Denny's Corp (DENN) 2009 Q4 法說會逐字稿

Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to the fourth quarter full year 2009 earnings release conference call. (Operator Instructions). Mr. Mayor-Mora, you may begin your conference.

Thank you, Josh. Good afternoon, and thank you for joining us for Denny's fourth quarter 2009 investor conference call. This call is being broadcast simultaneously over the internet. With me today from management are Martin 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 fourth quarter results. I will conclude the call with Denny's 2010 full year guidance.

As a reminder, we will be filing the 10-K by the due date of March 15th, 2010. Before we begin, let me remind you that in accordance with the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995, the Company knows that certain matters to be discussed my members of management during this call may constitute forward-looking statements. Management urges caution in considering its current trends and any outlook on earnings provided on this call. Such statements are subject to risks, uncertainties, and other factors that may cause the actual performance of Denny's to be materially different from the performance indicated or implied by such forward-looking 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 report on Form 10-Q. With that, I will now turn call over to Nelson Marchioli, Denny's CEO and President.

Thank you, Enrique, and good afternoon, everyone. I would like to start my comments by saying that I am very proud of Denny's ability to execute against the key strategic initiatives that underpin our business model transformation to 85% franchise. This, despite the challenging business environment the industry has been operating in for almost two years. Denny's has materially and predictably increased adjusted income, organic cash flow, restaurant openings, and net system growth. At the same time, we have continued to pay down debt, primarily from proceeds generated through the divestiture of Company-owned restaurants in our FGI program, while generating commitments for future restaurant growth. The transformation of our business model to a cash flow generating and franchise-focused operation has increased operating margins and earnings, and lowered both our business and financial risk.

Key accomplishments in 2009 included 40 new restaurant openings, positive (inaudible) system unit growth, total debt lowest in 25 years, with a debt leverage ratio of 3.28, adjusted income before taxes of $30 million. I recognize we must improve our sales trends. I do firmly believe that we are beginning to position the brand for sustained sales improvement. These challenges in 2009 can be broken down between industry-specific and Denny's-specific. From an industry standpoint, the existing consumer environment continues to be the most challenging. While the industry same-store sales performance in the fourth quarter of 2009 was better than the 28 year low incurred in the second quarter, it was still materially negative. This is despite the industry's easier year-over-year sales comparables. There are three main areas that have impacted Denny's the most from a geographic and demographic perspective.

First, our geographic concentration. 41% of our restaurants are located in California, Florida, and Arizona -- states that is have been particularly hard hit by the economy. Second, our late-night business, which represents almost a quarter of our sales, and which skews towards third shift workers and a younger demographic. These are groups that have been particularly affected by the economy. Third, our target demographic household income level is the lowest in the family dining segment, with 44% making a household income of less than $45,000 a year.

Based on the lessons we learned in 2009, we will make the following improvements that should result in our sales improvement in 2010; a more focused value strategy. In 2010, we intend on introducing an everyday affordability approach to value. We are currently fine-tuning our learnings from our test markets, and anticipate a roll out in the second quarter. This value approach should also improve our late-night trends, where we compete directly with QSR. Introduction of new products through limited time offers. In 2009, our new product strategy delivered many new, craveable items such as our Grand Slamwich, Pancake Puppies and breakfast and dinner item extensions to our Skillet platform. In 2010, new products will be offered through an LTO platform to create a greater sense of urgency for our guests to visit our restaurants.

Reallocation of marketing dollars to media. We are focused on increasing our presence on media through the reallocation of funds within the marketing fund, as well as by building off the success we had in establishing our local marketing cooperatives in 2009. Facility refresh. Pending test market results, we anticipate rolling out a system-wide facilities refresh program by the fourth quarter of this year. This program would allow Denny's to positively impact the look and feel of our units faster than our current seven-year model cycle.

Bigger and better Super Bowl promotion. Last week, we aggressively kicked off our year by having three separate commercials on the Super Bowl. This year's Super Bowl was the highest rated U.S. TV show ever, with an average audience of 107 million viewers, surpassing the final episode of Mash in 1983. Our objective was to build on the tremendous success of last year's event, while increasing the stickiness of the day. Said differently, extend the four to six week positive change in guest count trend we saw last year post giveaway. Here's some of the highlights of this year's Free Grand Slam Day event. Denny's served 2 million guests in our restaurants throughout the day, including 7% more than last year during the 6:00 a.m. to 2:00 p.m. promotional hours. We reintroduced Denny's Birthday Club with one of our spots. This is a 365 day a year traffic-driving opportunity that offers guests a free Grand Slam on their birthday. 59 million hits on our website, more than 4,900 TV and radio airings, and over 500 newspapers printed the story.

