Denny's Corp (DENN) 2009 Q2 法說會逐字稿

Good afternoon, everyone, and welcome to Denny's's second quarter 2009 earnings release conference call. At this time, I would like to inform all participants that your lines will be in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. In order to accommodate all callers, please limit yourself to one question and one follow-up question. If you would like to ask additional questions, we ask that you remove yourself from the queue and then re-enter it. (Operator Instructions). I would now like to turn the call over to Mr. Enrique Mayor-Mora, Vice President of Planning and Investor Relations. Sir, you may begin.

Thank you, operator.

Good afternoon and thank you for going us for Denny's second quarter 2009 investor conference call. This call is being broadcast simultaneously over the internet.

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. Nelson will begin today's call with an overview of our business and our strategic initiatives. After that, Mark will provide a financial review of our second quarter results.

Before we begin, let me remind you that in accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, the Company notes that certain matters to be discussed by members of Management during this call may constitute forward-looking statements. Management urges cautioning in considering its current trends, and any outlook on earnings provide on this call. Such statements are subject to risks, uncertainties and other factors that make 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 31st, 2008, and in any subsequent quarterly reports on Form 10-Q; speaking of which, we will file our 10-Q this evening.

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

Thank you, Enrique, and good afternoon, everyone.

Let me start by saying that I am pleased that Denny's has continued to deliver growth and profits, despite the unprecedented pressures on same-store sales in our industry. Denny's ongoing transition to a more franchise-based business model, inclusive of a more effective organizational structure, has allowed us to deliver profit growth consistently and with increased predictability. Our second quarter performance also reflected cost reductions in our Company-operated restaurants through efficiency gains.

Our progress towards a more franchise-based business model was characterized in the second quarter by an adjusted income before tax increase of $1.6 million or 27%, despite a $34 million or 18% decrease in revenue. In addition, we opened ten new franchise units in an environment where the restaurant and retail industries are cutting back development, sold 22 Company-operated units to franchisees, decreased G&A excluding bonuses, lowered interest and depreciation expenses, and voluntarily paid down $9 million of debt. Since mid-2006, Denny's has paid down $238 million or 43% of its debt. In addition, for the third quarter in a row, Denny's franchise gross profit contribution exceeded that of the Company units.

Denny's transformation has increased our operating margins, earnings power and system unit growth, while lowering both our business and our financial risks. We firmly believe that our business model is now better suited to withstand and succeed in the challenging economic climate. The existing consumer environment is easily the most challenging that I have seen in my eight years here at Denny's. NPD recently reported that the second quarter of 2009 was the worst sales performance in 28 years for the restaurant industry. [NAP Track] also reported a high single-digit drop in the casual segment in same-store sales, despite a fall in the segments check average.

The most important drivers of the industry sales challenge are decreasing consumer confidence and rising unemployment. In the short term, it does not seem that these indicators are expected to improve in any material fashion. That being said, we do recognize that some of our competitors aren't delivering same-store sales results that are are outperforming Denny's. Plainly said, we are committed to improving our sales and guest count. Starting in mid-2008, our marketing programs pursued guest count growth through our positioning as Real Breakfast, with strong lunch and dinner offerings, and a clearly differentiated late night experience through our all-nighter program. We believe this will continue to differentiate us from our competitors.

On the platform of Real Breakfast, Denny's has a three-pronged approach to driving sales. A focus on core equity of value, new product innovation, and improving the guest experience in our units. Denny's is recognized as a great value for our guests. As has been well documented, the Super Bowl giveaway event in February strengthened our value perception, and drove tremendous goodwill and repurchase intent from our consumers.

With the objective of further reinforcing the benefits we accrued from this event, we had a subsequent free event as part of the NCAA Final Four. On April 8th we gave away a free Grand Slamwich, an outstanding new product that takes our iconic Grand Slam and delivers it in a new sandwich format, to everyone in America who also ordered a Grand Slam. This event drove a 20% guest count growth on the day, and helped produce the brand's strongest comp traffic trends during Easter week in the past four years. While smaller in scope than the Super Bowl event, it still produced coverage from 1,400 TV broadcasts, 500 print and web outlets, and had 25 radio stations who interviewed Denny's management. Those radio stations represented 30 million listeners. We believe this tremendous and continued response speaks to the power of our brand, and how strongly it is embedded in the American culture.

