Denny's Corp (DENN) 2008 Q4 法說會逐字稿

Good afternoon. At this time, I would like to welcome everyone to the Denny's fourth quarter and year-end 2008 earnings release conference call. (Operator Instructions). Thank you. Mr. Lewis, you may begin your conference sir.

Thank you TK. Good afternoon, and thank you for joining us for Denny's fourth quarter and full year 2008 investor conference call. This call is being broadcast simultaneously over the internet and will be available for replay on our investor relations website, ir.dennys.com later tonight.

With me today from Management are Nelson Marchioli, Denny's President and Chief Executive Officer and Mark Wolfinger, Denny's Executive Vice President, Chief Administrative Officer and Chief Financial Officer. We're going to shuffle our lineup this quarter and have Nelson lead off with an overview of our business and an update of the most popular topic these days our terrific Super Bowl event. Mark will follow Nelson with a financial review of our fourth quarter results. After that I will walk through our 2009 guidance and some of the underlying assumptions. After our prepared remarks, Management will be available to answer questions.

Before we begin let me remind you that in accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 the Company knows that certain matters to be discussed by members of Management during this call may constitute forward-looking statements. 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 difference 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 Form 10-Q.

With that, I will turn the call over to Nelson Marchioli, Denny's president and CEO.

Thank you Alex and good afternoon everyone. Let me start by saying I'm pleased with the adjusted income growth we have generated in 2008 despite the considerable economic challenges facing our industry and our country. The successful execution of our strategic initiatives over the past few years, led by our considerable debt reduction, along with the significant shift in our business model to a franchise focused operation has increased our operating margins and earnings power, lowered both our business and financial risk, and contributed to a renewed restaurant development pipeline.

This transformation is clearly evident in our results. We remain committed to building on the success we have already achieved and optimizing Denny's business model and will continue to utilize our FGI program to promote growth across the Denny's system. While those efforts continue we also recognize the critical need to improve our guest traffic trends.

Over the past few years we have been able to raise average guest check through proactive menu management and drive intermittent traffic increases through selective discounting. However we have not been as successful as we had hoped in attracting and retaining light or lapsed users that have drifted away from Denny's over the years.

In 2008 our marketing programs pursued guest traffic growth along two paths -- products and value. In terms of products, we began the rollout of our new product pipeline including a brand new late night menu, our new Sizzlin' Skillet line of breakfast and dinner entrees, check builders like our Pancake Puppies and of course the handheld version of our Grand Slam, the Grand Slamwich.

Our second marketing tactic in 2008 was the promotion of proven Denny's favorites, particularly those with a strong value component. In particular we let our customers take control of their breakfast with our $5.99 Build Your Own Grand Slam offer. We also responded to the growing economic pressures with our $4 weekday Express Slam.

We launched two other successful initiatives last year whose benefits we expect to continue going forward. The first was Denny's Allnighter, which was directed at our primary late night demographic, 18 to 24 year olds. Through aggressive public relations, targeted marketing, and a staggered rollout of new late night only products, we moved late night from our most challenged day part before the Allnighter launch to our best performer thereafter.

We also launched our first comprehensive To Go initiative. Without considerable advertising support, we have seen our take-out mix of total sales increase this year from less than 3.5% of sales before the launch to approximately 5% at year end. We now incorporate To Go into our new product development and operational design to insure we continue to execute it in a quality manner.

While we have generated incremental benefits from these programs our real challenge is driving sustained traffic growth. This became even more difficult for full service restaurants as a whole as economic conditions continued to deteriorate. We were concerned about the economic shock to our customer base and thought a strong value message had a chance to break through for us. Therefore we made an incremental investment in television advertising over the Thanksgiving holiday and again from Christmas to New Year's. The Company contributed close to $1 million dollars to pay for this additional advertising. We were pleased to see a notable pickup in guest traffic during both of these investments periods. The month of December benefited from calendar timings, but even without those it was our strongest month of the quarter.

While we are proud of the new products and programs developed in 2008 we must continue to innovate and market more effectively in order to attract light and lapsed Denny's users and regain lost market share. We made a decision late in the year to change our advertising agency. Our previous agency had served us well for many years but we felt a shakeup was needed to foster new ideas. We are very pleased to have selected our new agency, Goodby, Silverstein & Partners, an award winning firm known for their world class creative. Their consumer clients include Sprint, Hyundai, Frito-Lay and Comcast. One advantage we believe they have for Denny's is that they are a California-based firm.

The Denny's brand began in California and has a strong heritage and loyal following there. And with 26% of Denny's restaurants located in California understanding and attracting those customers is of critical importance. We took a bold first step with our new agency and placed our first ever advertisement during the Super Bowl. When we decided to participate in the marquee marketing event of the year we knew we needed a big hit, we knew we had to have something to say.