Denny's was a top ten trending topic on Twitter in the fourth quarter of the Super Bowl and on the day of the promotion. From a financial perspective, the total cost of the promotion was around $8 million, $2 million greater than last year. The increase was driven by having three commercials versus one last year. Of the total amount, approximately $5 million are part of the advertising fund to which the Company and franchise restaurants contribute. Denny's Corporate incurred approximately $3 million in additional costs. Half of this amount was for the cost of the food, for the system, and the other half for a partial contribution towards the media cost. 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 year unfold. We firmly believe that we are proactively and aggressively taking the right steps forward in terms of driving profitable guest count growth.

These steps also include the increased wait to 75% of the same-store sales component in both the corporate, support center, and field organization employees' bonus plan. However, given the current muted visibility into the sales environment, our stronger first half 2009 sales performance and due to the the timing of some of the key initiatives listed above, we anticipate that our recovery will be a progressive build over the year, with first and second quarter the most difficult. The opportunity here at Denny's excites us, and 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 turn now turn the call over to Mark Wolfinger, Denny's Chief Administrative Officer and Chief Financial Officer.

Thank you, Nelson, and good evening, everyone. I will start my comments with a review of our fourth quarter sales performance. System-wide same store sales decreased 7%, comprised of a 6.1% decrease at our Company restaurants and a decrease of 7.2% at our franchise restaurants. Looking at the details for Company sales performance, a 6.7% decline in guest counts was partially offset by a .6 increase in average guest check. Denny's guest counts continue to be most negatively impacted by our late night business, and in the areas of the country that have been hardest hit by the economic downturn; notably, 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 in late 2008 and early in 2009, to help counterbalance commodity and labor cost pressures. Largely offsetting the increased pricing was the impact of a stronger value-oriented menu mix, as well as an increase in discounts compared with the prior year period. The decline in total Company restaurant sales in the fourth quarter largely reflects the continuing impact of our franchise growth initiative, or FGI, as sales decreased $43.5 million or 28%, due to 73 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 4.5 percentage points in the fourth quarter for our Company-operated units was driven in part by favorable Workers' Compensation claims development, which drove 2.8 percentage points or $3 million of the overall margin improvement; and a credit card settlement, which drove .7 of a percentage point improvement.

Excluding these benefits, Company unit margins would have increased by 1.1 percentage points. Other notable margin improving actions included efficiency gains in Company-operated units units, an increase in check average, the selling of lower margin units through FGI, and lower utility rates. These were partially offset by the deleverage driven by negative same-store sales, and by the $900,000 corporate investment in media in the fourth quarter, in addition to the costs associated with contributions to our local marketing co-ops. Product costs for the fourth quarter decreased .7 of a point to 23.7% of sales, primarily due to the impact of slightly higher average guest check, strong food waste management and flat commodity costs. This was partially offset by a higher mix of value-priced menu items. Payroll and benefit costs decreased 2.5 percentage points to 38.6% of sales, primarily due to favorable Workers' Compensation claims development that drove 2.8 percentage points or $3 million improvement. Without this benefit, payroll and benefits would have been 41.7% of sales.

The Workers' Compensation benefit is a result of multiple years of increased focus on safety at the unit level through well designed and executed programs, in addition to the benefit derived from selling Company units through the FGI program. Selling lower performing units through FGI, in addition to efficiency improvements in management and crew staffing levels, also benefited payroll margin, but were offset by the deleveraging of lower sales. Occupancy expense decreased .4 of a percentage point to 6.3% of sales, primarily due to the negative development of general liability claims in the prior year quarter. This was partially offset by the deleveraging effect of lower sales and the impact of the 53rd week in the prior year quarter. Utility costs decreased by .7 of a point to 4.3%. Denny's is benefiting from natural gas and electric rates that have fallen considerably from the levels seen in 2008. Repairs and maintenance expense decreased .2 of a point due to a reduction in the unit level painting.