The second quarter also saw Denny's continue to offer our starting at and tiered price points across all day parts. As 50% of all menu items sold at Denny's are breakfast items, and our competitive differentiation is based on Denny's offering Real Breakfast, this is where we have focused our value offerings. Specifically our new Abundant Burritos started at $3.99, and were tiered at $4.99 and $5.99. We also offered our new Grand Slam at the terrific starting price of $4.99 and our popular Pancake Puppies for $1.99; by the way, the first ever appetizer offered at breakfast.

In light of intense competitive pricing in the marketplace, Denny's began offering in June the Everyday Value Slam for $3.99, available all week long. This plate was designed to protect our margins while delivering craveable value to our guests. The Everyday Value Slam has been a popular seller with our guests, and has performed to our expectations.

We also continue to offer great value and choice to our customers with the Build Your Own Grand Slam, offered at $5.99. The combination of the incredible equity in the Grand Slam name and a very attractive price point has driven the incidence rate to almost 20%, five times higher than the next most popular entree. This product also has a very attractive food cost, and has supported our food margin rate objectives.

While we are pulling similar levers of price, value and product innovations at both dinner and late night, these day parts have been more negatively impacted than breakfast and lunch by the current economic environment. Dinner has also been impacted by aggressive pricing in the casual dining segment. We have also been more active in targeted markets, with the use of discounting vehicles that have historically driven return visits.

Our second approach to driving sales is a focus on delivering new product and program innovation across all day parts. Since late 2008, Denny's has been extremely active in this area. In addition to the Grand Slamwich that was introduced in December, the second quarter of 2009 saw exciting new entrees, drinks and salads that provide great appeal and strong value across all day parts. Our new entrees including four Abundant Real Breakfast Burritos, including the bacon avocado southwestern steak burritos; three new salads, including cranberry pecan and Baja chicken, in both full and half portions; new lunch melt sandwiches, including a prime rib melt; and our new Sizzling Skillet dinners, including sweet and tangy barbecue chicken and the tilapia ranchero. As a whole, we have been pleased with the performance of our new products, as they collectively mixed at over 10%; or said another way, an average of approximately 50 plates per day per restaurant.

We also built on our signature beverage platform by rolling out our new lemon tea and mango lemon tea Chillers, in addition to the new breakfast roast coffee. Denny's started out as a coffee shop, and we have gone back to our roots with the introduction of a more robust and higher-quality coffee; which by the way go great with our Pancake Puppies. The increased incidence rate on our new coffee has exceeded our expectations.

Denny's has also been proactive in offering healthier choices to our guests. Our new better for you menu choices and our sports themed kids menu were recently launched. The Better For You choices include delicious items with reduced fat or sodium, such as turkey, excuse me -- turkey bacon, wheat pancakes, egg whites, fresh fruit, yogurt and dippable vegetable sticks and apple slices for kids. Our new kids menu eliminated or replaced certain meals on the kids menu determined to be higher in sodium or fat.

While the economic environment has impacted the late night business, we have continued to update and strengthen our all-nighter platform. Our new Rock Star menu was recently rolled out, and includes a free-standing menu with items created by Rascal Flatts, Good Charlotte Gym Class Heroes and Sum 41. The incident rate for the Rock Star menu has climbed to 8% of our late-night business. Our award-winning all-nighter platform is a strong, competitive differentiator.

Denny's third area of focus is to improve the overall experience of our guests. Toward this goal, we have made system-wide progress along three fronts. First, our Mystery Shopper program has driven improved guest experience scores across the brand. Second, Denny's has successfully tested a low-cost kitchen equipment package focused on enabling faster table turns in higher volume units. This package is now available to all of our franchisees. Third, we recently began holding brand-building committee meetings with our franchisees. These committees are organized by marketing operations and development, and are expected to move the system forward through the sharing and implementation of best practice.

Our local marketing co-ops, now in 15 DMAs, representing 45% of our system units, were relativity quiet in the second quarter, as Denny's was on national media for much of the quarter. As a reminder, Denny's began this year to establish these co-ops, and has made considerable progress increasing our ability to communicate with our guests. We estimate that these co-ops will fill in approximately 12 additional weeks of media at the local level throughout the year, at times when there is no national media.

We firmly believe that we are proactively and aggressively taking the right steps forward, in terms of driving profitable guest count, with our programs and our Real Breakfast positioning. Furthermore, our continued migration toward a more heavily-franchised business continues to provide us with a more profitable and predictable financial model. We have never been more excited about the opportunity here at Denny's, and believe we are well positioned to achieve further success in the years to come. As always, I thank you for your interest in Denny's.

I will now turn the call over to Mark Wolfinger, Denny's CAO and CFO. Mark.

