Denny's Corp (DENN) 2012 Q1 法說會逐字稿

Good afternoon. My name is Heather and I will be your conference operator today. At this time, I would like welcome everyone to the Denny's Corporation first-quarter 2012 earnings-release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions) Thank you.

I would now like to turn conference over to today's host, Mr. Whit Kincaid, Senior Director of Investor Relations for Denny's Corporation. Please go ahead, sir.

Thank you, Heather. Good afternoon, everyone, and thank you for joining us for Denny's first-quarter 2012 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 first-quarter results. I will conclude the call with an update to Denny's 2012 full-year guidance. As a reminder, we will be filing the 10-Q on the due date of May 7, 2012.

Before we begin, let me remind you that in accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, the Company knows that certain matters to be discussed by members of Management during this call may constitute forward-looking statements. Management urges caution in considering its current trends and any outlook on earnings provided on this call. Such statements are subject to risks, uncertainties, and other factors that may cause the actual performance of Denny's to be materially different from the performance indicated or implied by such statements. Such risks and factors are set forth in the Company's most recent annual report on Form 10-K for the year ended December 28, 2011, 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. Good afternoon, everyone.

We are encouraged about the first quarter of the year as we are clearly starting to benefit from all of our efforts over the past few years. Denny's achieved the highest quarterly system-wide same-store sales increase in almost five years while growing our adjusted income before taxes and free cash flow. We achieved these results despite what continues to be a challenging economic environment. This is a testament to our efforts to reenergize a 59-year-old brand with a franchise-focused business model which allows us to grow profitability, while generating free cash flow that can be used to further strengthen our balance sheet and increase long-term shareholder value.

In the first quarter, we continue to make progress on all three of our key objectives, helping to make Denny's a leader in our segment and in the industry. The first key objective is our brand revitalization leveraging our America's Diner, Always Open positioning which provides the promise of everyday value with cravable, indulgent items served in a come-as-you-are friendly and inviting atmosphere. We now have five, going on six, quarters under our belt with our America's Diner brand positioning efforts. With this as our compass, we are at the beginning stages of effectively broadening our approach from the more narrowly focused breakfast all day platform. Guests today see us as a viable and relevant place to satisfy their craving for their diner favorites.

In addition, we are building frequency among our tried-and-true loyal customers looking to enjoy interesting new offerings on more regular basis. The first of five marketing modules planned for 2012 was our Sizzlin' Skillets LTO which mixed well above forecast, driven by three lunch and dinner offerings. The Skillets LTO which offered classic diner items that our customers cannot easily make at home also provided a great opportunity for add-on sales.

We also launched a new core menu in January containing new classic diner offerings, such as our slow-cooked pot roast, our Brooklyn spaghetti and meatballs, a Bacon Lover's BLT, and the Fit Fare Veggie Skillet. Most recently, we launched Build Your Own Pancakes, our second LTO module which will run until early June. This LTO plays off the strength of our Build Your Own Grand Slam products in addition to our guests' desire for customization while also offering great add-on and up-sale opportunities. Guests can add mix-ins for $0.50 each or indulge in our new peanut butter chocolate milkshake, peanut butter pie, or the double chocolate Pancake Puppies with peanut butter sauce.

We continue to emphasize the 2-4-6-8 Value Menu through selective product updates and focus national and local media. We saw the mix of 2-4-6-8 Menu decrease to around 15% as guests traded away from the value menu and value-oriented Build Your Own Grand Slam, to the higher-priced LTOs and core menu items. This added more than a 1% lift to our guest check average compared to the prior-year quarter, likely at the slight expense of transactions, while affirming that we have a broad array of strategies with our multi-tiered approach. Our success is being achieved through consistent brand execution, leveraging our three primary marketing strategies; everyday affordability, creating compelling limited-time-only product offerings, and driving sales beyond breakfast. Although we are disappointed that we did not achieve positive same-store guest counts at our Company-owned units this quarter, we believe that we have the right brand-building strategies in place to drive consistent improvement.

