped up.

When you say wrapped up, you mean wrapped up for the year?

Yes.

Okay. That's great to hear. Thank you. I'll get back in the queue.

Thank you.

Your next question comes from Dean Haskell with Morgan Joseph.

Hi, Dean.

Good afternoon.

Hi, Dean.

Gentlemen, congratulations on a great quarter and a great year.

Thank you.

Mark, my question comes to you in terms of what was the extent or the magnitude of the workers' comp, and that was in payroll. And then, the extent or the magnitude of the Katrina proceeds that were located in the operating expense line?

The workers' comp piece, I think it's either in the script or the press release, but I know we talked about a 3 million impact that would not recur. That was for the year. And on the hurricane, the business interruption insurance on the hurricane, that was about 1 million for the year.

Okay. Thank you very much.

You're welcome.

Your next question comes from [Karen Eldridge] of Goldman Sachs.

Yes, it's great, obviously, to see you guys increasing the new store openings for next year. Can you review--I know you've been experimenting with different formats, kind of what you have now in terms of cost to build a new store, both for flagship and for franchisees, and what kind of average unit volumes you're hoping to get from there? And also, with the new store openings, you said you're focusing on flagship. What markets are you targeting?

Such a short question, Karen. Welcome back. It is nice to hear your voice. Gosh, I'm sure several of us will have to participate in that discussion. But I am delighted to tell you that as of this year, we have one prototype for both company and franchise, and we are in a very good place from a square footage standpoint and a cost standpoint, remarkably so. I don't know--perhaps some of the other people here would like to get into more detail. I'm not going to. But we do have one prototype--it is less expensive than what we have experienced in the past. It is one that our franchisees in large part have developed and we have tweaked, if you will. And that just demonstrates one more time how closely we're working with our franchisees and what a great relationship is developing at this time.

What else did you--oh, you wanted to know the average unit volumes.

Yes. What's your target--what the cost is to build the new unit, and then, what kind of AUVs you're targeting with it?

Yes, I mean--Karen, this is Alex. We've said on the company side, we are looking for flagship locations in those markets that we've been opening in. In Florida, we just opened--late in the fourth quarter we opened a new unit on International Drive in Orlando. We opened a new unit in Fresno, California, which is a highly penetrated Denny's market. Earlier this year we opened a new unit in Hawaii that's doing very well. And as we've said in the script, we're getting ready to open another new unit in Las Vegas down the Strip near the airport in the gigantic new Tahiti Village complex. So we're very--that will be our fifth one on the Strip in Vegas.

So those are clearly the areas we're targeting and we'll have some more this year that we'll talk about as they come a little closer to fruition. We've said there--we're looking for 2 million in sales. That's sort of the target point for company units. And not all of them will be there. There'll be specific locations that won't be that. But the Hawaii unit one was doing well--probably well of 2.5 million. The Vegas units on the Strip have averaged 4 million, so it will depend. But that's our general target.

I would also add to Alex's comments, Karen, that we recently reacquired a few weeks before the Super Bowl a restaurant site from a franchisee directly across from the Dolphin Stadium that is--that we expect excellent volume from and are enjoying the benefit of that take back as I speak.

Great. And so, for the franchise side, which obviously are less of a flagship, what kind of new opening costs would they experience and what kind of average unit volumes would you expect them to target?

Well, the cost side is difficult--in fact, I think we've got a new UFOC that comes out here too shortly, so I don't think we want to talk about that in advance of that. But those items are certainly published there. I mean, clearly, it's been challenging the past couple of years on building costs, but as Nelson said, I think we've found a prototype that's going to be beneficial as we can make it.

On their side, their volumes have been higher. I think as you saw in the earnings release, the average franchise unit is running about--a little under 1.5 million, 1.48 million. And I think the franchise average recently has been 1.6 million or more. I think the '06 units have been over 1.6 million, so they're definitely outperforming as well.

That's great. And then, final question, this year you have successful built your dinner business and your advertising is a bit more varied. Can we expect that the same--more of the same in 2007, in terms of new menu items and how you're going to allocate your advertising time?