Thank you, Nelson. Good evening, everyone.

I will start by my comments with a review of our second quarter sales performance. System-wide same-store sales decreased 4.2%, comprised of a 2.7% decrease at our Company restaurants and a decrease of 4.7% our franchise restaurants. Looking at details for the Company's sales performance, a 4.9% decline in guest counts was partially offset by a 2.3% increase in average guest check. Denny's guest counts have been most negatively impacted in the areas of the country that have been hardest hit by the rescission. Those include California, Florida, and Arizona, which account for 41% of our system units.

Most of the growth in guest check was attributable to pricing actions taken over the past year to help counterbalance commodity cost pressures. Partially offsetting the increased pricing was the unfavorable impact of a stronger value-oriented menu mix compared with the prior-year period. The decline in total Company restaurant sales in the second quarter largely reflects the continuing impact of our Franchise Growth Initiative, or FGI, as sales decrease $38 million or 23% due to 96 fewer equivalent Company restaurants compared with the same period last year.

I will now turn to the quarterly operating margin table in our press release. The increase of 1.8 percentage points in the second quarter was due a combination of price increases taken during the last 12 months to help offset commodity inflation, a decrease in unit level labor, as well as lower utility rates. These were partially offset by a rise in occupancy costs, as well as by investment in marketing to the establishment of local co-ops. Payroll and benefit costs improved in the second quarter, decreasing by 0.07 to 41.6% of sales, due to more efficient crew labor and due to the reduction in Management labor that took place in Q2 2008. The reduction in Management labor contributed 0.3 of a point of leverage in the second quarter, despite a fall in same-store sales. This benefit is not expected to carry forward to the third or fourth quarters, and as a result will affect our year-over-year Company margins rate. Our operations team continued to do a solid job improving crew labor efficiency in the quarter, which resulted in an increase in field bonus compensation, which partially offset further reductions.

A quick note on the impact of the latest round of recent minimum wage hikes. While Denny's has been materially impacted since the inception of the program, at this point the near-term impact is minimal as the existing program winds down. Occupancy expense increased 0.3 due to sales deleverage and due to FGI. In the case of FGI, where Denny's owns the real estate, occupancy costs delever due to the loss of Company sales that were not incurring any lease expense. Our utility expense in the second quarter decreased 0.05. Denny's is benefiting from the natural gas rates that have fallen considerably from the levels seen in 2008. Marketing costs rose 0.4 in the second quarter, as Denny's continued to establish local marketing co-ops across the country.

As of the end of the second quarter, we had local co-ops in 15 DMAs; each of these DMSa had all of the Company and the majority of the franchise restaurants participating. These DMAs represented approximately 45% of our system units. Other costs decreased 0.5 on lower legal expense and lower new Company unit pre-opening expense, which was partially offset by a loss of business interruption income, as Denny's prepares to re-open one of our units on the Las Vegas Strip. It is scheduled to reopen in Q3 2009, and we believe it could be one of the systems highest-volume units.

In summary, the gross profit from our Company operations decreased $2.5 million, on a sales decline of $38 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 growth in the franchise side of our business. Specifically, the gross profit from our franchise operations increased $1.1 million or 6% to $19.6 million, on a revenue increase of $3.3 million or 12% the second quarter. Denny's franchise revenue increased consisted of an $800,000 increase in royalty revenue, a $2.2 million increase in franchise occupancy revenue, and a $200,000 increase in upfront franchise fees. Royalties on rents were higher, due to a 95-unit increase and equivalent franchise units. The franchises fees were higher, due to eight more franchise unit openings in the second quarter of 2009 compared with the second quarter of 2008.

Franchise costs increased $2.2 million, primarily related to the rental expense on properties subleased to franchisees. These subleases are the primary driver of 3.8 percentage points decrease in the franchise operating margin to 64.7%. Denny's is on the primary lease, and subleases these properties to the franchisee. We recognize our sublease income as franchise revenue, but there is an offsetting cost in franchise for the primary lease. Therefore, the overall franchise margin rate on a percentage basis will decline.

From a gross profit standpoint, the franchise side of our business contributed more than our Company restaurants for the third consecutive quarter. This income shift allows us to reduce the risk and increase the predictability of our earnings. General and Administrative expenses increased by $400,000 in the second quarter. Benefits from lower salary and other compensation costs are attributable to the new organizational structure we implemented in the second quarter of 2008 were offset by a $1.7 million increase in incentive compensation, an $800,000 increase in share-based compensation, and a $500,000 negative impact related to the accounting for a deferred compensation plan.