Fortunately we had a Grand Slam to offer. This event came together incredibly well and surpassed our expectations. It began with the good fortune that Super Bowl 43 was very competitive and garnered the highest average ratings ever. But most importantly for Denny's, the rating points during our third quarter ad placement and even our postgame spot were very strong.

While the ratings were great, the amount of secondary publicity and media attention this promotion received was truly incredible. We received almost 50 million hits on our website in the days following the Super Bowl. We received media coverage on almost every major TV and cable network and earned mentions from Katie Couric to Brian Williams, David Letterman to Jay Leno. More than 500 newspapers printed the story with more than 2,300 TV airings in local affiliates. Denny's reached number three on the Google hot trend list and was prominent on social networking sites such as Twitter, YouTube and Facebook.

We estimate the value of public relations coverage of this event at approximately $50 million. I think the most encouraging part of this promotion was the overwhelming goodwill and emotional connection it produced for Denny's. I keep calling it an event, because it truly turned into just that. We had lines down the block in sometimes freezing cold temperatures in the snow. In many cases we tried to offer rain checks to customers so they didn't have to stand in long lines, but many refused, just wanting to be part of the experience.

With the economic misfortunes affecting so many people in America we at Denny's -- all our operators, employees and franchisees -- are so proud to have made such a positive impact in our communities. And to find our customers so appreciative and grateful.

From a financial perspective, the total cost of the promotion as I've said before was around $5 million. This includes advertising costs, which were around $3 million for the Super Bowl and follow-up advertising. Those costs are part of the Denny's advertising fund to which both Company and franchise restaurants contribute. So there was no incremental spend, but a reallocation of the 2009 marketing budget.

We, Denny's Corporate, also incurred approximately $2 million in additional costs for the program and lost margin on that day. These costs will have an impact on our first quarter results. It is our goal to minimize the net cost of this event by achieving improved guest counts and sales, but that will be determined as the quarter and the year unfold. I can tell you that we have seen a very encouraging lift in guest traffic since our Super Tuesday event.

We do remain cautious regarding our expectations for the year as it has only been two weeks and the economic environment and the sales outlook for our industry as a whole isn't getting any better. The exit polling we did during the event suggested approximately 60% of the participants were in our target group of light and lapsed users. Meaning they had not visited a Denny's in the last three months. Well, over 90% of the respondents said they were either extremely or very satisfied with their experience and said they would either definitely or probably come back within the next three months. Much of the post-event success will depend on our execution in the restaurant when those guests do return. To that end we remain cautious in our outlook in light of the broader economic environment. However, our Company and our franchise operators have never been stronger and better prepared to demonstrate their operational excellence and hopefully turn a visitor into a customer.

We still have a ways to go to cover the cost of the Super Bowl program and farther still to return our business to where we think it should be. We hope the success of this event, the strategic changes we have implemented and the strength of the Denny's ongoing value proposition will propel further operational performance improvements as we move forward.

We have never been more excited about the opportunity here at Denny's and we believe we are well positioned to achieve further success in the years to come. As always, thank you for your interest in Denny's. I will now turn the call over to Mark Wolfinger, Denny's Chief Admin Officer and Chief Financial Officer.

Thank you Nelson and good afternoon everyone. I will start my comments with a quick review of our fourth quarter sales performance.

Systemwide, same-store sales decreased 6.1% in the fourth quarter comprised of a 3.2% decrease at Company restaurants and 7.2% decrease at franchise restaurants. There are many factors that contribute to the difference in same-store sales results between Company and franchise restaurants including the timing of pricing actions, geographical variances and the exclusion of same-store sales from restaurants sold during the year.

Looking at details for Company sales performance, the 7.5% decline in guest counts was partially offset by 4.6% increase in average guest check. Most of the growth in Company guest check was attributable to pricing actions taken during the year to help offset minimum wage hikes, food cost pressures and rising utility rates. Guest check also continued to receive a benefit in the fourth quarter from a modest reduction in discounting compared with the prior year.

The decline in total Company restaurant sales in the fourth quarter reflects the continuing impact of our franchise growth initiative or FGI as sales decreased $38.9 million or 20% due to 131 fewer equivalent Company restaurants compared with the same period last year. Through year-end 2008 we have sold 209 Company restaurants or 40% of the prior Company store base. As a result we have increased the mix of franchise restaurants in the Denny's system from 66% to 80%. We expect the mix to continue moving towards a more heavily franchised system.