As Nelson mentioned, this is being driven by the review of our remodel policy that currently requires a full facility's remodel once every seven years. In test markets across the country, we are currently testing a refresh approach that will result in more frequent updates to our facilities. This would have the duel benefit of keeping our facilities fresher and more contemporary, as well as spreading out the lump sum or remodel costs. Marketing expense increased 1.3 percentage points to 5.4% of sales, primarily due to .9 of a point in incremental corporate investment in media, and .2 of a point due to establishment of local marketing advertising cooperatives with Denny's franchisees. Legal settlements decreased a half a point due to the minimal new case development in the fourth quarter. Additionally, other costs decreased .9 of a point to 3.3%, primarily due to a favorable credit card claim settlement. In addition, the gross profit from our Company operations was flat on a sales decline of $43.5 million. For fourth quarter of 2009, Denny's reported franchise and license revenue of $29.2 million compared with $29.9 million in the prior year quarter. Excluding the prior year quarter's quarter of the 53rd week, revenues increased by $1.1 million. The growth in franchise revenue was driven by a $1.1 million increase in occupancy revenue.

The increase from an additional 85 equivalent franchise restaurants compared with the prior year period was offset by the negative same-store sales. Franchise operating margins decreased $1.6 million to $18.8 million in the fourth quarter. Excluding the impact of the prior year quarter's 53rd week, operating margin increased $200,000 to the prior year period. This increase was primarily driven by an increase of $1.2 million in royalties, and a $400,000 increase in occupancy margins from the additional 85 equivalent units. These increases were offset by negative same-store sales. Franchise operate margin as a percentage of franchise and licensed revenue was 64.6%, a decrease of 3.7 percentage points compared with the same quarter last year. The franchise margin decrease was primarily due to the increasing contribution of lower margin occupancy revenue as leased company restaurants are in turn subleased to franchisees through FGI. Denny's is on the primary lease, and subleases these properties to the franchise.

We recognize our sublease income as franchise revenue, but there is an offsetting cost in franchise expense for the primary lease. Therefore, the overall franchise margin as a percent will decline. From a gross profit standpoint, the franchise side of our business continues to contribute more than our Company restaurants. This income shift allows us to reduce the risk and increase the predictability of our earnings. General and administrative expenses for the fourth quarter decreased $1.7 million or 11.5% from the same period last year. This decrease resulted from Denny's continued migration towards a more franchise-based Company, a $1.3 million reduction in incentive compensation, and an $800,000 benefit from lower stock-based compensation. This decrease was partially offset by a $1.1 million increase in deferred compensation costs. Next, depreciation and amortization expense declined by $1.9 million compared with the prior year period, primarily as a result of the sale of restaurants and real estate over the past year.

Operating gains, losses and other charges on a net basis, which reflect restructuring charges, exit costs, impairment charges and gains or losses on the sale of assets, increased $12 million in the quarter. This increase was primarily the result of $11.8 million increase in gains on the sale of Company restaurants and real estate. Impairment loss was $2.4 million lower, driven by losses in the prior year quarter; while restructuring and exit costs were $2.2 million greater, largely due to the departure of Denny's Chief Operating Officer and the Chief Marketing Officer in the fourth quarter. Operating income for the fourth quarter increased $14 million from the prior year period to $24.4 million. Excluding gains, losses and other charges in both periods, operating income increased $2 million despite a $44.3 million decrease in total operating revenue attributable primarily to sale of Company restaurants. To post a $2 million increase in adjusted operating income despite a significant revenue decline is testimony to the efficiency of our transitioning business model. Although operating income decreased $900,000 or 10% to $7.8 million as a result of a $49 million reduction in debt from the prior year period.

Other nonoperating income increased $6.3 million in the fourth quarter, primarily due to the charges taken in the previous year for losses relating to our interest rate swap and natural gas hedge. 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 fourth quarter was $9.1 million, an increase of $2 million or 29% over the prior year period. This increase in adjusted income occurred despite the estimated $3.1 million benefit in the same period last year due to the impact of the 53rd week. We are pleased that we were able to generate 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.

Turning to activity in the Denny's restaurant portfolio during the fourth quarter, the system increased by a net positive six units, as ten new restaurants opened while four were closed. The ten new openings were all franchise restaurants, bringing the year-to-date franchise openings to 39, and year-to-date system openings to 40. These 40 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. Denny's year-ending net system growth, a positive ten units, was its highest level since 2000. Moving on to capital expenditures, our cash capital spending for the fourth quarter was $5.9 million, a decrease of $800,000 compared with the prior year period. For the year, cash capital was $18.4 million, a decrease of $9.5 million.