Next, depreciation and amortization expense decreased by $1.9 million from the prior year quarter, due primarily to the sale of restaurants and real estate assets over the past year. Operating gains, losses and other charges on a net basis decreased $6.8 from the prior year period, due primarily to a $6.4 million decrease in restructuring charges. These restructuring charges were primarily severance costs related to the organizational changes we made in the second quarter of last, as we transitioned our company focus towards becoming a frachisor of choice in the industry. Including these items, operating income for the second quarter increased $6.9 million to $17.4 million. If you exclude the gains, losses and other charges from both periods, operating income increased by $100,000 in the quarter despite a decrease in total revenue of $34.5 million. To post a $100,000 increase on 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 second quarter decreased by $600,000 or 7% to $8.2 million, primarily a result of a $22.2 million reduction in debt from the prior-year period. Other non-operating income decreased $900,000 in the second quarter, due primarily to the recognition of unrealized gains and losses related to our interest rate swap. Because of the significant impact to our P&L from nonoperating, nonrecurring or noncash 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 second quarter was $7.3 million, an increase of $1.6 million or 27% over the prior year period. We are pleased that had we were able to generate significant adjusted income growth, despite the difficult sales environment for the restaurant industry. We believe this success is a direct result of our FGI program, debt reduction efforts, and cost containment activities.

To summarize our P&L for the second quarter, the sale of Company restaurants to franchisees contributed to a $38 million decline in Company restaurant sales, and a $2.5 million decrease in Company restaurant income. We more than offset this lost Company restaurant income through the combination of a $1.1 million increase in franchise income, a $1.9 million decrease in depreciation and amortization expense, and a $600,000 decrease in interest expense.

Turning to activity in the Denny's restaurant portfolio during the second quarter, the system decreased by a net two units, as 10 new restaurants opened while 12 were closed. The 10 new openings were all franchise restaurants, bringing the year-to-date franchise openings to 20 and year-to-date system openings to 21. Denny's year-to-date net system growth as of the end of the second quarter is plus 3. These 21 units represent significant unit development progress for the Denny's brand, and are also impressive in the context of an industry that is pulling back on growth.

Moving on to capital expenditures, our cash capital spending for the second quarter was $4 million, a decrease of $3.9 million compared with the prior-year period. As we reduce our Company restaurant portfolio and remain selective on our new restaurant investments, we expect capital to decrease year-over-year. Our second quarter spending this year was partially lower, due to the timing of remodel spend anticipated in 2009.

Turning to asset sales in the second quarter, we generated proceeds of $7 million from the sale of 22 Company restaurant operations, and an additional $2.7 million from the sale of real estate. On a rolling 12-month basis, we have generated net cash proceeds of $25.3 million from the sale of restaurant operations and $5.8 million from the sale of certain real estate. In total, we have taken in $31.5 million in cash proceeds during the past 12 months. We used these proceeds to reduce our outstanding debt by $22.2 million over the past year. In addition, we held back a portion of the proceeds in cash, as you can see in our cash balance, which increased from $12 million at the end of second quarter 2008 to $20 million at the end of the second quarter 2009. This cash balance, combined with access to our credit facility, provides us with ample liquidity of approximately $70 million.

Given the challenges facing our national economy and our industry, we are very pleased to have reduced our debt by $238 million or 43% since mid-2006. We believe we are in a financial position to manage through this difficult operating environment. We have no material debt maturities in the near term, as our revolver is in place through December 2001, and our term line through March of 2012. Our senior notes mature afterwards, in October of 2012.

To conclude, the progress we made in our sales trends in the first quarter slowed in Q2, as restaurant industry traffic continued to feel the impact of rising unemployment and lower consumer confidence. It is important to consider any further sales declines would have a negative impact on the Company margin rate and earnings benefits we have been ben and cost containment initiatives. It is important to consider that any further sales declines could have a negative impact on the Company margin rate, and the earnings benefits that we've been generating through our ongoing business model optimization and cost-containment initiatives.

Based on the year-to-date results, and Management's expectation at this time, Denny's reaffirms its previous financial guidance for the the full 2009, with the following refinements. For both adjusted income before taxes and adjusted EBITDA, we expect to perform at the higher end of the ranges previously communicated. For the prior, the range was $15 million to $20 million, and for latter the range was $73 million to $78 million. As a reminder, last year's adjusted income before taxes of $23 million was positively impacted by $3 million from the 53rd week.