Turning now to the quarterly operating margin table in our press release, our Company restaurant operating margin in the fourth quarter was 11.8% of sales, a decrease of 0.2% compared with the prior year period. The slight decline in operating margin in the fourth quarter is due to additional marketing expense as Nelson mentioned in his remarks along with higher general liability expense which offset several positive margin contributors.

The first factor which contributed positively to Company operating margins in the fourth quarter is the additional week of operations. The 14th week of the quarter and 53rd week of the year is not just an additional week, but it also is the strongest week of the year because it includes Christmas Day, our highest volume day of the year, and continues through New Year's Eve, another strong operating day.

The second factor positively impacting our margins in the fourth quarter is the price increases taken during the year to help offset inflationary pressures. In addition to those factors our continued success with menu management helped to further reduce product costs which decreased 0.9% in the fourth quarter.

Starting in the second quarter of 2008 our promotional activities have focused on menu items with a lower food cost but that still provide a compelling value to our customers. Our customers showed their approval by driving up the purchase mix of our Grand Slam breakfast, but also with a strong reception to new menu items like Sizzlin' Skillets, our Allnighter menu and our new Pancake Puppies. The combination of all these factors has resulted in Denny's lowest product cost as a percentage of sales since 2002. This is a terrific accomplishment given the considerable commodity inflation experienced in 2008.

Payroll and benefit costs also improved in the fourth quarter decreasing by a substantial 1.5% to 41.1% of sales due to more efficient crew and management labor. Our operations team did a commendable job of improving labor efficiency in the quarter despite the considerable pressure from declining sales volumes.

Occupancy expense increased 0.7% due primarily to unfavorable developments in certain general liability claims. Utility expense in the fourth quarter increased 0.2% due to higher energy costs which peaked in the third quarter and have since begun to subside. We have locked in our natural gas costs for most of 2009 which should result in somewhat favorable utility cost comparisons beginning in the second quarter of 2009.

In summary, the gross profit from our Company operations decreased $5 million on a sales decline of $38.9 million. While the profit contribution from our Company restaurant operations is trending down due to the sale of Company units the offsetting effect is driving strong growth in the franchise side of our business.

In the fourth quarter franchise revenue increased $3.3 million or 13% comprised of a $2.3 million increase in royalty revenue and a $3.2 million increase in franchise and occupancy revenue partially offset by a $2.1 million decrease in upfront franchise fees.

Royalties and rents were higher due to a 127 unit increase in equivalent franchise restaurants. The franchise fees were lower due to 57 fewer FGI transactions in the fourth quarter of 2008 compared with the fourth quarter of 2007. Franchise operating margin increased by $1.6 million in the fourth quarter to $20.4 million. This higher franchise revenue offset a $1.7 million increase in franchise cost primarily related to rental expense on properties subleased to franchisees.

For the full year 2008, franchise revenue increased more than 18% and franchise operating margin increased more than 15%. In summary, the gross profit from our franchise operations increased $1.6 million on a revenue increase of $3.3 million. From a gross profit standpoint the franchise side of our business is for the first time contributing more than our Company restaurants. This income shift allows us to lessen the risk and increase the predictability of our earnings.

General and administrative expenses decreased $3.4 million in the fourth quarter due primarily to lower salary and other compensation costs, attributable to the new organizational structure we implemented in the second quarter of 2008. Contributing to the lower G&A was a $1.5 million decrease in incentive compensation and a $1 million benefit related to the accounting for our deferred compensation plan.

Next depreciation amortization decreased by $2.2 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 decreased $19.8 million from the prior year period, due primarily to a $2.1 million increase in restructuring and impairment charges and a $17.7 million decrease in asset sale gains compared with the prior year period. The significant decrease in asset sale gains was attributable to 57 fewer FGI transactions in the fourth quarter compared with the prior year period.

Including these items operating income for the fourth quarter decreased $17.6 million to $10.4 million. If you exclude the gains, losses and other charges from both periods, operating income increased $2.2 million in the quarter despite a decrease in total revenue of $35.5 million. To post a $2.2 million increase in adjusted operating income despite a significant revenue decline is testimony to the efficiency of our transitioning business model.

Below operating income interest expense in the fourth quarter decreased by $1.6 million or 15% to $8.6 million as a result of a $25.3 million reduction in debt from the prior year period. Other non-operating income increased $3.7 million in the fourth quarter due primarily to the changes in fair value of interest rate and natural gas hedging transactions. We reported a net loss in the fourth quarter of $3.2 million or $0.03 per diluted common share, a decrease of $17.9 million compared with the prior year period. Again the income decline is due primarily to fewer FGI transactions which resulted in significantly lower asset sale gains and fewer upfront franchise fees.

