Denny's Corp (DENN) 2008 Q1 法說會逐字稿

Thank you for standing by, and welcome to Denny's first quarter 2008 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). Thank you, I would now like to turn the call over to Mr. Alex Lewis, VP and Treasurer for Denny's Corporation. Mr. Lewis, you may begin the conference.

Thank you Latonya. Good afternoon, and thank you for joining us for Denny's first quarter 2008 investor conference call. This call is being broadcast simultaneously over the internet. With me today for management are Nelson Marchioli, Denny's President and Chief Executive Officer, and Mark Wolfinger, Denny's Executive Vice President, Chief Financial Officer, and Chief Administrative Officer. Mark will begin today's call with a financial review of our first quarter results. After that Nelson will provide his overview of our business and our strategic initiatives. After our prepared remarks, management will be available to answer questions.

Before we begin, let me remind you, that in accordance with with the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995, the company knows that certain matters to be discussed by members of management during this call, may constitute forward-looking statements. Management urges caution in considering its current trends, and any outlook on earnings provided in 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 risks and factors are set forth in the company's annual report on form 10-K for the year ended December 26, 2007, and in any subsequent quarterly reports on form10-Q. With that, I'll now turn the call over to Mark Wolfinger, Denny's EVP, CFO, and CAO

Thank you, Alex. Good afternoon. I will start my comments with a quick review of our first quarter sales performance. System wide same store sales decreased 0.4% in the first quarter, comprised of 0.7% increase at company restaurants, and a 0.9% decrease in franchise restaurants. Looking at details for company sales performance, a 4.7% decline in guest counts was offset by a 5.7% increase in average guest check. Approximately 60% of the growth in guest check was attributable to pricing actions, taken over the past year to offset minimum wage hikes, and commodity cost pressures. The remaining 40% of the growth in guest check was attributable to favorable menu mix, include a lower incident rate on our $5.99 promotional items, compared with the prior year period.

Looking at revenues for the first quarter, the impact of our franchise growth initiative, of FGI, is quite apparent. Sales at Denny's company-opened restaurants decreased $46.2 million or 21% in the first quarter, due to 128 fewer equivalent company restaurants compared with the same period last year. The decline in company units resulted primarily from the sale of company restaurants to franchisees under FGI. Since the beginning of 2007 we have sold 151 company restaurants, or more than 28% of the company base at that time. As a result, we have increased the mix of franchise restaurants in the Denny's system from 66%, to 76% in just over a year. As the successful execution of FGI is ongoing, the sequential decline in company units, company restaurant sales, and company restaurant operating income is expected to continue, while franchise revenue is expected to increase.

Turning now to the quarterly operating margin table in our press release, our company restaurant operating margin in the first quarter was 10.7%, a decline of 0.6 percentage points compared with the prior year period. Our primary cost product and payroll have been under pressure for more than a year, from record commodity inflation, and minimum wage hikes. However the most significant change in our first quarter P&L was a 0.8 percentage improvement in our food cost margin.

In addition to price increases taken to cover commodity pressures, we re-engineered our promotional items, producing lower plate costs, while still providing a compelling value offering for our customers. The food costs in our first quarter promotion this year, The Complete Breakfast Trio, was approximately one-third less than the food cost of The Mega Breakfast we promoted in the first quarter of last year. Our current promotion Build Your Own Grand Slam, which will run through the second quarter, provides an greater cost food margin, while leveraging the powerful consumer awareness enjoyed by our Grand Slam Breakfast. Payroll and benefits costs for the first quarter increased 0.5 percentage.to 43.5% of sales, due primarily to investment in management staffing in an effort to improve our customer service, and operational execution, and ultimately, recapture guest traffic.

Moving down the P&L, occupancy and utilities combined, were basically flat as a percentage of sales, compared with the prior year period. Repairs and maintenance expenses increased 0.4% of percentage points to 2.2% of sales in the first quarter, due primarily to the time of expenditures, as we expect repairs and maintenance expenses to average 2% of sales, for the full year. Other operating costs increased 0.6 percentage points in the first quarter, due primarily to a $650,000 benefit in the prior year period from an insurance recovery.