In respect to the FGI program to date through the second quarter of 2009, we have sold 261 Company restaurants, or 50% of the prior Company store base. This includes 22 sold in the second quarter of 2009. As a result, we've increased the mix of franchise restaurants in the Denny's system from 66% to 83%. While demand remains strong, and we expect the mix to continue moving towards a more-heavily franchised system, the current credit environment limits our visibility into the balance of 2009.

Denny's will continue to provide updates on the progress of the FGI program each quarter.

That wraps up my review of our second quarter results. I'll turn the call back to Enrique Mayor-Mora.

Thank you. We will now move to the question-and-answer portion of the call.

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

Good afternoon.

Good afternoon.

Just had a question, as you look at the trends to date in the third quarter, I guess you were at $11.9 million before taxes through the first half. Your strongest seasonal quarter is still ahead of you here in Q3; so it would seem like unless there was a major trend change you should be setting up to probably do better than your prior -- the prior guidance. Is there anything that you have seen in terms of change in trend to date in the third quarter that makes you a little more cautious toward the back half, or is it just the general uncertainty of the consumer environment? Given that -- obviously, the comparisons you have in the second half are certainly are a lot easier than the first half? Thank you.

Michael, it's Mark Wolfinger, how are you?

Good. How are you?

Very, very well. Thank you.

As far as the seasonality, obviously in the second quarter we did capture the -- what I will call the first month of the summer, depending upon where you are in the country. So clearly that's already in the second quarter. We talked about our guidance, and obviously from an adjusted income standpoint we are moving that guidance towards the higher end of the range, I think those are the comments I made in my overall comment.

I think what you are hearing from us is just a level of conservatism as we go in the second half of this year, and as things can change. I know one of the things that concerns Management here clearly is looking at GDP in the second quarter, which again was a negative number, I think from a consecutive quarter standpoint that was the highest number of consecutive quarters -- that was four consecutive negative quarters for GDP, which I think was a record since 1947, if I recall.

I think the second piece is just looking at some of the consumer confidence numbers that have come out most recently that clearly are concerning -- sending what I would term a mixed message. So I haven't specifically answered your question from a math standpoint, but I think what I wanted to sort of introduce is the tone in which we approached, you know, our comment on guidance.

I understand, and I think you did answer the question, which sounded like a no in terms of was there any real material change in trends that gives you pause, other than just general consumer environment, and I think it sounds like it is just a conservatism on the tone; is that a fair way of interpreting it?

I think that the -- the positive news that comes out of our discussion here is the fact our guidance range was 15 to 20, and obviously we have moved up toward the high end of the guidance range in our commentary, without setting a specific number.

But at the same time, this is a very tough, rocky economy we are in. Clearly the consumer is directly being impacted, and as I mentioned in my comments, I mean 41% of our system units are in those three states, Florida, California and Arizona, which have been exceptionally hard hit in this recession.

Okay. Helpful. Thanks a lot. Keep up the good work.

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

Good afternoon.

Good afternoon.

On the same-store sales front, Nelson, is the weakness in the second quarter, you know versus, maybe the first quarter or perhaps versus your own expectations, is that due to heavier maybe discounting in casual and QSR? If you are losing a share of the pie, is it to eating at home or is it eating at some other venue? Can you tell?

I would suggest to you it is probably eating at home. Casual, obviously, has been discounting significantly, but I would suggest there's over-capacity, and I don't know that they're taking anything away from us. I think folks are staying at home at night more often than not. I think NPD recently said, or Technomics said, that about half of the folks that ate out a couple of years ago are eating out less; 50% less, as a matter of fact, than they were a couple of years ago.

So I think we are dealing with consumer confidence and unemployment across the country. Remember our demographics; everyone is offering a value today, it is hard to find anything in retail, no matter what sector you look at that isn't talking about value, trying to get the customer to come out. So it is -- we deal with headwinds everyday. Whoever provides the best value and compelling argument for the customer to come in wins. I do clearly understand that there are winners and losers, but I also --as I said in my prepared remarks, there were some competitors in our segment that were outperforming us, and as I said, plainly, said we are addressing sales and customer counts, not forgetting obviously the necessity for profitability.

Right. As far as franchise health, you are comfortable with the financial health of your franchise system base?

Based on what we know, our accounts receivable, based on how we collect our funds, is probably one of the lowest, if not the lowest in the industry. And for the most part our -- we have good operators and they're well funded. I don't see any red flags at this point. I'm cautiously optimistic.

Got it. And my last question is, Mark, I couldn't catch the CapEx for the quarter or for the year?