Because of the significant impact or P&L from non-operating, non-recurring or non-cash items, we give earnings guidance based on our internal profitability measure adjusted income before taxes. We believe this measure best reflects the ongoing earnings of our business.

Our adjusted income before taxes in the fourth quarter was $7 million, an increase of $3.6 million or 107% over the prior year period. For the full year 2008, adjusted income increased $12.7 million or 120% from 2007.

We are very pleased that we were able to generate significant adjusted income growth despite the difficult sales and margin environment for the restaurant industry. We believe this success is a direct result of our strategic initiatives, in particular our FGI program and our debt reduction efforts. To summarize our P&L for the fourth quarter, the sale of Company restaurants to franchisees contributed to a $38.9 million decline in Company restaurant sales and a $5 million decrease in Company restaurant income. We more than offset this lost Company restaurant income through the combination of a $1.6 million increase in franchise income, a $3.4 million decrease in general administrative expenses, a $2.2 million decrease in depreciation amortization expenses and a $1.6 million decrease in interest expense.

Turning to activity in the Denny's restaurant portfolio during the fourth quarter, the system increased by a net three units as twelve new restaurants opened while nine were closed. Three of the nine franchise closures in the fourth quarter and 11 of the 36 franchise restaurants closed in 2008 were related to one failed franchisee.

The 12 new openings in the quarter were all franchise restaurants bringing the full year franchise openings to 31 and full year system openings to 34. These are the highest restaurant opening totals for both franchise and the system since 2002. Our renewed emphasis on growth over the past two years is delivering results.

Moving on to capital expenditures, our cash capital spending for the fourth quarter was $6.7 million, a decrease of $5.3 million compared with the prior year period. We expect our cash capital spending to continue trending downward as we reduce our Company restaurant portfolio and remain selective in our new restaurant investments.

Turning to asset sales in the fourth quarter we generated cash sale proceeds of $5.3 million from the sale of 17 Company restaurant operations, an additional $900,000 from the sale of real estate. On a year-to-date basis we have generated net sale proceeds of $35.5 million in the sale of 79 restaurant operations and $4.7 million from the sale of certain real estate assets. Excluding notes receivable taken for $2.7 million of the sale proceeds, we took in $37.5 million in cash during the year. We used these proceeds to reduce our outstanding debt by $25.3 million during the year.

We continue to take a conservative approach in our cash management. While we paid down $10 million in debt during the fourth quarter we did choose to keep $21 billion in cash at year end given the uncertain outlook for the economy and capital markets. We will continue to balance our debt reduction goals and our commitment to maintain ample liquidity cushion. Given the challenges faced in our national economy and our industry, we are very pleased to have reduced our debt by $226 million or 41% over the last three years. We believe we are now in a financial position to manage through this difficult operating environment.

I think it is worth restating that we have no material debt maturities in the near term as our revolver is in place through December of 2011 and our term loan through March of 2012. Our senior notes mature afterwards in October of 2012. That wraps up my review of our fourth quarter results.

Before I have Alex walk you through our specific financial guidance I will caution you that we have limited visibility into 2009 given the unprecedented economic uncertainties impacting our business. Technomic, a well-known consumer research firm recently revised downward their growth expectations for the food service industry in 2009 and are now predicting the worst year for the industry since they began tracking it in 1972.

As the CFO at Denny's it is hard to project with much confidence against such a backdrop. I will say we are encouraged by what we feel is a strong marketing plan in 2009. As Nelson discussed the Super Bowl event has brought an incredible amount of excitement to the Denny's brand. However, at this time we cannot predict a change from our sales trends over the last few quarters. We also caution that the impact of further sales declines could lessen the margin and earnings benefits we have been generating through our ongoing business model optimizations. With that I will turn the call over to Alex Lewis.

Thank you Mark and good afternoon everyone. I would like to take a few minutes to expand upon the business outlook section in today's press release.

There are a few important items to note prior to evaluating our 2009 financial guidance. The first of which is that 2009 returns to a typical 52 week calendar from the atypical calendar in 2008 which included 53 weeks and 14 in the fourth quarter. Again, we estimate that that additional week in 2008 contributed approximately $3 million to income.

With regard to our FGI program we are pleased to announce that subsequent to year-end 2008 we completed the sale of an additional 25 company restaurants to franchisees. Our FGI program has now resulted in the sale of 234 Company restaurants or 45% of the original base of Company units, contributing to a rapid transition to a franchise based business model. The 25 units sold so far this year have been delayed from 2008 into early 2009 because of complications in the financing process. Due to the shutdown in the credit market and the difficulty arranging transaction financing, we cannot confidently project the number of restaurants that we expect to sell in 2009.

