Denny's Corp (DENN) 2011 Q3 法說會逐字稿

Good afternoon. My name is Lacey and I will be your conference operator today. At this time, I would like to welcome everyone to the Denny's third-quarter 2011 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions) As a reminder, please limit yourself to 1 question, and then 1 follow-up. If you have any further questions, please press star 1 again to re-enter the question queue. Thank you. I would now like to turn the call over to Mr. Whit Kincaid, Director of Investor Relations. Please go ahead, sir

Thank you, Lacey. Good afternoon and thank you for joining us for Denny's third quarter 2011 investor conference call. This call is being broadcast, simultaneously, over the Internet. With me today, from management, are John Miller, Denny's President and Chief Executive Officer; and Mark Wolfinger, Denny's Executive Vice President, Chief Administrative Officer and Chief Financial Officer.

John will begin today's call with his introductory comments. After that, Mark will provide a financial review of our third-quarter results, along with an update to Denny's 2011 full year guidance and initial thoughts on 2012. As a reminder, the 10-Q will be filed by Monday, November 7.

Before we begin, let me remind you that, in accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, the company knows that certain matters to be discussed by members of management during this call, may constitute forward-looking statements. Management urges caution in considering it's current trends, and any outlook on earnings provided on this call. Such statements are subject to risks, uncertainties and other factors that may cause the actual performance of Denny's to be materially different from the performance indicated or implied by such statements. Such risks and factors are set forth in the Company's annual report on Form 10-K for the year ended December 29, 2010, and in any subsequent quarterly reports, on Form 10-Q. With that, I will now turn the call over to John Miller, Denny's President and CEO

Thank you, Whit. Well, I'm very pleased to say, we achieved our second consecutive quarter of both positive franchise and company same-store sales, overcoming what remains a fairly challenging consumer economic environment, as well as the inflationary pressures impacting both our business and our customers' wallets. In addition, we generated significant increases in both adjusted income before taxes and free cash flow compared to the prior year quarter. Our growing profitability and free cash flow driven by our franchise-focused business model enabled to us continue to strengthen our balance sheet through debt repayments and return value to shareholders through our share repurchase program.

Our third quarter results represent the ongoing evolution of our positioning as America's favorite diner. Our success is being achieved through consistent brand execution, leveraging our 3 primary marketing strategies delivering everyday affordability, creating compelling and limited time only product offerings and driving sales beyond breakfast. Although we are disappointed that we did not achieve positive same-store guest counts this quarter, against our positive 2.3% same-store guest count in the third quarter of last year, we are pleased that our two-year same-store guest counts were positive 2.1% for the quarter, a significant improvement for the Denny's brand.

In late August we launched our limited time only campaign, called Let's Get Cheesy, featuring 6 new craveable entrees inspired by everyone's love for cheese. This menu created high levels of buzz and interest, similar to the Tour of America and Baconalia campaigns, with the Mac and Cheese Big Daddy Patty Melt generating a significant amount of excitement. Overall these entrees mixed above forecast and exceeded the Tour of America lineup. In addition, we introduced our strawberry cream cheese Pancake Puppies with a new cream cheese icing which was much higher than prior flavors.

Even with all of the new product news, we have our guesses continue to desire value as evidenced by our 2-4-6-8 Value Menu mix increasing slightly versus the second quarter. The Value Menu mix remained in the high teens during the quarter which is much lower than the 20% mix seen during the third quarter of last year. Our everyday affordability strategy continues to work hard for us, driven by our 2-4-6-8 Value Menu and store level discounts directed by our local co-ops. Our barbell pricing strategy is helping to balance the impact from everyday affordability by driving trades into higher priced LTOs. Believe the key to our collective success will be the balance of everyday affordability and limited time only products. Our limited time only offerings leveraged Denny's core strength as a diner and drive consumer interest, while delivering an enhanced dining experience for our guests.