CapEx for the quarter was about $4 million, which I think I mentioned was about $4 million less than prior year. I think our guidance for CapEx was something in the low 20s on annual basis, $23 million. It was about -- $23 million was the annual number. That's our guidance and that's what we -- that still will hold true at this point.

Thanks, Mark.

Our next question comes from the line of Bryan Hunt with Wells Fargo Securities.

Good afternoon.

Good afternoon.

Nelson, I was wondering if you could talk about the menu. You guys have been very active in creating lots of new craveable items, and I was wondering if you could talk about how many items you have on the menu today versus a year ago, and maybe what's your menu target in terms of the number of items that you may have for each day part?

We probably have the same number of items on the menu this year as we did last year; there may be a more. But one of the things our consumers told us, we did some research here about a year ago, and we asked last users specifically, "Why don't you come back to Denny's more often?" They told us very clearly, "We know what Denny's is. You don't have anything new. Grand Slam's great, but hey, we know what that is." So we realized we needed to pump up the system, if you will, with new innovative craveable products, and our Chief Marketing Officer and Chief Innovation Officer, Mark Chmiel, has worked hard with the product development team, which I think he has upgraded quite nicely.

We added, I think, with this last Better For You entree, I think we -- or entrance I should say, we added about 17 new items that we're quite proud of. As I said about 50 plates a day, 10% of our mix. So of the new products we have introduced in the eight years I've been here, it is probably one of the most successful product introductions that we have seen. So it is about craveable, it is about new, because customers are looking for different things; they want things that they can't have at home, and we are about providing that tool.

Next, looking at the advertising co-ops, you have 15 DMAs covering 45% of store. What's the target goal by the end of this year for that measure, and when should we start to see benefits from leveraging local advertising spend?

Well, I would suggest to you, you know, there's probably 20 top DMAs; what would we expect to see this year? Maybe 16. I think we are there but four this year. When will you begin to see the benefit? I already see the benefit. I have to tell you, it has given us in those markets on average 12 weeks of incremental spend [on] media coverage.

I shudder to think what my sales and profit performance would have been if those co-ops weren't there, and I am particularly proud of my franchisees and my Company folks and operations for stepping up, if you will, in investment spending in these critical markets that we have. I think it is already working. I wish -- wishing doesn't make it so, but I wish the system-wide same-store sales had not decreased by 4.2% in the quarter just ended, but I have to tell you I think it would be more than that had we not had the co-ops.

My last question is on the kitchen package, what's the cost of the -- that new kitchen package? And will it give you greater flexibility to add new menu items in the future? Thank you for your time.

A couple of things. First of all it is about $10,000 to $11,000 per restaurant, and what it does, it gives us the opportunity in peak periods to increase our output in a restaurant hourly by probably 10% to 25%, which obviously is significant. And it does give us some flexibility for new menu items, but more importantly it is about increasing production and improving profitability during peak periods. And of course that's -- as I often say, you know, we will do over half our business between Friday noon and Sunday at 2:00 p.m; so those are key hours for us to perform.

Thank you for answering my questions.

Thank you.

Your next question comes from the line of Mark Smith with Feltl.

Hi, guys. First off, Nelson, can you talk a little bit about your product mix, and also the day part mix, and if you are seeing evidence that the current marketing message of Real Breakfast is working for you?

Clearly, product mix tells me that the marketing is working. As I mentioned in my script, 20% incidence on Grand Slam, first time in I can't remember when that we have a non-price-pointed commercial on air for Build Your Own Grand Slam. Grand Slam gives us an incredible -- particularly, the Build Your Own Grand Slam gives us an incredible food cost, and at a 20% incidence it is clearly one of our great weapons in this particular environment to ensure profitability and operations is just executing well. Whenever you give operations one thing to do to focus on, the better they do.

So I am very proud of the Company and the franchise operators in that regard, and I am very proud of my purchasing people, who have made such incredible buys, and finance holding them accountable, candidly, to get it through the bottom line, consistently and predictably. And if you have followed us for a number of years, that's a change over the last several years, and last year and-a-half it has been quite rewarding to see performance.

In fact I will quote a franchisee, a long-time Denny's employee and now franchisee with us for almost 35 years total, said he has never seen profitability at a Denny's restaurant, Company or franchise, as good as it is today. So mix and the marketing message is working. We just have to get more feet in the door. And that is that consumer confidence piece in this overall economy that we're -- all of us in this industry are working against.

Mark, can you talk about the financing environment, what your franchisees are seeing, and in particular these last 22 that were done?