Another key part of our brand revitalization efforts is to deliver consistent, reliable service across all of our Company and franchise units. Having a deep history in the restaurant business and coming up from the ranks in operations, I've spent considerable time focusing on our operating systems and the consistency and quality of our operating execution. At the end of 2010, we started implementing the Service Management Group, SMG for short, guest satisfaction tool and now have over 1,300 restaurants using the tool. We are leveraging SMG to develop a deeper understanding of each location's performance to benchmark Denny's performance against our peers and to track operational initiatives focused on improving guest satisfaction measures.

We know that consistent improvements in guest intent to return and intent to recommend can lead to improvements in guest traffic over time. Direct guest feedback for our units provides us with a common language to work with our franchisees to drive operational improvements. After a little over year, we are seeing improvements in our scores. Admittedly, there's a meaningful gap between Denny's scores and the full-service restaurant industry. We are working closely with our franchisees to reinforce the best ways to deliver consistent, reliable customer service to our guests, and continue the progress we've made in our intent to return and recommend scores. It will take time to move to the top of the category but it is another positive step in our efforts to drive consistent improvements in traffic.

There are a number of additional foundational objectives that will drive our success. By far the most important one is our relationship with our franchisees. They are the heart of the brand. We want to help them grow and strengthen their businesses. We work closely with the Denny's Franchise Association and its Board of Directors. In addition, our brand advisory councils for marketing, development, and operations made up of franchisees and corporate representatives plan and execute many aspects of the business. The depth of our relationships and benefits of trust built from transparency and working alongside each other for mutual benefit of our brand has been successful in developing, testing, communicating, and implementing new initiatives. We provide many support services to our franchisees such as purchasing, marketing, and training. Our goal is to be the model franchisor of the industry through these efforts and services to our franchisees. With this goal in mind, we have worked with the Denny's Franchise Association to develop a supply chain oversight committee which will allow us to partner more closely with our franchisees on the brand's purchasing efforts. By more closely aligning with our franchisees, we believe that we can further strengthen the brand and our franchisees.

Our second main objective is to continue the growth of the Denny's brand through traditional and nontraditional venues, both domestically and internationally. We are placing more time and resources toward building our development pipeline in the US and abroad. We opened six franchise units in the first quarter and we are pleased that two were international units in Puerto Rico and Canada. Our guidance for this year's 45 to 50 openings which will be primarily driven by traditional domestic units with a few more coming from international, nontraditional, and travel centers. I'm pleased to announce that we recently opened Denny's first airport location. Our newest international unit is located in the Las Americas International Airport in Santo Domingo, Dominican Republic, and was opened by one of our newest international partners.

And the third main objective is to grow profitability and free cash flow through our franchise-focused business model. Although the restaurant industry has faced challenging times over the past few years, with headwinds from a difficult consumer economic environment, inflationary pressures, and intense competition, Denny's has been able to grow sales, profitability, and free cash flow. This has enabled us to continue making investments in the brand, while strengthening our balance sheet through debt repayments and returning cash to our shareholders through our share repurchase program.

Subsequent to the first quarter, we closed on a new credit facility that will reduce interest costs and increase balance sheet flexibility, which Mark will discuss in more detail. This is a major milestone for the brand and allows us to continue to strengthen our balance sheet and achieve maximum flexibility for our use of cash in the next few years. This will enable us to continue our steady track record for supporting franchise growth and returning value to our shareholders.

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 afternoon, everyone. Our first-quarter performance was highlighted by positive same-store sales at both franchise and Company units with a 61% increase in adjusted income before taxes and an 82% increase in free cash flow, compared to the prior-year period. Driven by our franchise-focused business model, our growing profitability and free cash flow have allowed us to further strengthen our balance sheet, enabling us to refinance our credit facility at the beginning of the second quarter which I will discuss in further detail towards the end of my comments.