On that note, we are excited about our final marketing module for 2011, which is launching next week. It's called the Taste of the Holidays, and features the Holiday Turkey Dinner, Holiday Turkey Melt sandwich, a red velvet Pancake Puppies with cream cheese icing and a Holiday Build Your Own Grand Slam featuring special items like bread pudding, french toast and pumpkin pie pancakes.

We're especially excited about our partnership with Sony pictures to promote their new holiday movie, Arthur Christmas, which opens on November 23. As part of the promotion, our new milkshake flavor is an Arthur's Milk and Cookies Shake, with a special kids item, Arthur's Christmas Cookie Pancakes. We believe the combination of craveable items for all day parts with Arthur's Christmas holiday movie promotion will help Denny's stand out as America's favorite diner this holiday season.

Turning to unit growth, we continue to work closely with our franchisees and licensing partners to continue growing the Denny's brand through traditional and nontraditional venues both domestically and internationally. We opened 11 new units in third quarter, including traditional and nontraditional locations want in US and abroad. We have opened 106 new units in the last 12 months and 184 new units since the beginning of 2010. We opened 3 additional Flying J conversion sites in the third quarter. In October we opened the final Flying J conversion unit bring the Flying J conversion program to a successful conclusion. The Flying J conversion program has been a tremendous opportunity for the Denny's brand and our franchisees. Adding 123 units to the system whose overall average unit volume is in line with our franchise average unit volume of $1.4 million per year provided a significant increase to our total revenue and profitability. When combined with a $600,000 investment when has been a very attractive investment opportunity for the franchisor and our franchisees.

Due to Denny's commitment to Pilot in the extreme geography in some of the units, the Company went above it's 10% to 90% company-to-franchise unit mix target and opened 24% of the total units. As we seek to achieve our stated 10% to 90% company-to-franchise mix, we will sell some of these units to franchisees in order to continue to streamline our company's geographic footprint for supervisory efficiency and to stimulate new unit development as we have successfully done with our traditional company-owned units.

Although the Flying J conversion program has been completed, we continue to be very excited about our partnership with Pilot Flying J Travel Centers that began back in 2007. Over the next several years we anticipate that we could open up to 50 new Pilot Flying J travel centers. Pilot Flying J has restarted their unit development, which accounted for one of our new units in the second quarter of this year.

In addition to the Flying J openings, our franchisees and licensees opened 4 traditional units, 3 university locations and 1 international unit in Wellington New Zealand. The 3 university openings took place at Case Western Reserve, Nova Southeastern and Youngstown State Universities in partnership with 2 of the leading on-campus food service providers, Compass and Sodexo. These units utilized 2 different business models, with 2 food court settings and 1 fast casual-style diner. We are very excited about the 11 university units we have opened since the beginning of 2010 and the attractiveness of the Denny's brand in new distribution points. Although we do not expect to open any more university units in 2011, we remain focused on building our pipeline for 2012 and beyond.

We continue to face headwinds from the difficult consumer economic environment, inflationary pressures and intense competition. We remain cautiously optimistic about the remaining portion of the year as we continue to see choppy same-store sales and guest counts. Despite all this, Denny's updated annual guidance for 2011 puts the company on track to achieve significantly improved same-store sales, profitability and free cash flow. Our growing profitability and free cash flow has enabled us to continue to make investments in the brand while strengthening our balance sheet and returning cash to shareholders via share repurchases. We remain focused on differentiating Denny's in a crowded marketplace and executing successfully on our strategies to further strengthen our position as America's Favorite Diner in 2011 and beyond.

With that I'll turn the call over to Mark Wolfinger, Denny's Chief Financial Officer and Chief Administrative Officer. Mark?

Thank you, John, and good evening, everyone.

Our third quarter performance was highlighted by positive same-store sales at both franchise and company units with a 28% increase in adjusted income before taxes and a 55% increase in free cash flow. Our growing profitability in free cash flow, driven by our franchise- focused business model, enabled us to continue to strengthen our balance sheet through debt repayments and return value to shareholders through share repurchases. In the third quarter, Denny's opened 11 new units and closed 11 units, including 1 company closure and sold 3 company-owned units to franchisees. Although our net system growth was flat this quarter, we anticipate that franchisees will refocus on domestic traditional unit development now that we have completed the Pilot Flying J conversion opportunity.