As we reduce our Company restaurant portfolio and remain selective in our new restaurant investments, we expect capital to decrease year-over-year. Turning to asset sales in the fourth quarter, we generated cash proceeds of $14.4 million from the sale of 22 Company restaurant operations, and an additional $5.5 million from the sale of five real estate sites, including three that were previously part of an FGI transaction. Net cash proceeds were $19 million when factoring in the working capital run off we experience when a unit is sold. For the year, we generated cash proceeds of $26.7 million from the sale of 81 restaurant operations, and $14 million from the sale of certain real estate. Net cash proceeds were $29 million when factoring in the working capital runoff we experience when a unit is sold. We have used these proceeds to support the reduction of $49 million of outstanding debt over the past year, including a $26.9 million reduction in the fourth quarter.

We will continue to balance our debt reduction goals and our commitment to maintaining ample liquidity cushion. Our cash balance, combined with access to our credit facility at the end of 2009, provided us with ample liquidly of approximately $76 million. Given the challenges facing our national economy and our industry, we are very pleased to have reduced our debt by $272 million or 49% since mid-2006. This has driven our debt leverage ratio of 3.28 times as compared to 5.18 times at the beginning of 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 in is place through December of 2011 and our term loan through March of 2011. Our senior notes mature afterwards in October of 2012. In respect to the FGI program to date through the fourth quarter of 2009, we have sold 290 Company restaurants or 56% of the prior Company store base. This includes 22 sold in fourth quarter of 2009.

As a result, we have increased the mix of franchise restaurants in the Denny's system from 66% to 85%. Additionally, since the first quarter of 2007, Denny's has signed development agreements, including those through FGI ,for 185 new restaurants; 58 which have opened, yielding a current development pipeline of 127 new restaurants. Denny's targeted portfolio mix is 90% franchise and 10% Company units. We anticipate achieving this goal through a combination of new franchise unit growth and select FGI transactions over the next couple of years. This wraps up my review of our fourth quarter results. Before I have Enrique walk you through our specific financial guidance, I will caution that visibility into 2010 continues to be muted for both the industry and Denny's.

So while we are encouraged by a stronger sales driving plan for 2010, we do remain cautious until we deliver improved sales trends on a sustained basis. Our ongoing transition to a franchise-focused business model has been driving margin and earnings growth, but the impact of further sales declines could lesson these benefits in the near-term. We will continue to manage our expenses and capital spending to protect liquidity, reduce our debt, and further strengthen our balance sheet. Our 2010 guidance assumptions include topline sales reflecting a sequential improvement to our recent trends, the continued expansion of unit development, and system growth primarily through our franchisees, and the ongoing focus on the generation of cash with the objective of paying down debt and strengthening the balance sheet. With that ,I will turn the call over to Enrique.

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. As has been the case for the past three years, projecting our financial guidance during the FGI process is particularly difficult. A variation in equivalent units based on restaurants sold in the prior and current year result in a wide revenue change. 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 2010 are based on 2009 results, and management's expectations at this time. We expect full-year franchise restaurant sales to improve sequentially from our fourth quarter 2009 results, which remain negative in the rain range of negative 5 to negative 3%.

For Company restaurants, we are expecting sales to perform approximately 1 percentage point better than our franchise units, between negative 4 to negative 2. Underlying this assumptions, we anticipate little reliance guest check increases; but rather sequential improvement in guest traffic trends, meaning less negative than in 2009. We expect that our sales performance will get stronger as the year progresses. This is due to the current muted visibility into the sales environment, the relatively stronger sales performance we delivered in the first half of last year, and due to the timing of key initiatives this year. Moving on to equivalent units, we expect equivalent Company units to decrease between 30 to 40 units for full year 2010, due to the FGI transactions in 2009. Our franchise equivalent units should increase by a similar amount depending on the number of franchise restaurant openings and closures and the number of FGIs in 2010. We expect to open approximately six new Company restaurants in 2010, and for franchise to open approximately 35. Based on our analysis of potential closures, we anticipate the system will increase by five units in 2010.