On the franchise side of our business we are experiencing an offsetting positive impact from the FGI program, as equivalent franchise restaurants increased by 136 units in the first quarter, compared to the prior year. This contributed to a $5.5 million or 26% increase in franchise revenue. This growth was comprised of a $2.7 million increase in franchise rental income, a $2 million increase in franchise royalties, and a $700,000 increase in franchise fees. Franchise operating margin improved by $3.8 million as higher revenue offsetting $1.7 million increase in franchise costs, primarily related to rental expense on properties subleased to franchisees.

General and administrative expenses decreased $300,000 from the prior year period, due primarily to a $600,000 decline in share based compensation. Next depreciation and amortization decreased by $2.6 million from the prior year quarter, due primarily to the sale of restaurant operations and real estate assets over the past year. Operating gains, losses, and other charges, on a net basis grew $7 million over the prior year period, due primarily to a $7.4 million increase in asset sale gains this quarter, compared with the prior year period.

I want to take a pause here to comment on the notice in our press release, regarding the review of our accounting methodology, with regard to the write off of goodwill, in conjunction with the sale of restaurants under FGI. We were unable to complete this review in time to include the final financials in today's press release. As any change that may result from this review are non-cash, and will have no impact on our earnings guidance measure of adjusted income before taxes, we decided not to delay the release, and this call. We will complete our review prior to filing our 10-Q next Monday, and any necessary changes to this quarter's financials will be reflected in that filing. As detailed in financial release, the magnitude of any goodwill write off, and any impact on asset sales gains is expected to be minimal. Now back to the results as reported today.

The increase of asset sale gains distributed to a $7.5 million increase in operating income in the first quarter, excluding these gains and other charges, operating income increased by $500,000, despite a $40.8 million decrease in total revenue. Below operating income interest expense declined by $2.1 million, or 19%, to $9.2 million in the first quarter as a result of the $94.4 million reduction debt from the prior year period.

Other nonoperating expense increased by $5.6 million in the first quarter, as a result of our discontinuance of hedge accounting treatment, relating to $150 million interest rate swap, with the change in accounting treatment we now run changes in the swap valuation through our income statement, on this other nonoperating expense line, rather through comprehensive income or loss on the balance sheet. As interest rates fell substantially in the first quarter, the value of the swap declined as well, resulting in significant change in valuation reflected on our P&L. Going forward we will continue to reflect changes in the swap evaluation on this line of our P&L, though the fluctuations are expected to be less substantial, particularly as we reduce the swap by $50 million at the end of the quarter.

We reported net income in the first quarter of $5 million or $0.05 per diluted common share. An increase of $3.8 million, compared with the prior year period. Because of the significant impact to our P&L from nonoperating, nonrecurring, or non-cash items, we give earnings guidance based on on our internal profitability measure, adjusted income before taxes. We believe this measure best reflects the ongoing earnings of our business. Our adjusted income if the first quarter was $2.0 million, or $2.1million increase over the prior year period. We were able to generate income growth, despite the difficult sales and margin environment for the restaurant industry, which we believe is evidence of the progress we have made on our strategic initiatives, in particular the success of FGI, as well as our debt reduction efforts.

To summarize our P&L for the first quarter, the sale of company restaurants to franchisees resulted in a $46.2 million decline in company restaurant sales, and a $6.2 million decrease in company restaurant income. We more than offset this lost company restaurant income through the combination of a $3.8 million increase in the franchise income, a $2.6 million decrease in amortization expenses, and a $2.1million decrease in interest expense. We expect our P&L will continue to reflect these income and expense shifts, as we transition it a more franchise driven business model.

Turning to activity in the Denny's restaurant portfolio, the system increased by a net of four units in the first quarter, as 10 new restaurants opened while six were closed. We continue to be pleased with the resurgence of growth at Denny's, led by the new restaurant development efforts our franchisees. Over the last two quarters the Denny's brand has opened 23 new restaurants, the most for any comparable period over the last seven years.

Moving on to capital expenditures, our cash capital spending for the first quarter was approximately $7 million, up $2.3 million versus the prior year. Most of this increase is due to the time of expenditures, as last year's capital spend was heavily weighted toward the back half of the year. We expect this year's spending to be more balanced throughout the year.