In the third quarter system-wide same-store sales increased by 0.9%. Same-store sales at franchise restaurants increased 0.8% and same-store sales at company restaurants increased 1.1%. This is the second consecutive quarter that both company and franchise same-store sales have been positive. Looking at details for company sales performance, guest check average increased by 1.3%. The higher guest check average was driven by both product mix, and the core menu price increase implemented in June. The product mix was primarily driven by lower incidence of 2-4-6-8 and higher mix of higher price limited time only products. In addition, we are seeing higher store level discounts, driven by the local co-ops, which are offsetting some of the positive impacts from our product mix and our increase in menu pricing.

In the third quarter we saw same-store guest count decrease of 0.2% in the quarter. Although we are disappointed that we did not achieve positive same-store guest count, we are pleased that 2-year same-store guest count increased 2.1% in the third quarter.

Denny's total operating revenue including company restaurant sales and franchise revenue decreased $3.2 million compared to the prior year quarter, primarily driven by a decline in company restaurant sales in the quarter. The decline in company restaurant sales reflects the continuing impact of our Franchise Growth Initiative, or FGI, as company sales decreased $2.5 million, or 2%, primarily due to 8 fewer equivalent company restaurants compared with the same period last year, which was partially offset by the 1.1% increase in same-store sales for the quarter. I'll now turn to discuss the quarterly operating margin table.

The company restaurant operating margin of 14.1% decreased 0.8 percentage points in the third quarter and was primarily impacted by the following items, which I'll take you through in detail at this point in time. Product costs increased by 1 full percentage point to 24.7% of sales, primarily due to the impact of increased commodity costs. Payroll and benefit costs increased by 0.6 percentage points to 39.4% of sales, primarily due to $2.1 million or 2 percentage points of favorable workers compensation claims development in the prior year quarter, partially offset by improved scheduling of restaurant staff.

Other operating costs decreased by 0.9 percentage points to 15.1%, primarily driven by a 0.5 percentage point decrease in marketing expenses, principally due to the 2010 corporate media spending related to the Super Bowl and the testing of the 2-4-6-8 Value Menu and a 0.3 percentage point decrease in other operating costs associated with the new store opening expenses from 6 Flying J conversion units opened in the prior year quarter. In summary, the gross profit from our company operations decreased $1.2 million on a sales decline of $2.5 million.

For the third quarter of 2011 Denny's reported franchise and license revenue of $32.0 million compared with $32.8 million in the prior year quarter. The $800,000 decrease in franchise revenue was primarily driven by a $2.3 million decrease in initial and other fee revenue associated with opening 42 Flying J conversion units in the prior year quarter, offset by a $1.8 million increase in royalties from 103 additional franchise equivalent units and the positive effects of higher same-store sales. Franchise operating margin increased by $0.5 million to $21.3 million in the third quarter. This increase was primarily driven by the $1.8 million increase in royalties and a $900,000 decrease in direct franchise costs, offset by a $2.3 million decrease in initial and other fee revenue.

Franchise operating margin as a percentage of franchise and license revenue was 66.4%, an increase of 3.1 percentage points compared with the prior year quarter. The franchise margin increase was primarily due to lower direct franchise costs and higher royalties, offset by lower initial and other fee revenue. The franchise side of our business contributed 59% of the gross profit margin in the third quarter, which is $6.5 million more than our company restaurants. The income shift to our franchise-focused business model allows us to increase the predictability of our earnings. Our adjusted EBITDA margin as a percentage of total operating revenue was 16.5%, an increase of 1.2 percentage points compared to the prior year quarter.

Total general and administrative expenses for the third quarter decreased $1 million from the prior year quarter. General and administrative expenses, excluding share-based compensation decreased $1.3 million for the prior year quarter primarily due to a decrease in performance-based and deferred compensation accruals relative to the prior year period. Depreciation and amortization expense declined by $400,000 compared with the prior year period.