It is important to consider that the average sales volume on a unit closed in 2009 was 1.1 million, while the average sales volume for an opening was projected at 1.6 million, or 45% higher. Due primarily to the impact of FGIs, we expect Company restaurant sales to decline by approximately 75 million to between 410 million to 420 million. Conversely, the midpoint for franchise revenue is expected to increase by approximately 1 million to between 118 million and 122 million. This will be driven by the increase in franchise units, offset by lower same-store sales. At this time, we expect Company operating margins will be 1 to 2 percentage points below 2009. This is due in part to the sales deleveraging from our expected negative same-store sales, which could have an impact from a percentage margin standpoint on the fixed cost component of our P&L.

We are also taking into account the year-over-year material benefits we experienced in 2009 from favorable Workers' Compensation claims development of approximately 1.1 percentage points or $5 million, as well as a favorable credit card claim settlement of approximately $800,000. Offsetting a portion of these margin pressures is the margin lift provided to our restaurant portfolio by the sale of the lower volume units. We anticipate flat to a slight increase in product costs for year. At this time, we expect our underlying commodity basket to range from flat to an increase of 2% in 2010, with pressures increasing in the back half. Our focus on value for 2010 will also contribute to higher food costs. For payroll and benefits, we are expecting a deleverage due to same-store sales declines, and as we lap last year's material Workers' Compensation benefit. We do anticipate to continue to benefit from a soft 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 declines.

One note related to rent; for those of you that model the Company from a credit standpoint and choose to (inaudible) operating rents, our operating rent expense in 2008 was approximately 50 million, with approximately 49 million in 2009, and will likely be the same in 2010. When we FGI a leased property, we remain on the head lease until the term expires and we receive sublease income from the franchisee. Therefore, the lease expense shifts from the Company portion of our P&L to the franchise portion. It does not go away. What does change is the amount of sublease income we receive to offset the 50 million in rent. In 2008, sublease income was approximately 32 million. In 2009, it was approximately 38 million. I cannot project 2010 sublease income without knowing the number of FGI transaction, but it will certainly continue to rise. We suggest modeling our operating rent expense on a net basis to better reflect impact of our new business model.

Turning to our general and administrative expense for 2010, we expect to see a reported G&A decrease by approximately $2 million to $4 million from 2009. Our income guidance is presented based on two metrics which we detail in all 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 also utilize adjusted EBITDA, as it is the metric used to determine covenant compliant 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 tax estimate for 2010 of 23 million to 28 million is 2 million to 7 million below our 2009 results. Excluding the materiality of the Workers' Compensation and credit card claim settlement benefits in 2009, we anticipate adjusted income will be up 1 million to 6 million in 2010 on an approximate $70 million decrease in revenue.

Our adjusted EBITDA estimate for 2010 is 71 million to 75 million. Compared with 2009, we expect depreciation and amortization will decrease by approximately 5 million; cash restructuring and exit costs will decrease by approximately 4 million; and cash payments for share-based compensation will decrease approximately 1 million. Two other items of note for 2010 are cash interest expense and cash capital spending. We expect cash interest expense to decrease approximately 6 million in 2010 to 23 million. This reduction is based on a modest debt pay down and due to our December 2009 buyout of our debt swap, which was paying approximately 6.89% on our term loan versus the LIBOR plus 200 point rate we will pay in 2010. Noncash interest expense should be similar to 2009 at approximately 3 million.

Turning to capital expenditures, we completed 2009 with capital spending of approximately 18 million. Our estimate for 2010 is 1 million lower at 17 million. This decrease is attributable to a reduction in maintenance capital requirements as we reduce our Company restaurant portfolio. This is being partially offset in 2010 with the anticipated openings of six Company-operated units and the anticipated roll out of a new remodel or refresh program. Four of the new Company restaurant openings will be conversion sites and Flying J travel centers, and will have capital expenditures of approximately $500,000 per unit. The Company will take the leadership position to test the success of these sites prior to potentially opening the opportunity to our franchises.

That wraps up our guidance commentary. I will now turn the call over to the operator to begin the Q&A portion of our call.

(Operator Instructions). And your first question comes from Michael Gallo.

Hi, good afternoon.

Hi, Michael.

Just had a question as to whether you can give us any initial feedback on what kind of results you are seeing from the test of the more value-oriented -- I guess the "Right on the Money Menu" as it's called. I know it is early, but I was wondering if you can share with us any feedback from that. Thank you.

Hi, Mike. It's Nelson. We are encouraged by the results, but it is too early to make that call. We certainly would hope that we could give you some more information on our next call.