In the first quarter, system-wide same-store sales increased 2.4%. Same-store sales at franchise restaurants increased 2.7% and same-store sales at Company restaurants increased 0.8%. This is the fourth consecutive quarter that both franchise and Company same-store sales have been positive.

Looking at the details for Company sales performance, guest check average increased by 2.4%. The higher guest check average included a 1.6% increase from core menu pricing taken in January of this year and June of last year. In addition, favorable product mix provided a positive benefit to our guest check average, as we sold a greater mix of higher-priced entrees compared to the prior-year quarter. In the first quarter, Company same-store guest counts decreased 1.5%. Around 70 basis points of this decrease is driven by the honeymoon impact of the new Company-owned units we opened in 2010 and 2011 as new units become part of our same-store calculations after being open for 12 months. Franchise same-store sales increased 2.7% in the first quarter, primarily due to the impact of higher guest check averages, combined with a higher same-store traffic than seen at the Company units.

Since our franchise units account for 88% of the system, we believe that franchise and system-wide same-store sales metrics better reflect changes in unit level performance throughout our system. We anticipate ending reporting same-store Company guest counts and guest check average when we complete our franchise growth initiative, or FGI program, at the end of this year.

Denny's total operating revenue, including Company restaurant sales and franchise revenue decreased $9.1 million compared to the prior-year quarter, primarily driven by a decline in Company restaurant sales in the quarter. Sales at Company-owned units decreased $10.4 million, primarily due to 31 fewer equivalent Company restaurant units compared with the same period last year, reflecting the continuing impact of selling Company-owned units to franchisees as part of our FGI program. This decrease was partially offset by the 0.8% increase in same-store sales for the quarter. In the first quarter Denny's opened 6 new franchise units, closed 11 franchise and Company units, and sold 6 Company-owned units to franchisees, leading to a 5-unit decrease in system units in this quarter.

I'll now turn to the quarterly operating margin table. In the first quarter, Company restaurant operating margin of 15.1% represents a 3.0 percentage point increase, compared to the prior-year quarter and was primarily impacted by the following items, which I will discuss in more detail. Product costs increased 0.5 percentage points to 25.0% of sales, primarily due to the impact of increased commodity costs. Payroll and benefit costs decreased 2.2 percentage points to 40.1% of sales, primarily due to improved labor efficiency and a $1 million or 1 percentage point increase from favorable workers compensation claims developments in this quarter and unfavorable workers compensation claims developments in the prior-year period.

Occupancy costs decreased 0.5 percentage points to 6.1% of sales, primarily due to favorable general liability claims development in the first quarter of this year. Other operating costs decreased 0.9 percentage points to 13.7% of sales, primarily driven by a 0.8 percentage point decrease in other operating expenses, which were higher in the prior-year period due to new store openings expenses for 5 Company-owned units in the first quarter of 2011 and 14 Company-owned units in the fourth quarter of 2010. In summary, the gross profit from our Company operations increased $1.6 million on a sales decline of $10.4 million.

For the first quarter of 2012, Denny's reported franchise and license revenue of $32.6 million compared with $31.3 million in the prior-year quarter. The $1.3 million increase in franchise revenue was primarily driven by a $1.2 million increase in royalties from 51 additional franchise equivalent units and the effects of higher same-store sales in the current-year quarter. The $600,000 increase in occupancy revenue was primarily driven by selling Company-owned units to franchisees. This increase was offset by a $500,000 decrease in initial and other fee revenue, primarily driven by opening seven Flying J conversion units in the prior-year quarter.

Franchise operating margin increased $1.6 million to $21.3 million in the first quarter. This increase was primarily driven by the $800,000 increase in royalty and fee revenue, a $400,000 increase in occupancy margin, and a $400,000 decrease in direct franchise costs. The decrease in direct franchise costs was primarily driven by a $500,000 one-time franchise settlement in the prior-year quarter.