Net operating gains, losses and other charges, which reflect restructuring charges, exit costs, impairment charges and gains or losses on the sale of assets decreased $3.7 million in the quarter. Gains on the sale of assets were $2.9 million lower, primarily due to the safely real estate in the prior year quarter. in addition, impairment charges were $2.1 million higher than the prior year, primarily driven by 1 underperforming company-owned unit and 2 units identified as assets held for sale during the quarter.

Operating income for the third quarter decreased $3 million from the prior year quarter to $14 million, primarily due to the decrease in net operating gains, losses and other charges mentioned previously. Below operating income interest expense for the third quarter decreased $1.6 million or 25% to $4.8 million as a result of the lower interest rates under the refinanced and repriced credit facility and a $29.1 million reduction in total gross debt over the last 12 months.

We believe the best measure of the ongoing earnings of our business is adjusted income before taxes. In the third quarter adjusted income before taxes was $12 million, a 28% year-over-year increase.

Moving now to capital expenditures our year-to-date cash capital spending was $12.9 million, a decrease of $275,000 compared with the prior year period. The decrease was primarily driven by lower IT and remodel capital spending, offset by slightly higher new construction expenditures reflecting the impact of opening 8 company-owned Flying J's in 2011 and the timing of payments for the company-owned units opened in the fourth quarter of the prior year.

The transition to a franchise-focused business model and improved operating performance has allowed us to continue to strengthen our balance sheet as we repaid another $10 million in term loan debt in the third quarter. We have reduced total debt by $320 million or 58% since the end of 2005, lowering interest expense by $33 million when comparing full year 2005 to the last 12 months. Our total debt to adjusted EBITDA ratio is below 3 times, compared to 5.1 times at the end of 2005 and the cost of our debt is currently 5.25%. We will continue to use our free cash flow to repay debt to make us a stronger franchisor and to give us additional flexibility on the use of our free cash flow.

We repurchased 1.3 million shares in the third quarter, bringing the total shares repurchased under the 6 million share stock repurchase program to 3.1 million shares. We have repurchased a total of 6.1 million shares in the last 10 months, when you include the 3 million share stock repurchase program approved last November and completed in the first quarter of this year. That wraps up my review of our second quarter results.

I will now talk about our current expectations for our full year 2011 guidance, in addition to our initial thoughts on 2012. Based on year-to-date results on management expectations at this time Denny's is updating its full year 2011 financial guidance to reflect the third quarter positive same-store sales, current commodity inflation expectations and current thinking on our new unit development initiatives.

There is a great deal of volatility around same-store sales, and the thinking about consumer economic trends, which leads to us remain cautiously optimistic. That being said, the company now expects the company same-store sales to range from flat to positive 1% and the franchise same-store sales to range from negative 0.5% to positive 0.5%. The company expects the gap between company and franchise same-store sales to be around the current year-to-date gap of 0.4 percentage points.

As it relates to the company guest check average, we expect the year-over-year product mix benefits seen in the past 2 quarters to decrease in the fourth quarter of this year as our 2-4-6-8 incident rate in the fourth quarter of last year dropped to the high teens when we ran our 2010 holiday Build Your Own Grand Slam promotion. We are currently expecting the annual increase in commodity costs to be at the high end of our second quarter outlook, which was in the high 4% range.

Looking now to 2012, the volatility and uncertainty in the markets lead us to continue to be cautious, as it is difficult at this time to say how much opportunity there will be for year-over-year improvements. Based on our current thinking, we believe that in 2012, commodity costs pressures will continue to provide a headwind for us in the 3% to 5% range. Strategically we will remain focused on our relative priced value advantage to our competitors and potential negative impact of pricing to long term guest traffic, which is why we are looking at taking a modest amount of pricing next year to offset inflationary pressures.

We currently expect to achieve net system unit growth of at least 25 units in 2011. We now expect to open between 60 and 62 new company and franchise units this year and close around 35 system units. The unit openings include 23 Flying J conversions, made up of 8 company and 15 franchise units, in addition to 5 university locations, and 3 international units, all of which have already opened. We continue to focus on building our new unit pipeline for traditional and nontraditional domestic units, as well as international locations.