Turning to our balance sheet, in the first quarter we generated net proceeds of $14.4 million from the sale of 21 company restaurant operations. As the bulk of these transaction closed on the last day of the quarter, approximately $12.7 million of the net proceeds were not received until after the quarter closed, and are therefore shown as a receivable on our balance sheet. Accordingly, we were unable to apply any proceeds to the debt reduction in the first quarter, but did make a $2.1million reduction in our credit facility term loan, subsequent to quarter end. We may make additional mandatory and voluntary debt payments in the second quarter, based on additional asset sales proceeds, and operating cash flow.

That wraps up my review of our first quarter results. Before I end my remarks, I think it's important to note that while the operating environment may be impacting our guest traffic performance, we continue to make progress on our strategic initiatives to drive system growth, and optimize our business model. One of our internal objectives was to attract prominent new franchisees to the Denny's system . In the first quarter we sold 16 restaurants to a new franchisee in northern California. He is the largest franchisee of Jack In The Box, and their Operator of the Year. Last year we added the largest franchisee of Carl's Jr. to our franchise base, as well as several other strong new operators. In total we have sold 151 company restaurants, and have signed development agreements with our franchisees to build 135 new restaurants.

These development agreements have already contributed 12 new restaurants to the Denny's system, with many more expected to open over the next few years. We will continue to pursue the optimization of our business model, however the ultimate mix of company and franchise restaurants won't be determined by the continuing demand for company restaurants, the commitment for growth from our franchisees, and the availability of capital for our franchisees to fund both FGI transactions, and new restaurant development. So far, FGI has exceeded our expectations, but the operational difficulties impacting our industry, and the tightening of financing sources, has introduced several additional uncertainty, in an already competitive process.

The increasing contribution from our franchise business certainly helps to lessen the volatility in our results during these difficult times. However, we cannot avoid the impact of reduced consumer spending, and food cost pressures, that are taking a toll on the earnings of many restaurant companies. We are very pleased to have reported an increase in adjusted income for the quarter, but these macroeconomic factors leave our visibility limited for the remainder of the year. With that, I will turn the call over to Nelson Marchioli, Denny's President and

Thank you Mark, and good afternoon, everyone. During the first quarter, and really over the last six to nine months, the success of our strategic actions has helped to offset challenges to our restaurant business. We have made considerable progress in a relatively short time, in our efforts to optimize our business model, energize growth across the Denny's system, and strengthen our financial position.

Through the first full year of FGI, we have increased our franchise mix from 66% to 76%. And expect that will increase to more than 80% by the end of this year. We have signed a record number of development agreements, and are beginning to see them realized in new restaurant openings. We have substantially reduced our debt, and increased our financial flexibility, which is the considerable benefit during these difficult economic times.

As franchising is becoming a key driver of our earnings growth, we have undertaken a comprehensive process to evaluate the service and support we offer as a franchisor. We have engaged a consultant that has an extensive background in helping design and improve franchise companies, both in and out of the restaurant industry. We expect to utilize the findings from this work, to become a stronger, more attractive franchiseor.

The first step in our organizational transformation was the recent realignment of our leadership structure, with three senior executives reporting directly to me. We named Janis Emplit to the new position of Chief Operating Officer, with the responsibility and oversight for all Denny's restaurants, whether they are company or franchised. In addition to changing the structure of our operations group, we also made changes within our support functions, by adding several areas of responsibility to Mark Wolfinger, our CFO, and now Chief Administrative Officer as well. Additionally, renamed Mark Camille, as our Chief Marketing and Innovation Officer, with responsibility for all marketing, brand, product and innovation activities. Together we will move this organization forward, and remain committed to the success and growth of the Denny's brand.

As we stated on our fourth quarter call, we expect to complete our franchisor best practices review, and begin any further organizational changes during the second quarter. We will communicate our plans in this regard, prior to, or during our second quarter conference call in July. While we anticipate revisions to our corporate structure, and that these changes should provide cost benefits, the primary goal of this process is to offer our franchisees, both current and prospective, a stronger franchisor to partner with, as they build their individual businesses. We expect this will require a shifting of resources, as we look to provide valuable services and support to our franchisees, while also maximizing our company restaurant operations. It's important to remember that today, many of our G&A functions support all 1550 Denny's restaurants, both company and franchise. When this process is completed, I'm confident we will continue to operate a support structure that compares favorably on a cost efficiency basis with our peers.