Sure, Mark. I would -- I think a little bit of my commentary is going to echo what I said in the first quarter, and that is it continues to be a tough financing environment, you know, just in general, in the restaurant sector when it comes certainly to our business. At the same time, and as I said in my comments, the demand out there for our Company-operated stores continues to be very strong. You know, certainly we have -- I think even with our guidance when we started this year we have been cautious about giving a sense of direction as far as specific numbers on FGI, the number of 22 in the second quarter brings us to 52 on a year-to-date basis, so 52 in the first half. So 52 stores [sold] in a difficult financing environment off the base of Company stores that we started the year is -- I think is reasonably strong performance, against headwinds of financing.

You know, it is one of the times, as I mentioned in my first quarter commentary, the financing is there. The terms and conditions seem to be a little bit tougher at times, and it simply takes longer to get those deals put in place.

In a way, is it weeding out and giving you a stronger franchisee who is coming in and buying these?

Not necessarily. We again -- to Nelson's comment on an earlier question about the strength of our franchise system, I don't necessarily think that is an issue at all. I think it really comes down to it's just slow, arduous process; again the restaurant sector, in what is already a very difficult credit market environment, the restaurant sector is obviously and even more challenged sector as it relates to lending. Again, we continue to focus on FGI, and the appropriate geographic focus, and as I said 52 in the first half is certainly fine from our perspective.

Last question. Of the 52 that you've done this, can you tell me offhand about how many of those may have been in the California market, or any of the other markets that you mentioned that have been troublesome this year?

It was a wide distribution. There was -- of the 52, there was a rather large transaction that took place in New Yor, in New York State, and that was probably greater than 50% of those units sold. And probably something maybe in the high single-digit number was probably sold in the state of California out of the 52.

So of the Company base, you are still looking at 1/3 or more that are in California?

We still have a very strong base. Again, overall obviously California is where the brand started, in Southern California, a very strong base of both franchise and Company operations there, highly penetrated in several of those DMAs.

All right. Thank you.

Your next question comes from the line of Steve Anderson with MKM Partners.

Circling back to the proceeds issue, the asset sales, back of the [market] calculation suggests per unit proceeds of about little over $300,000, certainly better than what we saw first quarter; can you give any color as to where most of these assets lie in terms of the quintile scale?

It's Mark again. You're absolutely right. I mean, the average was a little bit over $300,000 of the 22 that we sold in the second quarter. I think the first quarter was around $140,000. So basically probably twice as much approximately on a per unit basis versus the first quarter.

Again, our focus has been toward the lower quintiles; if you recall that chart that we've shown in a number of our analyst presentations, where we took the original Company base and divided it into the five quintiles, our focus has been to the lower quintiles, that are certainly an attract investment on the part of our franchise system. Depending upon the market, there may be a mix of different quintiles in there, obviously, to finish out a market. But I think as we have said in our presentations, on average we have been selling the quintile 4-type of store.

Again, I think we have mentioned that -- those proceeds per store can range significantly depending upon what part of the country, and the underlying profitability of the store. Overall, our discipline is to make sure that these transactions remain accretive to our shareholders, and we are focused overall on that as well.

Okay. And to get back to the quarterly comp story, do you provide any kind of color as to what you saw in April, May and June?

We no longer break out the monthly performance, we just provide quarterly comp sales.

Okay. Thank you.

Your next question comes from the line of Ken Bann with Jefferies & Company.

Good afternoon. Just wondering, looking at next year, and you -- I presume you are beginning to form your capital expenditure plans going into 2010, and given the difficulty in the industry, can you give us an idea, will you continue to spend in the low $20 million range for CapEx, or will you maybe cut that with the idea of not building any new stores on the Company basis?

This is Mark. We obviously haven't thought about guidance yet for 2010, but I think -- to answer your question strategically, obviously in transitioning to this franchise business model, one of the things we have seen consistently since the transition began was a continued reduction in CapEx, obviously, with a lower asset base, certainly from a maintenance capital standpoint, but then also with the majority of the growth taking place in the franchise system, our CapEx numbers have come down. Our guidance for 2009 again was $23 million for the full year. If you go back to probably 2005, that's probably half of the number we spent in 2005; we spent something in the mid 40-plus range in 2005.

We will continue, certainly if the locations are available, to open on a very selected basis Company stores. In the first quarter we opened a store in Hawaii that is doing exceptionally well for us. I mentioned in my comments, we have a store, and it will be a Company-operated store, opening on the Strip in Las Vegas probably late third quarter, early fourth quarter timeframe. Again, on a selected basis, we will continue to make those investments, but a majority of the new store growth will come from our franchise systems.