When we launched the FGI program at the beginning of 2007, our system was 66% franchised and we set out a target to reach 90% franchised. We are very fortunate to have a great group of franchisees who are energized about investing in and growing the brand. At the end of the third quarter we have sold 327 company-owned units to franchisees, bringing us to 87% franchised. We expect to reach the 90% target by the end of 2012, which implies we anticipate selling an additional 40 to 50 more units in the next 15 months. As John noted, some of these units may include Flying J conversion units as we seek to further consolidate our company-operated markets and simulate franchise unit growth.

Our adjusted EBITDA guidance is now between $80 million and $83 million, and adjusted income before taxes is between $36 million and $39 million. These ranges are significant improvements relative to our 2010 results, where we reported $73.8 million of adjusted EBITDA and $27.3 million of adjusted income before taxes. Our shift to a franchise-focused business model has allowed us to increase the predictability of our earnings, while generating increased free cash flow, which we will continue to use to repay debt and repurchase shares.

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

(Operator Instructions) Michael Gallo of CL King.

Just a couple questions. You mentioned, it seems to be apparent, for the last couple quarters, that the new LTO's seems to be resonating well. I was wondering if you can just give us, an update on how those are mixing in lunch and dinner. It would seem, obviously, a lot of items that could provide some growth in that day part and whether you're seeing yourself picking up share there, despite obviously, it's been fairly competitive in those segments, with casual discounting. Thank you.

This is John. I'd just say, that we're pleased with what the Beyond Breakfast initiatives are bringing us, and that we'd say that our dinner and late night is responding in a positive way. And I think, you know, the rest of the overall mix remains fairly balanced, as you'd expect a brand with our positioning, would.

Okay, great. Housekeeping question for Mark. Mark, there's about $800,000 of non-operating expense in the quarter, I think. What was that?

Hold on a second, Mike.

You are talking about the $780,000?

Yes.

I'm looking at the wrong -- let me get back to you, Mike, and give you the details behind that.

Okay, great. And then, just final question, I think you mentioned, pretty specifically, you expect it to get to 90% franchise by the end of next year. So, it sounds like there's specific units involved or, you know, probably negotiations you're already having. Is that a number of markets that you plan to do? Should we expect to see it happen fairly quickly? You think it will be pretty balanced in terms of getting there?

No, I think, Mike - this is Mark. I think from our standpoint, obviously, we've got 15, sort of 15 months left in the program to get to 90%,which we said the target is at the end of 2012. Now, that will primarily be very market focused, I think, as both John and I mentioned. It may include some of the Flying J conversions as well. Again, the focus is obviously on concentration of both the Company and the franchise base, in respective markets and again, the target is in that 40 to 50 unit range, between now and the end of 2012

Okay, thank you.

Mike, I've got the detail on the other non-operating expenses for the quarter.

Okay.

The $800,000. One, was it is an offset for our deferred compensation plan, offsetting the expense that hits the -- in our G&A and the other piece, is the write-off of DFC's associated with paying down the term loan.

Okay. Thank you.

Will Slabaugh of Stephens.

Wonder if you could talk, just broadly, about trends that you saw in October. And while I realize you don't want to be too optimistic, or get too granular here, just I would assume (routing) and easier traffic comp would help out for 4Q, just curious about what you're seeing out there.

Will, this is John. I'd say, that when we say choppy consumer environment, we're looking at more, you know, negative weeks in third quarter than in second quarter, than positive. Did I get that right? Did I mix the two quarters up here?

That's right.

So -- but we see a strengthening in areas where, people have been concerned, California, Florida, Arizona, Nevada in particular, where we have a pretty high concentration of stores. We're pleased with trends in those areas. So, I think that's the best way to answer the question, is looking over Q2 and Q3

Also, curious about -- you mentioned, geographies. Any particular pockets of strength, that you're seeing out there, or weakness? I know, you mentioned California had kind of bounced off the bottom, but still, seems a bit choppy and then heard that maybe Midwest might be a bit choppy as well, so just wondering if you could speak to that?