As both a restaurant operator and franchisor, our biggest challenge remains driving profitable guest traffic. We are confronting this fundamental objective with more enthusiasm, more resources, and more talent, than at any time in my tenure here at Denny's. This isn't an easy problem to address. Particularly under these difficult consumer conditions. But we do not have the luxury to wait for the economic headwinds to die down. For Denny's to remain relevant, and to attract new guests, we must continue to innovate by investing in new products, new facilities, and new operating models.

As we develop and test many different opportunities, we are focusing our consumer messaging on Denny's core attribute, real breakfast. Our current marketing campaign aggressively differentiates the real breakfast experience offered at Denny's, from the less appealing breakfast available at many of our quick service competitors. Building on this our current promotion, the Build Your Own Grand Slam, is a new approach to our most recognized menu item. Allowing our customers to have the Grand Slam the way they want it, creates an unbeatable combination of customization and compelling customer value.

In two weeks we will be launching Denny's All Nighter, a new campaign focused on re-energizing our late night business, in an effort to win back late night customers, we are creating a whole new vibe in our restaurants after 10:00 p.m. The demographics of our late night business usually skew toward a younger 18 to 30 year old customer, we are reaching out to those guests with a new attitude, and a new atmosphere. One of the major drivers of this program will be a tie-in with several musical groups popular with this particular age group. We are inviting our partner bands to come into our kitchen, to design their own late night fare, which will be marketed under their name. There will also be numerous cross promotional activities, that can be followed on the new website Denny'sallnighter.com, which will launch on May 13.

As always the success of a new restaurant promotion, rests with the food, so we are launching a new line-up of craveable product offerings designed specifically for our late night guests. Such as Potachos, which are potato chip nachos loaded with all the trimmings, Sweet Riot Nachos, which are cinnamon sugar chips with fruit and chocolate toppings, [SmokinQ] 4-packs, which are mini barbecue cheeseburgers with bacon and onion rings, and many other items to let our guests get their crave on, only at Denny's. You won't be able to find these items anywhere else. Particularly not at the drive through. We are supporting this program with a strong marketing campaign, including television and online advertising. Late night is a vital part of our business, and we are rejoining the fight for this day part more aggressively than ever before.

I want to thank our employees, our franchisees, for all their hard work to improve and grow the Denny's brand . I would also like to thank our shareholders for our ongoing support. These are difficult times, but we are encouraged by the opportunities ahead of us, and the commitment of our team and our franchisees to capitalize on them. As always, thank you for your interest in Denny's. I will now turn the call back to

Thank you, Nelson. Before we go to Q&A, I would just like to remind you as what Mark said in his remarks. We will be filing our 10-Q if not before, definitely by Monday the 5th. Be sure to pick that up, and you'll see if there do result in any changes to both our P&L and our balance sheet, you'll need to get those out of the 10-Q when when we file it. With that, I'll turn it back to Latonya to begin the Q&A.

Thank you. (OPERATOR INSTRUCTIONS). Your first question comes from the line of Bryan Hunt, with Wachovia Capital Markets.

Hi, Bryan.

Hello, how are you? Can you hear me all right?

Yes we can.

I was wondering if you could talk about the financing environment in detail? Have you had any franchisees delay openings because of lack of financing? Or have you had a potential franchisee back away from a transaction because of lack of financing? And then I have a follow-up.

Hi, Brian. It's Mark. How are you?

I'm great.

On the financing side, I'll start with the franchise growth initiative and the FGI as we call it. We have not seen anything, I think you used the term back away, yet. We haven't seen that type of reaction yet in a marketplace. But at the same time clearly it is getting tougher. I think the credit standards across-the-board on third party financing, really is sort of to increase-- about 12 to 15 months ago, we clearly saw that. The requirements as far as the percentage of cash or equity down payments, those things had already started to increase about a year ago. Clearly there is more pressure out there, but we haven't seen that at this.point impact our activity. But again, you look at 21 stores we sold in the first quarter. I think our guidance for the year was 75 to 100 as far as re-franchisees.

The other part of your question was on new store builds. Again, we have not seen any kind of material impact there. You know at this point, we know those pressures are out there in the marketplace, and clearly, I think the pressure that we reference is more the pressure on the consumer, and what is going on sort of across the country, and the economy. But yes, it's certainly more challenging on the financing side. But you know it hasn't materially impacted our go forward progress, at this point.