We remain encouraged by the franchisee demand for Denny's restaurants and their energy to grow with Denny's. But in this environment demand is not enough to insure a transaction. We will continue to provide updates on the progress of FGI each quarter.

As has been the case for the past few years projecting our financial guidance during the FGI process is particularly difficult. The variation in equivalent units based on restaurants sold in the prior year and the current year result in a wide revenue range. Comparable sales uncertainty only adds to that challenge. The estimates provided today are our most likely combination of the impacting factors.

The following estimates for full year 2009 are based on 2008 results and Management's expectations at this time. We expect full year Company same-store sales to improve sequentially from our fourth quarter results but remain negative in the range of negative 3% to negative 1%.

Underlying this assumption we anticipate less reliance on guest check increases and modest sequential improvement in guest traffic trends meaning less negative than in 2008. We are expecting franchise restaurant sales to perform approximately 2% lower than Company restaurants based on recent trends. Also we expect our equivalent Company units to decrease between 55 and 75 units for the full year 2009 due to FGI transactions in '08 and '09. Our franchise equivalent units should increase by a similar amount depending on the number of franchise restaurant openings and closings.

We expect to open approximately three new Company restaurants in 2009 and for franchisees to open approximately 30 new restaurants. Based on a conservative analysis of potential closures we anticipate the system will decrease by a net five restaurants in 2009, similar to 2008. While we are certainly working towards net positive growth the considerable variance between new store and closed store performance continues to provide revenue growth. Let me add some figures to that statement.

The stores closed in 2008 had average sales volumes below $1 million. While the stores open in 2008 had average sales volume projection exceeding $1.6 million or 60% higher. Due primarily to the impact of FGI we expect Company restaurant sales to decline by approximately $155 million to $485 -- to between $485 million and $500 million. Conversely franchise revenue is expected to increase approximately $9 million to between $120 million and $123 million.

At this time we expect Company restaurant operating margins will be approximately flat with 2008. This is due in part to the sales deleveraging from our expectation of negative same-store sales, which could have an impact from a percentage margin standpoint on the fixed cost components of our P&L. We must also overcome the benefit of the 53rd week in 2008.

Offsetting a portion of these margin pressures is the margin lift provided to our restaurant portfolio by the sale of lower volume units. We anticipate a modest increase in product cost as we compare against a record low in 2008. At this time we expect our underlying commodity basket to increase 4% to 5% in 2009. We also have product and ingredient quality improvements planned that will contribute to higher food cost.

For payroll and benefits we are targeting modest margin improvements from ongoing efficiency efforts and a softer labor pool. The other line items in our P&L such as rent, insurance, utilities and repairs are more fixed in nature and therefore more vulnerable to further sales decline.

One note related to rent -- for those of you that model our Company from the credit standpoint and choose to capitalize operating rent, our operating rent expense in 2007 was approximately $50 million. It was approximately $50 million again in 2008 and will likely be so again in 2009. When we FGI a leased property we remain on the head lease until the term expires and receive sublease income from the franchisee. Therefore the lease expense shifts from the Company portion of our P&L to the franchise portion but does not go away.

What does change is the amount of sublease income we receive to offset that $50 million in rent. In 2007, sublease income was approximately $22 million. In 2008 it was approximately $32 million. I can't project 2009 sublease income without knowing the number of FGI transactions but it will certainly continue to rise. We suggest modeling our operating rent expense on a net basis to better reflect the impact of our new business model.

Turning to our general administrative expenses for 2009, we expect to see our reported G&A decrease approximately $2 million to $4 million from 2008. Underlying this assumption was a $2 million benefit to 2008 G&A from the accounting treatment for our deferred compensation plan. Additionally our 2009 plan includes approximately $3 million in higher incentive compensation expense as our results did not earn a full payout in 2008.

Our income guidance is presented based on two metrics which we detail in each of our earnings releases -- adjusted income before taxes and adjusted EBITDA. Adjusted income before taxes is our internal profitability metric which we believe most closely represents our ongoing business income. We employ adjusted EBITDA as it is a metric used to determine covenant compliance under our credit facility. Please refer to the historical reconciliation of these metrics to net income in today's press release.

Our adjusted income before taxes estimate for 2009 of $15 million to $20 million is $3 million to $8 million below our 2008 results. Excluding the $3 million benefit from the 53rd week we anticipate adjusted income will be flat to down $5 million in 2009. But this is on a $145 million decrease in revenue. While our goal is to grow adjusted income we are providing this guidance for 2009 based on the unprecedented challenges facing our industry.