Yes. Well, certainly some of the other -- Florida, obviously, is a big market for us. Certainly, we've seen improvement there as well and Arizona, another big market we've seen improvement. Certainly relative to last year and Nevada as well. Specifically, where we have Company units, I would say in the strip, we've definitely seen continued strength there.

Great, and then just also curious, and apologize if I missed this, on the slight adjustment you made to your guidance there on EBITDA. Did that have to do with that charge that was in this quarter, or was that commodity-related, or sorry if I missed if you went through that?

The primary reason for the EBITDA, pointing to the lower end of our range, is the commodities are now at the high, very high end, of our range that we had in the second quarter.

Okay. Thanks, guys.

Sam Yake of BGB Securities

I was real pleased with the quarter, considering all the challenges out there. I'm just wondering, when you look at, in general, the economic conditions, would you single - what indicator would you single out? Would be it unemployment rate, consumer confidence? You know, what one should we look for, that when it turns, it could really be a nice tailwind for you?

I think, clearly unemployment is directly correlated to confidence, and the two are correlated to the number of transactions, eating away from home. I think we're all holding our breath, for the day that those things turn. So, as we talk about, how we've done year to date in light of the tougher times, and the remaining high unemployment, you know, I'd have to say, we're overall pleased with the ability to connect to our consumer.

I think -- Sam, this is Mark. I think the other piece, and I will go back to the comments that John and Whit made earlier, and that is, there's obviously, key markets that we operate in, like the state of California, Nevada, and Arizona, which obviously, represent a large portion of our units. So, obviously, those economic metrics in those states are very important to us, as well

I guess I'm like you. I'm kind of anxious to see how you guys can do when you get a little bit of an economic tailwind behind you

We are looking forward to that day.

We agree.

And then, one other question. I'm real pleased, as you mentioned, you got your debt-to-EBITDA ratio, now, well below three times. I'm wondering, I think you've talked in the past, you didn't want to set a specific number, but it seems to me where the stock is now, it is an extremely attractive opportunity, and when do you kind of, move away, from paying down debt and move more aggressively to buying back more stock?

It's Mark. I would say, again, we're below 3. I think we're just slightly below 3, probably in the 2.9 to 3.0 range, if I recall. We've got a little bit more, I think, progress to make there. As we mentioned, we paid down, out of the $10 million of debt in the quarter, I think, that's $10 million in each of the last four quarters, if I recall, so we continue to push the debt down.

Within our loan agreement, there's flexibility we have, within the use of excess cash flow, that as we continue to de-leverage a little bit further, it frees up more excess cash flow that we can use, obviously to your point, for more stock buyback, as well as, potentially, if we ever consider paying dividends. But we're obviously -- we're satisfied with the amount of stock we've continued to buy back, and we're excited about that, and we're continuing to generate obviously, strong free cash flow metrics.

And Mark, when the stock declines, do you have a flexibility, are you opportunistic, that when the stock goes up, you kind of, pull back and when it goes down, you get a little more aggressive?

We have programs in place, we think, work reasonably well. Again, as choppy as the markets are, and certainly today was an indication of that, we try to be relatively consistent in our approach.

Okay. Thank you very much.

Mark Smith of Feltl and Company.

Hi, guys. I just wanted a quick update on how the franchisees are doing? We saw closures come up, just a little bit, guidance on openings come down in Q4. Is there anything that we should read into that, and then how well they've been able to deal with the commodity pressure?

I think -- this is Mark Wolfinger. I think, from our standpoint, when you look at the change in the opening numbers, it was a little bit on the Flying J side. I think there was-- we're at 123 and I think initially, we thought we'd be at, maybe at 125. So, it was a slight adjustment there.

There was also adjustment on our university campus openings, of around 5 and, you know, from our standpoint that's a different type of licensee-partnership relationship. It's either a large institutional licensees or the universities, themselves. So, that's again, a different avenue for us.