Nelson, I don't want to leave you out, I know you put a lot of energy into new products, to-go options, as well as the express format. Could you talk about, maybe the successes and the challenges you have had so far? I know you were talk testing six to-go options, you talked about last quarter, as well as premium coffees, and rolls and wraps, at the express format. Could you just talk about those in detail? How hose efforts are progressing?

Well, two things. One on the six carry out items, we really didn't have the demand in the 32 locations, where we tested them, that we expected. The fact of the matter is, people came in more for our full breakfasts, versus a portable product. I don't think people realize that we can be, and are a great place for a portable offering . The reality is they continue to come in for full breakfasts for carry-out. In fact, I believe June 10, we roll with a nationwide carry-out program, including national media, for the first time for Denny's.

Moving on to Fresh Express, we continue to test those items. And we are encouraged by customer feedback. But right now it is about brand, visibility, and recognizing the Fresh Express trademark. It really is underneath, if you will, as a support to the Denny's brand itself. So that continues to be R&D. And we continue to be very optimistic about pulling that forward, as well as items from Fresh Express into the base

Thank you very much. Have a good evening.

You too. Thank you for the question.

Your next question from the line of Reza Vahabzadeh, with Lehman Brothers.

Good afternoon. On the same store sales funds, obviously significant price menu, upward movement and downward movement on traffic, is this the right combination that you are looking for under the circumstances? Or is this something that you need to recalibrate for a slightly different mix going forward?

It's Nelson. We have to make mid-course corrections all the time, and this particular environment with the economy, causes us to understand very clearly that the customer wants value. So everything we talk about has to be value. Our late night offering that I talked about a little while ago, that launches on May 13, a week later it launches on MTV, and digital, is about value, and experience as well. So I would tell you the consumer wants value. We are addressing that. We continue to refine the offerings, obviously we still have to make money. So I don't regret making any of the decisions we have made thus far, as it relates to price increases to cover commodity costs, or the repositioning of our menu to make sure we get the right menu mixes, Mark mentioned earlier.

So for this particular quarter, same-store sales came out where as you were hoping for, or slightly different?

Well I would have hoped for much more, as we go forward in all our promotions. However the headwinds and the economy were such, that where we wound up, I ultimately was, I hate to say I was satisfied with it, but the reality is under the circumstances, I was pleased we were as close to flat as we were.

Okay and then on the menu item re-engineering, is this something that can be sustainable, obviously it had a very positive impact on food costs ratios. But I don't know if it offers enough value, in whether you think this is sustainable going forward.

Well, it's a gas break methodology. You continue to tweak it, and there are times in fact, you enjoy the benefits of that. We believe we can manage the menu mix on a go forward basis, we are very careful about it. It is really about driving more customers into the restaurant. The incidence level on what we are offering, is meeting our expectations, if not exceeding it at times . The issue is really about getting more customers into the restaurants. Guest traffic is not where we want it to be. And unfortunately, it isn't with the most of the industry, although there are

Thank you very much.

Your next question from the line of Brian Moore, with Wedbush Morgan.

Good afternoon. I guess a question for you Nelson, given kind of-- really on the media calendar, given your comments regarding the Denny's all night beginning May 13. And I guess in the past it seems you have talked about, when you moved away from breakfast, promoting other items, whether it be dinner other types of items, sales have suffered. So could you walk us through the media calendar for the next few months?

Well we are certainly going to be focused on-- our next event obviously, is late night, as I mentioned. We are going to be investing approximately $5 million into our late night effort. We have not invested in our late night effort before. We have tested some things, we have run the same ads on Letterman and Leno, with limited success.

This really is about carving out that customer, and focusing on that customer on, and reaching out to them in ways that they communicate, and they receive entertainment. As it relates to breakfast, underlying all this, is of course our Build Your Own Grand Slam offering, which will include-- beginning some time after mid-June, the inclusion of, now you can get real breakfast to go, in a very high quality way, in new packaging that we are offering.

So we'll continue to talk about breakfast, but we felt with the erosion of our late night business, which is very important to us, we felt we really needed to carve out a special effort, to frankly bring those customers back, and remind them that we are 24/7 and we are a great place after the party, or after work.