Okay. And then just, I was wondering whether you've started to see any regional differences emerge? I've sort of heard some of your peers indicate Florida's gotten a little better; California obviously has been one of the more challenging areas for some time. I was wondering if you could just talk regionally about whether you are seeing some areas starting to show some improvement?

Well, I would echo what you've said. California continues to be most challenging. There has been some improvement in Florida in the southern part. Elsewhere, it is about the same.

Okay. Thank you.

And your next question comes from the line of Bryan Hunt.

Hi, Brian.

Hi, how are you?

Good.

Good. Thank you for the time this afternoon. I was wondering if you could talk about the pace of FGI-related openings in 2009 relative to the contractual agreements you have established over the years when you sold the Company-owned unit?

Hi Bryan, it's Mark. If I understand your question, you are asking about the development agreements and how those openings have occurred once those agreements have been signed?

Right. Relative to the expectations or --

Right. I mean, I would say -- I mean, I guess I would start first with the 40 new store openings we had in 2009, of which 39 were franchise; and a considerable number of the 39 came out of those development agreements that we started back in 2007. On average, if you look at the number of stores that have been agreed to in the development agreements, you probably would suggest they're going to open over -- let's say, call it a five year time frame. And so we continue at this point to be on target to what those development agreements call for and our opening targets. And again, there's really two types of development agreements that we've signed. One is through FGI; and then separate from that, we have something called -- and pardon my acronym here -- MGIP, which is a market growth incentive plan that does not relate to FGI, and we also have development agreements in place for those. But the numbers that I gave in my script tie to the overall number of development agreements that we have in place.

Okay. And then my follow-up question has to do with the executives that departed during Q4. Are there any plans to replace those individuals in the short-term, or what type of time line do you have for replacing those individuals?

It is Nelson again, Bryan. We absolutely do plan on replacing those individuals. We have initiated a search some time ago with a specific executive search firm. We are looking for just the right fit. Our officer group, which we are very proud of, has stepped up and we haven't missed a beat. And we are providing an opportunity for them to be developed and for them to get more deeply involved in the business. So we feel we are in a pretty good place right now looking for just the right candidates. As far as a time line is concerned, I would suggest we will get it done this year.

Okay. Thank you. I will get back in the queue.

Thank you, Bryan.

And your next question comes from the line of Reza Vahabzadeh.

Hey, Reza.

Good afternoon. The value of marketing plans for this year, I guess is -- why not focus on value earlier such as 2009, because you did have a value message a couple of years back and it seems to have worked out well. So I am just curious why you have decided that the value message is the right way to go?

Reza, it's Nelson again. What we did last year, we had a lot of promotional items that actually provided a significant discount with a lot of visibility through various advertising methods -- the National Media Fund, as well as co-ops -- be that on electronic media as well as in FSIs. And we just didn't get the traction using that particular discount method that many people did in the industry. We felt it a better approach this year to look at an overall value menu, and that is in fact what we have in test at this point in time in six markets; and we actually started those tests the first of the year. So we did address value last year, but on a one-off promotional basis. And candidly, we didn't see that work, so So are looking at more of a roll back strategy. And as I said earlier on the call, I am encouraged. And it is about every day, 24/7. And it is about affordability, and I think that's where the difference is, and where I think we can take credit for it, particularly with our blue collar customer base.

Right. Do you feel like you may have lost all your value perception among consumers in 2009 that you had gained perhaps previously?

Well, the good news is, no, we still get high value marks in our research; but the reality is I think we are getting that because of a halo effect from -- to your point, from earlier years. And the good news is we still have that value perception. It is still in our top five that I talk about often. I'm convinced with this strategy -- assuming it works based on the encouraging results thus far -- that we will take the value position in the mind of consumer in our segment.

Right. To the extent that you may have lost some sales, do you think the sales loss was to eat at home or to quick service or other venues?

I think it was to quick service in particular, and at home. But I would say quick service -- as consumers look for value, particularly at lunch and at breakfast, people are trying to figure it out in this economy -- but I think grocery stores have eaten into our business, as well as the quick service, to your point; not just at breakfast, but late night and dinner as well.

Right. And then on the product costs, are you largely hedged or how much visibility do you have on that?

We are are about 50% hedged at this point for 2010.

Okay. Thank you much.

Thank you.

And your next question comes from the line of Mark Smith.

Hey Mark.