You'll continue to see us focus on breakfast. You may--we are also featuring late night. You may have seen some of that that is not breakfast with new menu items. All year long, you'll see compelling new menu items throughout the year. We feel that's absolutely necessary to drive traffic and have new news for our consumers to come back in for. But breakfast will continue to be our core. We are trying some new things.

I know Margaret, who actually is here with us today, actually recently negotiated for nationwide radio on traffic and weather announcements in key drive times, which is something we haven't done before. They're 10-second spots. It just demonstrates the innovation that Margaret and her team and the agencies bring to Denny's to look for new ways. And we're still early in that process, but we are looking for new ways, both that as well as on the Internet, and new ways to maximize our network strength as well.

Great. Thanks very much. Congrats on a really incredible year.

Thank you.

Thank you.

Your next question comes from [Nafaro Nazam] with JPMorgan.

Yes, hi. A few questions. First, I was wondering if you can give us an adjusted EBITDA translation for your adjusted [down] income before taxes - the guidance of zero to 10 million for '07.

No, I don't think we want to give any guidance that's not published as we published today.

Okay. Can you tell us what D&A you expect for '07?

That really will depend, as it did in the fourth quarter, on asset sales. Clearly, it will come down some, as you saw in the fourth quarter where we were down--I don't have it in front of me, but we were down 2 million in the fourth quarter. You could probably extrapolate that and the restaurant will depend on additional asset sales.

Okay. And taxes--cash taxes, any numbers around that for '07?

We're--as we have been for several years and due to our beneficial tax [indiscernible], we won't be paying significant cash taxes. We pay 1 million, 2 million a year at the most at this point in time.

Okay. And just finally, your net interest expense guidance is 47 million. Is that the same as cash interest?

No. That also includes non-cash interest as well.

And so, cash interest would be--?

--We don't have a breakout for that.

All right, great. Thank you.

Your next question comes from Alexis Gold with UBS.

Hi. Good afternoon.

Hi, Alexis.

I realize traffic trends have been pretty difficult. But just as you look across the store base, are there any areas where you've actually seen pockets of [indiscernible] or anything that you've actually seen sort of perform or trend more positively than you'd expected?

We see dinner performing in a positive fashion for Denny's. The weather patterns this year, thus far, one day to the next it hops from one end of the country to the other depending on weather patterns, economic situations, and year over year comparisons. So there's nothing really definitive other than we do see positive traffic in our dinner day part.

So just geographically, are there any areas of the country where you're actually seeing areas that are performing better than others? I'm just trying to think about the store base and if we might see certain areas at least outperform?

I wouldn't pick any given area. If you ask me on the next call, we might have better information. Once we get through winter, I think we'll have a better idea of how overall we're doing in different areas. We--this week is a good example. We, as I'm sure many other restaurant operators, had significant closing in the Midwest and in the Northeast. So it's hard to say. And then, the West, it was referred to earlier by one of the callers about the freeze and the produce being adversely affected in California.

It's been an interesting year for weather. I don't like talking about weather, but it's hard to tell you--I don't see any areas that are just bursting at this point in time with robustness. On the other hand, I don't see any areas that are in terrible shape either.

Well, that's fair. Just you talked about being down in both late night and weekday. But could you guys in terms of where you're actually down more--just because I mean, I would think it's easier to get back or grow that late night business if it's [your point] and certainly a core part of your overall business.

I'm not sure I understand your question, Alexis.

Well, I think you were--like you said dinner was positive. But I think you mentioned earlier that the areas where you actually saw weakness were in late night and then weekday day parts. So I was just trying to get a sense for those two categories. Was there one that was actually down more than the other? And I know that it sounds like you're focused on actually returning the late night to growth categories. I'm wondering if you were down more in late night, if there was anything that led late night to be down more this year than in prior years. And getting--because it seems like it would be easier to get that business back since it is a very core part of your business and what people--.

--We are facing more competition today from quick service in both those day parts than in the history of the brand, or if possible, the history of the restaurant industry. Weekday breakfast is something that quick service is growing and it's convenient and it's affordable and it's a value and everybody's in a hurry. At late night, many, many late quick service operators, as you know, are either staying open very late or open 24 hours. So it's an area of competition that we need to differentiate ourselves.

So I don't know that one is bigger or better or worse than the other. Those two areas are our area of challenge to maintain our position.

Just one housekeeping. Could you just give us a sense for rent expense for '07?