Brian the other thing I would say to that is, clearly we are putting television dollars behind the late night campaign, and it is a strong commitment we are proving to that day part. But as you know, that demographic the online, and all the other ways we are going to go about targeting that demographic, through the band promotions, the viral marketing, if you will, all the things we're going to do there, I think really can play a big role as well, hitting that demographic.

Okay, since we are this helpful on sales I guess, a question on really tax rebates that perhaps for Nelson or Mark, or any of you, goes back to 2001 comps, it appeared that June, July, August, traffic trends appeared to accelerate from basically negative, to positive 3%, 4%. Wondering what drove that? If you think that tax rebate effects in 2001 had an impact, and what your thoughts are, and perhaps the potential impact as checks go out currently?

Brian I got your message on this earlier, so I had some time to look at it. I wish I could say I think that's what drove the traffic back then. But I couldn't quite remember back to '01. So I did have to go back and do my research. But in '01 and '02 during the summers both those years, we heavily promoted on T.V. the $2.99 Grand Slam, and that really was the traffic driver there. In fact, if you go back and look at our quarterly release, we said while that promotion was on, we did have traffic. That promotion came off in the middle of August, and that was when the tax rebate checks were fired up in '01, and then of course after the tragedy on 9/11, business went down for all of us, but I don't think at that point in time, we saw any benefit worth calling out from the tax rebate checks.

I would say we are all very excited about the checks going out, but I think we are all a bit realistic that those checks are going to be spent on, catching up on one mortgage payment, or putting gas in the tank. Love to see a fringe benefit in restaurants, but we are certainly not planning for it.

I guess given then, in this current quarter Q2, being your most difficult comparison of the year, how should we think about that in the relationship to the guidance you have previously given? And perhaps if you might consider other companies, many others have broken protocol, and actually provided mid-quarter updates on sales trends?

Well I don't think we are going to break protocol, and I don't think we are even go to talking about quarterly. We do so many things during the year to Nelson's point on [gas] break, we really target to ending the year where we planned to end the year. Promotions and timing of media calendars, and all those things can play into that. So clearly it's going to be a challenging quarter. Might be a challenging year, as we have seen. But our guidance will continue to be annual.

Okay. So it's safe to assume that the negative two to flat, comp guidance remains in place?

Well I think Mark just said we have limited visibility at this point.

Okay. With you there. I guess on G&A, I could appreciate you're at mid review, and you'll be talking about this in the coming months. But given you mentioned some benchmarking you have done, and perhaps a favorable relative comparison to peers, I'm wondering what you have looked at in terms of bench marks, what you define as best in class, how we might think about the $65 million to $67 million in nominal G&A perhaps coming down over time, at least from preliminary take?

Brian it's Mark. Again, I think as we indicated in our comments and Nelson's specific comments, obviously we continue to sort of do this analysis, and the work, we are not going to comment on any change in our G&A structure at this point in time. As far as peer group and analytics, we've looked across the board at both food and nonfood type of players. Obviously there are a lot of franchise systems out there that are not food related, and we wanted to make sure we looked at all sides, and we've done a lot of work, there's still more work to be done, which is why we don't have any significant update to talk about today.

Okay. Just one final question on the FGI and the previous guidance of 75 to 100 units. Certainly appreciate all the color there, regarding the credit markets. But looking at kind of proceeds, and the trend there remaining relatively stable, thinking about I guess at this point, it would appear you would be selling perhaps higher margin units, wondering how that might you know impact the ability of franchisees to get credit? How you weigh that in terms of dollar proceeds per store? Just trying to get a sense as to your comfort level with the 75 to 100 unit goal as well.

It is Mark again, Brian. You are saying higher margin, are you talking about the average sales price?

It appeared you were selling the bottom two?

Well, to go back to last year, we sold one-third out of quintile 3, one-third out of quintile 4 and one-third out of quintile five. So theres plenty of all of those still in the pool, and still being marketed every day. We'll probably continue to say, the average will be the average. Every quarter it might change, but over a year period the average is going to hold.

Again on each individual quarter, and each individual month it depends on that type of transaction, or where that transaction is going to occur in the country perhaps. Our annual guidance that we provided was 75 to 100 FGI transactions, or units sold through FGI companies, sold through FGI. Obviously at this point we are not changing that guidance, or commenting any further, it is 75 to 100 is what the annual guidance number was.