Hey guys. First off, I just want to ask -- your outlook on FGI -- and I know this is always tough -- but with a getting down to a 10% goal, is this something that you had hoped that by the end of 2010, or is this going to continue to be a longer process?

Hi Mark, it's Mark Wolfinger. I would tell you that it is going to be a more gradual process that will be a combination of selected refranchisings; but also again, a majority of our new unit growth will be franchise growth. So obviously, we have moved very rapidly from that 66% to the 85%. And again, we view the progress we made in FGI as terrific -- very positive, and it has obviously added a lot of new franchisees to our system as well. But I think we will gradually get to that 90%, but we also felt that as a management team, we had give a sense of direction as to where we were headed.

And looking at our cash flow and your use of cash, your guidance on interest expense, what kind of a rate does that, I guess, look for on paying down your debt? Now that your swaps expired, will you still aggressively knock down your debt there, or are you tempted to hold onto cash and look at your notes come late in 2010?

Well, the only portion of our debt that we can pay down is the term loan, and that's what we have been paying down for the past couple of years, and that's what we will continue to pay down. The notes, as we mentioned, don't come due for a couple of years; so we will continue as we have to pay down our term loan.

The other piece, Mark, is that when you look at the year-end cash, I think we're around $26 million on the balance sheet. That's a little bit higher than last year. There's no message or signal there. Again, we have always talked about liquidity range of about 70 million, including the availability on the revolver. And obviously, we are focused on that 2012 date, and we are know we are headed towards a capital structure decision and we will make that at the appropriate point in time. And obviously, we're also very focused on deleveraging our balance sheet, and that's why we are obviously very pleased that sitting below 3.3 times levered and almost two full terms in leverage down since 2006.

And looking at the food costs on this year's free Grand Slam promotion, it looks like -- I believe that came down from what it was last year. Is that just a function of commodities being lower?

Exactly right.

Okay.

It is a function of the the commodities being lower.

Okay. And second, on that same note, on your other promotions from free refills on pancakes to the free burger giveaway coming up, are you doing any subsidies for your franchisees on these other promotions?

No, we are not.

Okay. Perfect. I will jump back in the queue. Thanks.

Okay, thanks, Mark.

Thank you, Mark.

And your next question comes from the line of Tony Brenner.

Hey, Tony.

Guidance on the various line items is helpful. My question pertains to you topline guidance, and specifically same-store sales for 2010. I assume that you are not attempting to forecast things like changes in unemployment rates by state and that sort of thing. But it sounds like you're simply penciling in roughly a 1% sequential improvement quarter by quarter and you will adjust that as you go along. Is that fair?

I think it is a little bit more than a point.

But it still leaves you with negative comps for all four quarters of the year; is that right?

Our guidance is for the entire year. What we did say is that we do expect, for the reasons I mentioned, sequential improvement throughout the year. So said another way, improvement throughout the year, but still negative, yes. So we have not broken out the comps by quarter.

And your next question comes from the line of Jonathan White.

Yes, hi. Question for you on just the consumer spending -- and maybe even looking at your mix shift of late, and wondering if you could maybe sparse out the weather impact and talk about if you have seen any positive signs of the consumer and how they're spending? Do they still need the big carrot to get in the door, or are you seeing any signs of hope of late?

I can't really point to anything in particular that is improving consumer confidence from our perspective. I think all of us in this industry are fighting for every customer and working very hard to get them to come back, and that's our focus -- to talk about value and hospitality, and executing consistently. I'm not seeing anything in the economy that indicates an overall improvement.

Okay. Can you -- just on some housekeeping items, the incentive comp -- the stock comp in the quarter -- was there any reversal in those numbers, or was that just kind of accruing at a lower rate? What's the story there?

Yes, that's more of accruing at lower rate.

Okay. And then I didn't catch what the story was on the Workers' Comp benefit of (inaudible)?

Sure. We saw it this year in the third quarter; we saw it again in the fourth quarter, which is a benefit to our liability. So on the balance sheet we have a liability for Workers' Compensation; and we saw in the third and the fourth quarter again a material benefit based on the actuarial reports we get back that are done at every quarter end. It doesn't necessarily change what we accrue at a monthly level in terms of an expense, and so when looking forward, I think it is a question for folks, what does the Workers' Compensation for Denny's look like moving forward? I think if you go back to 2008 and look as a percent of sales, roughly 1.3% to 1.5% of Workers' Comp percent of sales is what you can expect to see. However, at the end of every quarter, there is an actuarial report that comes back looking at all the historical claims and adjusts potentially either positively or negatively our liability on the balance sheet, and that's what you saw in the third and fourth quarter in terms of a positive benefit (inaudible).