Franchise operating margin as a percentage of franchise and license revenue of 65.3% represents a 2.3 percentage point increase compared to the prior-year quarter. The franchise side of our business contributed 60% of the total operating margin in the first quarter, which is $7.1 million more than our Company restaurants. As we've emphasized in the past quarters, the income shift to a franchise focused business model gives us greater predictability in our earnings. For the quarter, adjusted EBITDA margin as a percentage of total operating revenue was 15.4%, an increase of 1.8 percentage points compared to the prior-year quarter.

Total general and administrative expenses for the first quarter increased $1.5 million from the prior-year quarter. General and administrative expenses excluding share-based compensation increased $1.7 million, primarily due to an increase in payroll and benefit costs and an increase in performance-based compensation accruals relative to the prior-year period. The increase in payroll and benefits cost is primarily driven by enhancements in key areas like operations and brand support, as well as a higher pension accrual related to a year-end adjustment to the valuation of our closed pension fund. In addition, we hosted a series of road rallies with our franchisees in key markets during the first quarter.

Depreciation and amortization expense declined by $1.1 million compared with the prior-year quarter, primarily as a result of sale of Company-owned restaurants over the past two years. 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 $400,000 compared to the prior-year quarter, primarily driven by higher restructuring and impairment costs that were offset by higher gains on the sale of assets. Gains on the sale of assets were $1 million higher, primarily due to higher average net proceeds per unit for Company-owned units sold in the first quarter of this year, compared to the prior-year period. Restructuring and exit costs were $800,000 higher than the prior-year quarter, primarily driven by anticipated severance for our former Chief Operating Officer. Impairment charges were $500,000 higher than the prior-year quarter, primarily driven by an underperforming unit and a unit identified as assets held for sale.

Operating income for the first quarter increased $2.4 million from the prior-year quarter to $13.9 million, primarily due to the increase in franchise and Company restaurant operating margins, and a lower depreciation and amortization, primarily offset by higher general and administrative expenses. [Total] operating income interest expense for the first quarter decreased $1.2 million to $4.5 million as a result of a $41 million reduction in total gross debt over the last 12 months and the lower interest rates under our former credit facility. On April 12, Denny's refinanced its credit facility, establishing a new five-year $250 million senior secured bank credit facility comprised of a $190 million term loan and a $60 million revolving line of credit. This all-bank facility is a testament to the tremendous progress Denny's has made over the past several years with its franchise-focused business model, resulting in a stronger balance sheet with growing profitability and free cash flow.

The refinanced facility features interest rates step-downs based on the Company's total debt-to-adjusted EBITDA ratio and is initially set at a 30-day LIBOR plus 300 basis points. The new credit facility does not contain an interest rate floor for either the term loan or the revolver. When compared to the prior facility, which had an interest rate of LIBOR plus 375 basis points, with a LIBOR floor of 1.5% for the term loan, and no LIBOR floor for the revolver, the new facility will lower our interest costs by 200 basis points based on current interest rates. In addition to the interest savings, the new facility allows us to continue to benefit from further deleveraging by offering lower interest rates while allowing us to achieve maximum flexibility for the use of cash.

The term loan will amortize 10% per year, paid quarterly, or $4.75 million with the balance due at maturity. There will be an excess cash flow sweep starting at 50%, decreasing to 25%, with a total debt ratio below 2.5 times but ending when the total debt ratio is below 2 times. The facility offers the opportunity to lower interest rates by 25 basis points for a total debt ratio below 2.5 times and another 25 basis points for a total debt ratio below 2 times.

Our cash allocation for share repurchases and dividends will be capped at $34.8 million each year, with the only limitations being the mandatory debt repayments. Once our total debt ratio gets below 2 times, the $34.8 million cap will go away, so long as we have a minimum of $20 million of availability on our revolver. The new facility does not require Denny's to be rated by the ratings agencies. As a result, we will not be renewing our ratings with S&P and Moody's. We estimate that the closing of this new bank facility will result in a one-time charge to other non-operating expense of approximately $8 million in the second quarter of 2012 as a result of charges for the unamortized portion of deferred financing costs, and original issue discount related to the prior facility, and a portion of the fees related to the new facility.