No, I don't have that in front of me. But, Alexis, you can call me offline and I'm able to provide that.

Okay, great. Thanks very much.

Your next question comes from Reza Vahabzadeh with Lehman Brothers.

Yes. On the labor expense again, baked into your guidance, what type of a year over year increase in payroll expense or labor expense are you assuming?

Well, I mean, we've talked a little bit about California alone is probably 5 million. Now, the benefit of that is that is by far our biggest exposure. IN fact, pending federal exposure, which we haven't priced for yet, we did take--we've taken our pricing for all of the states that have already taken minimum wage. If the state--if the federal acts then we'll have to react to that as well. But frankly, that's not believed to be a very big impact compared to what California was because California is a--does not give tip credit, so servers are paid a full minimum wage. So that was clearly the most impactful. And some of the other states that have a like mindset have already done their work. So most of what we're going to see is baked in at this point.

Okay. So, I mean, would you anticipate labor costs to be flat as a percentage of restaurant revenues or higher?

I don't know that we're ready to go to that level of detail. But it--again, it is a significant impact and we've taken pricing through December and January around from the state that went by ballot. We had to take those later. They weren't known at the time. So we've done conjuncts to cover those. We're probably looking at about a 3% price increase to cover the cost.

Okay. And on the product cost front, you mentioned that you've wrapped up your protein costs for the year. For the entire '07, would you anticipate total product cost being relatively flat to '06? Any type of inflation or deflation?

We're predicting that commodity costs overall are going to be up 1%.

Up 1%. Okay. And then, on the occupancy and operating costs front, [indiscernible-accented] any kind of a moderation in that--on that--on those expense lines?

I'd say that line's been pretty consistent for several years now. The percentage [rents] seem to keep it at about even with our percent of sales.

Thanks.

At this time I'm showing it's three minutes till the top of the hour. Would you like me to continue with the questions?

We'll take two more.

Okay. Your next question comes from Kevin Starke with Weeden and Company.

Hi. As I understand it, this is the first time you ran promotions during the month of December. And I was wondering if you could give us a quick postmortem on that?

About promotions?

Yes.

During December? What do you mean by that?

Couponing activity, discounts, et cetera.

No, I don't think that's the case.

No, we have actually run coupons--I've been here for six years now, and probably three--four out of the six years that I've been here nationally we have run some kind of a coupon offer, and certainly, regionally, all six years--or locally all six years I've been here, we've run some kind of discount. This might be the first time in a while that we have used a freestanding insert in national newspaper distribution. But we use other methods of distribution [now]. So that's all I would suggest. We--and typically, we would be on air the entire month of December and this year we were not.

Okay. Thank you.

You're welcome.

Your next question comes from Jeff Kobylarz with Stone Harbor Investments.

Hi. Yes, I was curious what are your initiatives to improve speed of service?

Well, we have several. We have one internal program that we are using outside consultants as well as internal resources to identify where are the opportunities in the design of our kitchens, in the design of our food products, to deliver more consistently faster. We also are looking at other delivery models to get it to the customer more quickly as well. So I'm not really prepared to talk too much more about that.

But this year will be a year of testing and trials so we can get implementation going by the end of this year and the beginning of next year. And that's--my reference to our balance sheet and our financial structure no longer restricts us. We actually have sufficient resources to make these kinds of investments.

Sure. And is speed of service--is that an issue for you at late night, or is it more just that the customer is not aware that you can serve quickly and portably at late night?

I'm not sure I heard the whole question. You cut out part of it. Could you--would you mind repeating?

Sure. I was curious if speed of service--if that's an issue in your late night [day] parts?

Well I think that--.

--Is that a reason why customers are not showing up at late night?

No, I wouldn't say so. I would tell you it would be service and menu would be the reason that they're not showing up. The late night customers that we get is not the individual that's going through a late night drive through typically. It's a customer that wants to gather with family and friends and enjoy the rest of the evening or the morning with camaraderie and not sit in an automobile, so really isn't as much of a factor at late night as it is during the day.

I understand. All right. Thanks very much.

Thank you.

Thanks, Jeff.

Okay. I think that's all the time that we have. Thank you for joining us and we look forward to talking to you at the end of next quarter.

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