So the model overall is obviously to transition to the franchise model more and more, and obviously that will continue to require less CapEx, but we have not given guidance for 2010 at this point.

And on food costs, have you begun to move into 2010 in terms of purchases, of commodities? And can you give us any idea of whether things are continuing to be fairly benign on the commodity front for the next several quarters?

We have not moved into 2010 yet, in terms of forward buying. We are going to see how the market does. Currently, if you take a look at the future, we are looking at maybe 2% to 3% inflation rate is what we're seeing; however, for the time being, we are going to watch the market more closely, but we are not locked in to 2010.

Thank you very much.

Thank you.

(Operator Instructions). Your next question comes from the line of Reed Kim with Merrill Lynch.

Good afternoon. I was just curious if you could go over sort of the reasons why the average unit sales for franchisees -- there's that gap between your stores and theirs, and sort of what was going on with the comps maybe in the quarter?

From a comp standpoint or from an AUV standpoint?

I guess both.

Let me start with the comp. From a comp standpoint, there's a couple of major things. One is pricing, historical pricing. So last year the Company stores were a little more aggressive than the franchise stores in terms of taking pricing in the units. Every year we go and take a look at how we're competing in DMAs across the country, and we recognized we had opportunities in the Company stores, and we took them; more so than what our franchisees, who typically have higher prices than we do in the unit. So that's one reason.

The second reason is the exchange rate with Canada. Part of the franchise comp sales is the Canadian exchange rate impact. So those are the two primary drivers this year, why there's the difference between franchise and Company.

In terms of AUVs, what you see is part of that is driven by our franchise growth initiative. So as we sell more and more of our quintile 4 units, those tend to trend at the low end of AUVs, so therefore the AUV spread will continue to widen between Company and franchise.

Got it. That's helpful. The other question I wanted to ask you was just in terms of remodels, how much that typically costs across your system? Maybe how many you did in the quarter, and whether in this kind of economic environment you are seeing any noticeable sales pick-up after you complete one versus historical?

From a -- we do see a pick-up in performance with the remodels. We see about a 5-point increase in sales post-remodel in the units that we go in and remodel, and that's for about 12 months, a rolling 12 months. In terms of franchises -- remodels within the quarter, we remodels about 30 units within the quarter, both Company and franchise.

Thanks a lot.

Enrique?

Yes?

We currently have four minutes until call stop time; will we take any more questions?

Yes, there's one more question. Let's go ahead.

Okay. We have a follow-up from the line of Ken Bann with Jefferies.

Yes, sales of restaurants to franchisees, on the financing of that, is most of that being provided by more national concerns, or is it more local financing for those sales?

It's Mark. We've seen a little bit of both. I would say probably if you went back and looked at the entire program of FGI since it started in early 2007, most of the financing probably -- and again, I don't have a percentage break-out, but most of the financing probably came from national firms, and that is well over $100 million in transactions.

The other question we normally asked is the Company, is Denny's, taking any of the notes or paper in this process? I can tell you that we have been very focused on that, and have a minimal number of notes that we have taken back in total over the 2 and-a-half years of the program.

Okay. Just one other thing on the late-night program, in your prepared comments you sort of indicated that -- or it sounded like it was being a little more than some other day parts, due to the economy. Is that the case, and are you disappointed in some of the initiatives you have taken there, like you changed that?

Late night and dinner have been affected in this economy, there is no question about it. However, I'm quite pleased with how late-night has kept us in the game, and it has differentiated us from others that might be in the 24/7 business as we are. And so I have been pleased by the all-nighter platform; with the introduction of Rascal Flatts, Good Charlotte, Gym Class Heroes and Sum 41, it really sets us apart. And our new menu innovation keeps that area a strong competitor in that market.

So would I like it to be more? Well, of course I would. But we are using social networking, the Internet, more aggressively, and we are seeing a stabilization at late-night, but clearly we need to drive more traffic at late-night; it is a very profitable business for us. And -- but the economy is the main culprit here; people are choosing to go home because, frankly, they either don't have a job or are running low on funds, or they are just trying to be careful, or they know someone who is out of work. So during the traditional summer holidays, and other holiday periods, you know, the kids are home from school, we get a bump on the weekends, as we always do, but during the week it is a fight for whatever is out there.

Okay, great. Thank you very much.

Thank you.

There are no further questions at this time. I would now like to turn the call over to Management for any closing remarks.

That concludes our call for today. Thank you for participating, and we will talk to you next quarter.

You may disconnect.