Our effective income tax rate of 39.9% in the first quarter was higher than our initial estimate of 30% to 35%, due to updated assumptions for the year, including lower potential tax credits to be received. The change in the effective tax rate compared to the prior year resulted from the release of a substantial portion of the valuation allowance on certain deferred tax assets, based on our improved historical and projected pretax income. Due to the use of net operating loss carry-forwards, we only paid $200,000 in cash taxes this quarter. We will continue to utilize additional net operating losses and income tax credit carry-forwards to eliminate the majority of our cash taxes for the next several years.

In the first quarter, adjusted income before taxes increased 61% to $10.1 million. We believe the best measure of the ongoing earnings of our business is adjusted income before taxes, as it does not include operating gains, losses, and other charges such as restructuring charges, exit costs, and impairment charges. It also does not include the changes we have had in our effective tax rate.

Moving onto capital expenditures, our first-quarter cash capital spending was $1.8 million, a decrease of $3.9 million compared to the prior-year period. The decrease was primarily driven by lower new construction expenditures reflecting the impact of opening five Company-owned Flying J conversions units in the prior-year period. The transition to a franchise-focused business model and improved operating performance has allowed us to generate a significant improvement in free cash flow. We generated $13.7 million for free cash flow in the first quarter, an increase of $6.2 million or 82% compared to the prior-year quarter.

The free cash flow has allowed us to continue to strengthen our balance sheet as we repaid $8 million in term loan debt in the first quarter, bringing our total debt repayment over the life of our former credit agreement to $60 million. We have reduced total debt by $339 million, or 62%, since early 2006 and now have outstanding term loan debt of $190 million. Our total debt-to-adjusted EBITDA ratio is now 2.6 times. We anticipate achieving the 2.5 times ratio threshold in the new credit agreement in either the second or third quarter of this year. We anticipate achieving the 2 times debt ratio threshold some time in the next 24 months.

During the last 18 months, we've returned value to shareholders through share repurchases in addition to repaying debt. We maximized our share repurchase availability in 2011 and have purchased a total of 6.7 million shares since initiating a share repurchase strategy in the fourth quarter of 2010. Due to our focus on closing the new credit facility, we did not repurchase any shares during the first quarter of 2012. We have 2.3 million shares remaining in our authorized 6 million share repurchase program and anticipate completing it in 2012. We will continue to balance the use of our free cash flow between debt repayment and share repurchases, as we seek to both make us a stronger franchisor and return value to our shareholders.

That wraps up my review of our first-quarter results and will now turn the call over to Whit, who will speak to the updates in our 2012 guidance.

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. Based on year-to-date results, our refinancing, and Management's expectations, Denny's is updating its financial guidance for full year 2012. The areas with updates are as follows. We expect full-year system-wide restaurant same-store sales to be between positive 1% and positive 3% which includes an expectation for franchise restaurant same-store sales to perform between positive 1% and positive 3%, and Company restaurant same-store sales to perform between flat and positive 2%.

We expect commodity inflation to continue to impact our business in 2012 but to a lesser degree than what we saw in 2011. Based on our current thinking, we believe that commodity cost pressures will be in the 2% to 4% range this year which is slightly lower than our initial thinking of 3% to 5%. We are currently locked in to over 70% of our needs for 2012. Due to the commodity increases we saw in 2011 and anticipate seeing in 2012, we took a less than 1% price increase with the core menu that came out in January. This is in addition to the less than 1% price increase we took in June of last year. We anticipate that we will be able to more than offset any inflationary pressures impacting our Company operating margin with unit-level improvements, efficiencies gained through selling Company-owned units to franchisees, and by not having the startup costs associated with the Flying J conversions. As a result, we anticipate that our Company restaurant operating margin will be between 150 and 250 basis points higher than the 13.1% margin we had for the full year of 2011. This includes the $1 million favorable impact we had from nonrecurring items during the first quarter of this year, including $500,000 of favorable workers compensation claims adjustments and $500,000 of favorable general liability claims development.