I think, to answer your question about overall franchisee strength, you know, we continue to see a tremendous amount of support for this brand, in our franchise system. Obviously, they continue to open new stores. When you look at that store opening number, between last year and this year, and our core franchise system and in addition to that, as far as reinvesting the brand, there's been a tremendous amount of remodel capital put in the brand in the last 18 months, as well.

So, you know, from our standpoint, obviously, that, combined with the strong same store sales performance the last couple quarters, you know, obviously I think our franchise system is in pretty good shape right now.

And second, could you give us an update on any contracts that you guys currently have on commodities?

Yes. You're talking about for 2011, Mark, we are certainly, obviously, now that we're at the tail end of the year, contracted over 90%. We are contracted over 70% for the -- for the rest of the year. Probably our biggest exposure for the rest of the year would be pork, given that we're a large purchaser.

Not locked on pork here?

That's correct. Where we were we were locked in a significant amount of our pork purchases in the second and third quarter.

Okay. And then do you guys have anything that runs into 2012 on -?

So, for 2012 we are really 25% locked, for the year, and certainly I would say, most of that is leaning towards the first half of the year. So, only a limited items are locked, kind of, beyond the first half of the year.

If we look forward to the next conference call, should we see that number come higher than 25% in 2012, are you guys aggressively looking at those contracts now?

Yes. It's difficult to say. Obviously, there's a tremendous amount of volatility and uncertainty in the commodities market. So, you know, certainly we're looking closely at all of these commodities, and trying to take advantage of, areas where we see opportunities to be opportunistic. So, yes, we will definitely update the updating, when we get to the February call.

Perfect, great. Thanks, guys.

Tony Brenner of Roth Capital Partners.

Good afternoon. I think, Mark mentioned, that system wide 60 to 62 new units would be opened in 2011. Do you have a preliminary number for 2012?

We do not have that yet, Tony. We'll give that when we do our fourth quarter call, on our 2012 guidance.

Okay. Would Company openings be expected to, going forward, be about 10% of that total, beginning next year?

I think what we had said, we certainly want to do a - as a franchise-focused business, majority of our openings will be done by our franchisees. So, I think, Flying J was, kind of, an exception from the way we view that.

Yes, but that wasn't the question. I mean, to maintain that 90%, presumably, you're going to have to open around 10% of the total that opens. Will that begin next year or at some future date?

Yes. We're not ready to talk about that level of detail.

Okay. And, I believe you've had two fast casual test units, open now, for a year. I think they opened last November. Could you make some comment as to whether those have met your expectations, and if so, whether you plan to expand that concept?

Yes. Tony, this is John. We're obviously very excited about what is going on, on our college campuses. We have multiple versions of the tests going on there, 11 opened to date, and, are quite pleased with the results. We commented earlier, that the 2 that we had in earlier guidance, to open this year, of fast casual or the Denny's Cafe, that was in the earlier guidance, will not open this year.

It is R&D, we're excited about our opportunities in nontraditional formats, and we'll continue to work toward, a new introduction. We're not ready with details at the moment, of the time of that and, the nature of it, but given what we've learned on campuses in that venue, we are excited about the future potential of it.

We do believe that a smaller footprint Denny's, can assist the brand, especially in penetrating those urban centers the farther east you go, in New York, Boston, DC, markets like that where there could be some tremendous upside. So, it is R&D, and as we're prepared to make further announcements, we will.

Thank you.

Conrad Lyon of B. Riley & Company.

Thanks and good afternoon. Question regarding, and this is probably geared towards Mr. Miller, I think you mentioned, the Let's Get Cheesy promotion, and that it mixed a little bit above forecast. What I'm curious about, is that necessarily a positive, or a challenge, when it mixes above forecast? And, if it something that is not -- or is more of a challenge, do you try to ratchet that back or soften it up, with other elements on the menu?

What I would say is, its always a good thing when your LTO efforts are looked forward to by your frequent customers. If people are saying, boy, that Baconalia connected with me; it was interesting and fun. And more reasons for more people to come, more often to Denny's.