Our adjusted EBITDA estimate for 2009 of $73 million to $78 million is $10 to $15 million below our 2008 results. Compared with 2008 we expect depreciation and amortization will decrease by approximately $7 million. We expect cash restructuring and exit costs will decrease by approximately $4 million. And we expect cash payments for share based compensation will increase approximately $1 million. Again all those items are reflected in the reconciliation in our press release on a historical basis.

Two other items to note for 2009 are cash interest expense and cash capital spending. We expect cash interest expense to decrease approximately $2 million in 2009 to $29 million based on modest debt reduction. Non-cash interest should follow 2008 at approximately $4 million yielding a net interest expense as reported on our P&L of approximately $33 million for 2009.

Turning to capital expenditures, we completed 2008 with cash capital spending of approximately $28 million. Our estimate for 2009 is $5 million lower at $23 million. This decrease is attributable to a reduction in maintenance capital requirements as we reduce our Company restaurant portfolio. From a growth capital perspective, we expect a level of spending similar to 2008 with the planned opening of three Company locations.

Before we wrap up the commentary portion of our call I would like to echo Mark's comments regarding liquidity management.

At year-end we had approximately $70 million in liquidity comprised of $21 million in cash and $50 million available under our credit facility revolver. While we expect to be cashflow positive in 2009 we are comforted by our strong liquidity position as backup. That wraps up our guidance commentary and I will now turn the call over to the operator to begin the Q&A portion of this call.

(Operator Instructions). Your first question comes from the line of Michael Gallo with CL King.

Hi, good afternoon.

Hi Mike.

Question I have when I look at the revenue guidance for '09, particularly on the Company unit side, obviously there was the 25 units that were refranchised it sounds like early in '09, so pretty much are those completely out of the first quarter or almost completely out of the first quarter?

Well, they happen by now so --

Okay. I guess in terms of just a couple questions on that front. Can you let us know what the proceeds for those were just trying to understand what the impact was, because it looks like again back of the envelope that the revenues on those stores might have been a little higher than the basket of stores that you sold overall in 2008?

No, no, I don't think that's the case at all. We're not going to get into anything that's happened so far in this quarter from a proceeds standpoint.

But, again, we have -- when you go back to the revenue guidance we're trying to solve amongst a lot of moving factors -- what ends of the comps do you have, how many FGIs do you have -- there's a lot of -- we're trying to sort of target in the middle and that's where our revenue guidance is. Our best guess amongst all those things. And again, we said 55 to 75 lower equivalent units this year, so when you model that I think you will get closer to that number for revenue.

Alright, okay. So it sounds like you have some additional FGIs built into the number even though it's hard to put a number on it.

Depending on which end of the spectrum you go to on all of them, yes. We're certainly hoping to do more, we have demand to do more, the problem is having any confidence you can get that financed right now.

Okay, that's helpful, thank you.

Thanks Mike.

Your next question comes from the line of Reza Vahabzadeh from Barclays Capital.

Good afternoon.

Hi Reza.

Hi. So Nelson, I wasn't sure if the strategy, if the business strategy in '09 is focused more on building traffic or protecting your margins. Can you talk about that?

The simple word would be yes. It's both. We have to find a balance, but it is about sales, traffic count and margin and we have to achieve all three, one can't offset the other.

And what can be done really to improve traffic counts from the last couple of quarters. Is it just the promotions that you touched on in the first quarter and more of that.

Well, you may have heard me say this before the Super Bowl or maybe after, but we talk about as an Executive Management Team here one is about surviving this incredible economic environment that we're in. But it's also about outlasting competition and ultimately taking back share. And so we're going to be competitive. We have to steal share.

And it is as you saw in our Super Bowl commercials and in the flight that followed it's about real breakfast versus sugary and candy breakfast. And it's about new unique products. One of the things the customers told us in our private research last year was they didn't come back to Denny's because there wasn't anything new.

Well, we have got new this year. We have a Grand Slamwich we introduced the first week in December without any advertising that we have been particularly pleased with our customers' reception. We have Build Your Own Grand Slam which we initiated last year and this year we're going to introduce it with healthier options, because we know that's a concern of our customers. And we're going to address that extremely aggressively and sometime this year you will see a new product introduction, we're already testing on the west coast, that's the Grand Slam Burrito.

We're going to continue aggressive, trial promotions for lapsed and non-users. That's how we're going to product margin, that's how we're going to drive additional traffic just as we did after the Super Bowl event.

Got it. By the way, I cannot wait to try the Grand Slam Burrito.

I don't recall what part of the country you live in. If you call Alex he will tell you where we're selling them.

Okay. What about competition, is there any increase in promotional and price intensity in recent times?