Did that benefit put you at that 1.3 to 1.5 range for '09?

No, those are independent.

Okay.

So one is a (inaudible) of a balance sheet accrual, and the second is just an ongoing rate at which we --

Okay, got you. So what did you end up being in 2009 in full year Workers' Comp as a percent of sales?

Yes, what we said -- so it's about a $5 million benefit for the entire year -- year over year.

Okay.

Which is about 1.1 points -- so 110 basis points.

Okay, okay.

(Inaudible).

Great. Thanks a lot. Appreciate it.

Thank you.

And as an update, I am showing we are five minutes from the hour.

Yes.

And your next question comes from the line of Mark Smith.

Thank you.

Hi, guys. Just a couple of quick follow-ups. First, Nelson, can you comment on your new initiative on continuing to offer new items? Will we look for this primarily in late night or will this be spread throughout the day parts?

It will be spread throughout the day parts, and it will be focused on value.

And then second, the Flying J units that you are doing, are all of these conversions that you are looking at right now? And secondly, how big of an opportunity is this if these work out for you?

Well, they are conversions, to answer your first question. I would also tell you that they're obviously preexisting restaurants, that -- and the four that we have done that we are looking at as a test actually have a pre-volume performance rate of 1.5 million each. We like the travel center businesses we have talked about. I really -- and a franchisor has to take the lead -- there is a real demand for this brand as an expansion vehicle, and this is just one of those things we felt that as the franchisor we needed to take the risk and demonstrate to our franchisees that it makes sense; but at this point, it is too early to talk about the size of the opportunity until we get some more results.

But at least on these initial ones, it looks like a $.5 million kind of investment on units that are in their steady state running about 1.5 million average unit volume?

Yes, and so we expect -- obviously, that's a very good return, and we expect to do better than that.

Excellent, great. Thank you.

And your next question comes from the line of Jonathan Dash.

I think this will be the last question. Hey, Jonathan.

Hi. The question is for Nelson. Nelson, why do you think the sales and guest traffic have been down over the past year? Is it more the economy, or was it because of operations and marketing?

I would tell you that it is probably -- over the last three years, to expand it a bit -- I would say it is a combination of the three things that you mentioned. We are far more focused this year, however, on executing against operations, marketing with a specific objective, and focus. So I am confident that we are going to reverse that.

All right. And then I've got a second question about the Super Bowl ad. In regards to last year's Super Bowl ad, you guys said some -- the ad you got also -- indirectly got about $50 million in indirect marketing through the buzz it created. Is that correct?

That was last year. That's correct.

Yes, that's correct. So, and then last year, even with that 15 million in marketing buzz that you got, the trends in the traffic were still pretty bad throughout the year right after that quarter. So I was just trying even with that extra $50 million in indirect buzz on top of your $60 million in total marketing spend that you have a year, that if we got those types of results, then why would with we triple down on that again this year?

Well, you have to look at this -- and getting to stickiness, it is about brand awareness. We clearly got a lot of -- I'll use your term -- buzz from the media. And certainly it put us at the forefront in our segment in the minds of the consumer. Our responsibility, and where I feel we dropped the ball last year, was that we didn't continue to focus on the opportunity that the Super Bowl provided us. We can't expect the Super Bowl to carry us the entire year. It carried us the first quarter. We have a responsibility as management to take care of the second, third and fourth quarter accordingly, and we were not strong enough in providing that stickiness that we talk about to get consumers to come back over and over again throughout the year. And that's where our focus is now.

Okay. And then so once we get the results from this year's Super Bowl ad, if it carries us through that quarter, does that mean next year we are going to triple or quadruple down on it again?

I wouldn't think so. But I think we will make that decision in the fourth quarter of next year once we see the overall benefit and determine whether or not the Super Bowl makes sense. We think it was absolutely the right thing do last year, and this year as well. It may be time to do something different, or it may be time to do the same thing.

Thank you, Jonathan.

Thank you.

Alright. That concludes our call for today. I'd like to thank everyone for tuning in, and we will talk to you again next quarter on May 4, as our tentative date. Thank you, and have a great evening.

And this concludes today's conference call. You may now disconnect.