That's followed by Tour of America and then, you know, it outperforms and more people are saying, well, not just for a Grand Slam, but for other day parts and other items. So, when it builds check, it builds interest. And then - and so, when that's followed by yet another successful high mixing LTO, I'd say that it means that our franchisees have been brilliant with execution. It means that customers are growing in their affection for the brand, and it means that our strategies can be developed more fully toward precision.

For cost management, for purchasing opportunities, and that we, overall, see this as a very good thing. Now clearly, there are, challenges if you way over achieve. You can have a supply chain challenge, but we welcome those kinds of successful problems.

And that's kind of where I was going. It's just supply chain and it sounds like you guys are handling that very well, so good to hear.

Different question, this one regarding units, this is just to help me understand a little bit about the unit counts planned for this year, slight reduction. Is that more so -- and you may have talked about this. I think Mr. Wolfinger talked about it. Is that more so, from say permitting-type things, or what typically causes the outlook to change?

This is Mark. On the outlook change, sort of dialing back to the numbers real quick. As I mentioned, I think Flying J openings were -- there's probably 2, that are not expected to open at this point in time. And again, as we got to the balance of that portfolio, there's a number of geographic outlying locations and just challenges as to how those units would fit into our system. So, again we went from a 125 number to a 123 and we've got the 123 open now, 123 units open.

I mentioned the campus university piece, and that really is -- we're off about 5 openings there, and that really came down to, one, to timing differences, which is always a challenge when you get into the university side of the business. And then secondly, a little bit on the expectations as we went through the RFP process with our partners. Some of those didn't work out as we expected, but I think, as John mentioned in his comments, we continue to be very excited about the university development. We've got 11 open already. We're clearly ahead of the pack, as it relates to family dining on campus, and that nontraditional venue for us, I think, will continue to be a very exciting piece of our business.

Final question. I don't know if you can comment about this, but with a 3% to 5% food cost inflation looking at for fiscal '12, you mentioned, maybe taking menu prices up a little bit. Any sense what range you would look at or is it too early to tell?

Conrad, at this point I think it's too early, but what we are I can tell you is, certainly probably looking at taking menu prices earlier than we did this year, which was in June, kind of a midpoint of the year.

Okay. All right. Thank you.

Michael Gallo of CL King.

Hi, just a couple follow-up questions. Can you give us an update on how many units are in the pipeline right now, in the franchise pipeline?

You're talking about, Mike, it's Mark. You're talking about future development units?

Correct.

Yes. I think the way we can look at, that is, that just a couple longer term perspectives. One is, obviously, as we've said in the past, we have a longer term objective of trying to get to 50 net openings a year. That is 5-0 net openings, but that is a longer term perspective. So, don't take that as a 2012 guidance number on our part.

I think the second piece, is from a development commitment standpoint. As far as our development agreements, I want to say, that we started out in range of about 240 commitments and probably, something in the range of a little bit over 100 have been opened, out of the 240 development commitments. And those would be more traditional type of openings, in the US.

So, about 140 and that doesn't count, obviously, some of the nontraditional university and the like?

That's correct, and obviously, those agreements, can get reworked based on timing and availability of real estate, but that - again those are sort of range of numbers for you.

Okay. And also, Mark, did you have the quarter end share count?

Let me turn to Whit here. He's got some of the details. Let's see if we've got that.

Yes. I do not. Let me see if we can get it.

Quarter end, we've got 102.5 million shares, but if you could do me a favor, Mike, if you could call Whit, maybe after the call, and just confirm that.

That doesn't sound right. You sure you gave me the right year? Sounds like you gave me 2010. I think you had an average of 98.7.

Right. Yes.

I'll get back to you, Mike.

Give us a call on that, because I don't have the numbers right in front of me.

Okay, thank you.

At this time, there are no further questions. I would now like to turn the call back over to Mr. Kincaid, for any closing remarks.

Thank you, Lacey. I'd like to thank everyone for joining us on our third quarter call today. Look forward to our next earnings call to discuss our fourth quarter and full year results. Thank you and have a great evening.

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