Everybody is discounting, everybody wants to drive traffic, and I just enjoy frankly the position that Denny's now enjoys in the minds of the American public and most importantly with my franchisees and how strongly they feel about this brand, particularly now that we're more franchise focused and how strongly our employees and leadership feel about where we are. This Super Bowl promotion was more than a promotion, it was a game changer, no pun intended.

Got it. And what was the actual dollar impact in terms of EBIT of the 53rd week, Mark or Alex?

About 3 million.

We targeted about 3 million.

Okay. And then lastly on food cost inflation, are you largely locked and loaded on it?

No, I don't know if Nelson wants to -- I would say we're probably less than we have been in the past just because I think the guidance I've been getting from our purchasing folks -- I'll let Nelson expand on it -- is things have come down certainly very dramatically over the past few months and we're wanting to sort of find that bottom and find places to get back in.

We're still trying to understand the demand in the foreign markets because that really has been the real key here. We see prices frankly at very favorable levels particularly in some of the protein areas. But based on the worldwide economic situation I think we're in a better place today as my purchasing people are -- just let's wait and see. The market may be good to us.

Okay. Thank you.

Thanks.

Your next question comes from the line of Bryan Hunt with Wachovia.

Thank you and good afternoon. I was wondering, I had a little static on my line, if you can give us an idea of maybe how hedged you are -- it just sounds like you all are pretty much wide open on your purchases for 2009?

Oh, we're not wide open, I'm sorry, I may have mislead you. I would say we're at least 50%, maybe 60% locked, somewhere in that neighborhood. But it's a moving target.

Some things we locked in at terrific prices and then other things we locked in where we felt the market was pretty stable and it dropped further. So we're going to -- we play it close, we talk about it, I'm not going to say we talk about it every day, but almost every day.

And I'm sorry to ask the question again Nelson, I just had static. If I look at your comments on food inflation of 4% to 5% what's driving that if you're seeing such favorable costs in some items?

I'll jump in there. Part of the issue Bryan we have is frankly that we're -- we beat -- and one of the stats our purchasing folks gave me -- I'll brag on them a little bit -- last year we beat PPI, our costs went up 3% less than PPI.

So in some cases we're rolling over contracts we weren't -- we weren't in last year's market on some things. So we're now reupping on certain items we bought a year or two ago. So we might still be higher than that a year or two ago. We're not exactly tied to market on every item and again so that's having some impact on why we're seeing more nominal increases if you will.

Okay. And how many, could you tell us how many stores are actively marketing under FGI -- I know financing is difficult, but could you give us an idea of what you plan on marketing?

Bryan, it's Mark. We have never really obviously specified that number. I think as I said in my comments we obviously are now at an 80/20% mix and that was before the January transaction that Alex talked to in his guidance. We continue to move towards a more franchise model. Clearly our new store opening piece is going to be heavily franchised.

But I don't want to disclose right now what that perfect percentage is. Quite candidly we will sort of know when we get there. We have said that in the past. And it sounds simplistic in nature but I think to step back, we have been very pleased that FGI as far as a program, we have been very pleased at our existing franchise base and the stores that they have purchased from us. And we have been also very pleased with a lot of the new franchisees that have come into the Denny's system over the last two years. We will continue to make sure that program is accretive in nature for our shareholders.

And, last question Nelson, I was wondering if you could talk about what else you asked customers on their exit poll. Where have they gone to eat versus Denny's or do you feel like you have an opportunity to take share from your competitors based on this big Super Bowl event?

There's no doubt in my mind we're going to take back share. I'm not going to reveal at this point in time, perhaps on a later call.

Exactly -- on the exit polls that we did it was phenomenal the very satisfied and extremely satisfied level. And the number of people that had not visited with us prior that intended on coming back, it was extremely significant. And the revisit intent was just so encouraging, it really is about taking back share.

In my remarks prior to the Super Bowl event and after the Super Bowl event when I was being interviewed I talked about reintroducing the Denny's brand to America. I didn't realize how accurate a statement that was when I made it.

We have gotten thousands of e-mails and hits to our website about I'd forgotten about Denny's, I'd never been to Denny's. It was a great opportunity for me to reunite with my family. These aren't just one offs --it's quite incredible -- so it is about taking back share.

I appreciate your time, thank you.

Thank you.

Your next question comes from the line of Mark Smith with [Sidoti].

Can you tell me out of the 33 or so new unit openings next year how many of those would be Pilot ones?

It's Mark, Mark, so I appreciate your first name.