I'm sorry one final question for Nelson on staffing levels at store. A call or two you talked about, putting more labor in the stores. Maybe an update on that?

Well, we have reached our highest staffing levels on management that we have, probably in the history of the company. And we are beginning to see the benefits of that, through better service attribute information coming back to us. And I feel good about where we have staffed our franchisees, are I believe following suit, and delivering improved service. So I, I think the investments have been made. And I think that the results should be forthcoming.

Great. Thank you very much.

Thank you.

Thanks, Brian.

Your next question from the line of Eric Wold, with Merriman Curhan Ford.

Hello, good afternoon, guys. Follow-up question a little bit on one of the ones that came out just now, and kind of the mix of the franchise units that have been sold . I know you said, Alex said they are kind of the same the one-third, one-third, one-third last year. Looking at the 4.2% increase in average sales you had in Q1, and best one quarter jump, in a year and a half or so, is it safe to assume that the majority of that game (inaudible), is by selling off re-franchising costs, the lower end units? How should we think about going forward, in terms of what's possibly in your pipeline in terms of discussions you're having, what units are likely to be sold? Should we continue to see that number go up, as hopefully-- as the kind of lower end units, or lower echelon kind of units get sold

Eric, it's Mark. The 4.2% is the first quarter AUV for company restaurants, is that what you are quoting there?

Correct.

I think what we have said, and what Alex referenced, was the fact it was sort of a one-third, one-third, one-third split in those three quintiles last year. In general, the average quintile was a quintile 4, as far as the company sold, and yes, clearly I think was we have laid out the game plan strategically for FGI, it tends to be obviously the lower volume stores that are being sold, and yes we obviously hope and expect that will impact positively the remaining company stores. So going back to our various external presentations, we talked about that, and obviously there is a reflection of that in the first quarter. Despite the fact that obviously it was a very challenging, comp sales type of quarter for us. But then, we can't obviously make predictions or comments on an ongoing-- out going basis on that (inaudible).

Would you assume, okay from what you know, or want to assume, that the units will be re-franchised over the next 12 months, are likely to still be in that same mix? Or would it shift one way or the other?

We would hope it would in in the same mix. Obviously subject to market conditions, and demand and supply, and all those other factors that I'll always mention to you. But clearly, strategically that is what we are hoping to do, and obviously concentrate our company base in specific markets.

Okay. The last question. The 75 to 100 that you are still looking for this year, were 21 is clearly in that I think ray. You know, was that kind of as you start the year, whenever you came up with the 75 to 100, would that 21, obviously I know you have knowledge of that, when you gave the 75 to 100. Would that have been, higher than they might have expected in the first quarter? Is there any stuff that didn't close in Q4 ,that looped into Q1, to get that number, or was it kind of in line with what you thought it would be?

Transactions take awhile sometimes, and that big 16- Unit one was in the pipeline, I would say. All the transactions closed the last week of the quarter, or the week prior to that. So nobody really lopped over from December. As we said on the fourth quarter call, we had to really kind of step back, and get going again. All those transactions, that's why probably you'll have challenges in your math. And that's all you can do, put equivalent units, because all those transactions happened right at the very end of the quarter.

Perfect. Thanks, guys.

Thanks, Eric.

Your next question comes from the line of Dean Haskell, with Morgan Joseph.

Hi, Dean.

Dean?

Sorry about that, guys.

Hello Dean, how are you?

Hello Alex, Nelson, Mark. My question comes down to the marketing on the late night. You are spending $5 million. I estimate system-wide you probably spent about $90 million on advertising. That $5 million, is that going to be all TV?

No. And we spend $72 million overall, both on working and nonworking creative. $50 million approximately goes on media. Of the $5 million I referred to, candidly, is going to be on MTV, internet and digital. We are after that 18 to 30 year old that is our customer, and has chosen in recent months, to not go out. And we're going to give him a reason to come back to Denny's.

My last question is for Mark. If you would a sensitivity analysis on your swap, or 1% change in interest rates, generates what kind of change in the swap impact?

Alex and I don't have our pencils out.

There is no impact because they don't change, obviously. The valuation has been hopefully written down, as far as it will go. Because the rates and the market strength come back up from where they were at quarter end. What you'll see going forward, will actually be income, as that swap liability bleeds off. So it will actually come through the other way.

Are you using a LIBOR base, or a prime, or some other base rate on that?