We normally don't disclose that. I will tell you that we currently operate three Pilot locations. That's two Company locations and one franchise. We believe that number will improve, it will grow during 2009. We are very excited and very pleased with a terrific relationship with a company like Pilot.

So probably of the 33, I would say the number which is three today is going to increase by a delta greater than three, but I don't want to give a specific number at this point in time.

Okay, fair enough. Then can you give us any more insight on the impairment charges in the fourth quarter.

Yes, the most of that was related to the transaction that was pending in New York. There were some losses on some of those units. Since we knew those were going to be transacted we were already at that point, we went ahead and took that impairment in the fourth quarter.

Okay, all right. And then just to confirm Alex, in your statement the G&A, did you say $2 million to $4 million decrease, did I hear that right.

Right, $2 million to $4 million decrease year over year recognizing that last year's number had a $2 million benefit from the deferred comp plan accounting and which is offset that -- that's a benefit to G&A and it's offset in the other [non-op line]. So there was a 2 million adjustment on the other non-operating expense line in the P&L in '08.

Also recognizing as we start the year we start with a full bonus accrual, that would indicate $3 million more of bonus incentive compensation in '09 if you were to make full plans.

Okay, thank you.

Thanks Mark.

Your next question comes from the line of [Dan Koshaba] with KSS Capital Partners.

Hello. Of the Cap Ex of $23 million, how much of that is maintenance Cap Ex and how much of that is scheduled for growth projects?

Well, we don't typically break [all] that because there's other capital as well that might be corporate capital and all. But we're pretty consistent in saying that we run in cash for maintenance capital about $26,000 or so a unit a year.

And then we also have a remodel that's due every seven years or so. If you divide that out you're looking at another $30,000 or so. We tend to model for what you would consider maintenance and what you would consider remodels, $55,000 or so a year per unit.

That would assume somewhere in the $10 million, $12 million, $13 million --

That's right .

Is that correct?

Somewhere in that neighborhood

That's a fair assumption.

Okay. Then the rest would be for the three new company owned restaurants?

That's right. We said we anticipate three company openings.

Okay. Now, are those all Pilot restaurants?

No, not necessarily. What I said earlier was the fact that we clearly believe, we currently operate three Pilots. There's one operated by one of our franchisees and two operated by the Company side of our business

Okay.

We anticipate that will obviously grow in number, but that will be a combination of both franchise and Company openings and we're very excited about what's in the pipeline for Pilot.

Now correct me if I'm wrong, the Pilots are all basically on these interstate highway type things, right, rest stops and --?

Absolutely, major crossroads, not necessarily large cities or towns, but major highway crossroads.

Right and when you look at the -- you have three of them?

That's correct.

When you look at them in terms of traffic patterns and profitability and all the various metrics that you look at, how do they stack up to franchise restaurants, existing franchise restaurants and how do they stack up to maybe Company owned? And maybe it's best if you talk a little bit about how they stack up to other new restaurants that you have opened but ones that have not been affiliated with that Pilot strategy.

Well, Dan, I'll just say what we put in our presentation and all, we're very pleased with what the Pilots are doing. Their average volume -- the corporate, the average volume across the brand is in the $1.6 million range and the Pilot average about $2 million in sales. They do better than new franchise restaurants in general. They do better than new Company restaurants in general.

On the Company side typically we're not going to do a unit. We've talked about [a lot] -- our units are typically these days either Pilots or marquee locations. That might be Orlando, that might be Hawaii, that might be Vegas but it's going to be typically high foot traffic type locations where we have a very strong track record. That's the limit of the selective investments the companies are going to make.

So the Pilot restaurant have met your expectations?

Very much so.

Absolutely.

Okay, thanks guys.

Thank you.

Thank you. Our final question comes from the line of Michael Gallo with CL King.

Hi, just have a follow-up question on To Go. Obviously in 2008 it seemed like it was more about customers coming in and getting existing products. It seems like you have more products particularly with products like the Grand Slam, that are more portable in nature. I was wondering what your expectations are for To Go as we go through 2009, thank you.

Well, we're also focusing in select markets on catering. But we think there's more upside opportunity on the To Go side of our business, it's very profitable for us, you will see us continuing to tag our ads on television with the fact that takeout is available. And you will see us with a more -- the Grand Slamwich and this burrito clearly as we have said before -- we're going to have more portable and affordable products for our customers and this To Go piece is a critical part of that.

So you will see us being more of a player in the To Go and on the go side of things. Did I answer your question?

You did, thanks a lot.

Thank you. There are no further questions at this time. I would now like to turn the call back over to you, Mr. Lewis.

Thank you. With that, we will close the day. If you have any questions, please feel free to give me a call as a follow up, and we look forward to talking to you again in the first quarter.