It's a LIBOR. We are paying a fixed 4.8925 as LIBOR on that. But the one note we did make, we want to make sure we clear up, is on the last day of the quarter, we terminated $50 million of the $150 million swap. So now we have $100 million fixed at 4.8925 plus 2% for our premium, so 6.89, and then that $50 million floating on LIBOR plus 200, and LIBOR's probably around 3 today, a little under 3. So we are actually-- we'll pick up some interest savings going forward, by having bought out of that swap, at least in part. And we have exactly-- just post quarter end, we have exactly $150 million out on the term loan right now, 100 that's swapped at 6.89, and 50 that is floating.

Okay, and you expect to pay down somewhere in the neighborhood of $10 million to $15 million in debt from the proceeds that were received post end of the first quarter?

We'll see. We have voluntary baskets and we'll--the biggest problem is first quarter is always a strong negative working capital quarter. We have our no payment that we made on April 1. So we, you know, held back some of the proceeds, as we are allowed to do under the agreement to do that. As the quarter progresses, we'll make our normal decisions on how much to pay down, and how much to hold back.

Okay. So hopefully we'll see a bigger change in the second quarter. Thank you, again.

Thanks, Dean. I think you will.

Your next question from the line of Nicole [Pelatzi] with Babson Capital.

Hello, it's Nicole Torraco. I think on the last call you had given EBITDA guidance of $83 million to $89 million for 2008. Is that still where you would come out today?

Yes. It's Mark, Nicole. That was part of our annual guidance, and again there's been no comment today about changing any of the components of our annual guidance, at this point in time.

Okay and just to go back to SG&A for a second, if you exclude share-based compensation, it looks like SG&A is actually up, or G&A is actually up this quarter over last year's first quarter. Is that something you could speak to, or is that something you want to talk about next quarter once the G&A review is completed?

Well, again, you know, we talked about that was a part of the change in there. But the three we didn't comment on was the $300,000 difference year over year. A lot of things going in and out of G&A, that were positive and negative. We didn't give any more detail.

Okay. All right. Thank you.

Thank you.

(OPERATOR INSTRUCTIONS). Your last question from the line of [Meli Fioni], with JPMorgan.

Hello. Can you elaborate a little bit more about your plans for debt reduction? And I have a follow on question.

I don't think we have specifically given any guidance on that, other than our track record of turning asset sale proceeds into debt reduction, and we'll continue to do that. Some of it's mandatory under the credit facility as we sell assets, and some of it last year, I think we made $30 million in voluntary payments last year. So it's something we are definitely committed to, and it will ride on operating cash flow, and asset sale proceeds during the year.

And what is your target leverage for 2008? Is that still around 3 times?

Yes, I don't think we have a target that we are out with right now. I mean, clearly we want to continue to reduce debt, and we'll-- we are pleased with where we are at, and want to keep moving forward.

And my follow on question was if you have seen performance differing materially by geography, say in California?

California clearly has been the hardest-hit with unemployment, and foreclosures. So we do see California taking the brunt, of what I believe is a recession. There are Florida, closely followed by Florida. And then I would suggest the rest of the country is pretty much the same place. We actually see a little strength in the Northeast. But clearly, California is the most difficult operating environment, for the reasons I mentioned, followed closely by Florida.

All right. Thank you.

Thank you.

Thank you.

Your next question is a follow-up question from the line of Dean Haskell, with Morgan Joseph.

Hello, Dean.

Thank you, I'm back. Day part analysis, you have four day parts. You are pushing forward on the late night. Have you seen the late night be your strongest, or weakest period? Is that why you are focused on this? And talk about the other three periods as well.

As you have probably heard me say before, Dean. Late night is one of our profitable day parts. We have been losing traffic. We want to focus on that, as well as breakfast, and that is the two places we are going to focus on, obviously we don't want to get too spread out, as you know, my goal here has been to create menu products that will be desirable, craveable in all day parts, and we are getting closer to that. And you'll hear more about that soon.

Okay. I think that's it.

Thank you. Mr. Alex Lewis, I turn the call back to you for closing remarks.

Thank you Latonya, and thank you everyone for joining us. As always, if you have any follow-up questions, feel free to call me, and again be looking out for the Q later in the week, or on Monday. Thanks a lot. Take care.

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