We anticipate that our total reported general and administrative expenses for 2012 will increase $3 million to $6 million compared to 2011. Our goal is to ensure that we have the proper resources to drive our key initiatives. This year-over-year increase is primarily driven by an increase in payroll and benefit costs, due to enhancements in key areas like operations and brand support, and an $800,000 increase in our pension accrual related to a year-end adjustment to the valuation of our closed pension fund. The biggest driver of variability in general administrative expense is performance-based compensation expense which is based on our annual performance. When you benchmark Denny's G&A expenses versus other franchise-focused restaurant companies, we believe we compare favorably on a variety of metrics including total G&A per system unit, total G&A as percent of total GAAP reported revenue, and total G&A as a percent of total system sales.

Due to our new credit agreement, we expect net interest expense to now be between $12.5 million and $13.5 million with net cash interest expense to be between $10.5 million and $11.5 million. Variability in interest expense will be driven by the 30-day LIBOR rate and the amount of term loan debt we repay during the year. As part of the new credit facility, we are required to hedge a portion of the $190 million term loan. We entered into an interest rate hedges that cap the LIBOR rate on borrowing for the term loan for a two-year period. The 2% rate cap for the 90-day LIBOR rate applies to $150 million of the borrowings starting the first year and $125 million of the borrowings for the second year.

Our updated guidance for adjusted income before taxes is between $45 million and $49 million which is annual gross of 21% to 32%. Our updated free cash flow guidance is $51 million to $55 million which represents annual gross of 7% to 16%. We currently estimate that our effective tax rate for the full year will be between 35% and 40%. As Mark mentioned, we continue to benefit from certain deferred tax assets and expect our cash payments for income taxes to be between $3 million and $4 million in 2012.

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) Thank you.

Our first question comes from the line of Will Slabaugh with Stephens Inc.

Thanks, guys, and congrats on the quarter. On the strength you're seeing in franchise same-store sales, wondering if you could talk a little bit more about what's going on there from a traffic and check perspective? And also if you have that actual breakout of the growth between the traffic and check, that would be great.

Yes, Will, this is John. Thank you for the nice comments. There's a couple things going on. First of all, we're performing really well in the key states so that certainly helps with our franchise community when Texas, Arizona, California, Florida are having a good showing. Secondly, we did have quite a number of remodels wrap up the fourth quarter of the year and then go into the first quarter of this year. And a good portion of those, call it rounding up to 40% or so, somewhere in that neighborhood, are at the full scope and the rest would be this program we had over the last couple of years. So that, I think, played a role in that. And then, we're looking at about 2% pricing between last July and then the January menu print, the cumulative effect of those two.

Okay, great. And then, just quickly as a follow-up, we've been seeing a little more of the media mix -- it seems like, at least -- for the 2-4-6-8 Value offering. Didn't know if that's because of something you've been seeing the market, or if that just to be my television. Just curious if that's what you expected to be a larger percentage of the mix and just how you're thinking about that, your media spin there going forward?

Yes, I think you see that we're learned how to use the broad array of tools that are available to us. If you dial check up a little from the add-on sales, it has some consequence to traffic so we've seen a little lower incidence of our 2-4-6-8. I think that we'd be inclined to put a little bit more weight on it now that you see traffic softening just a little bit.

But the way we organized our modules, we developed our strategy coming out of the year with check in mind because transactions had really started to improve for the brand. And I think now we'll just re-balance the scale. Inside each module basically, we lead with value, I'd say it's safe to say, and then we go more towards the check-builders in the middle, and then we finish with 2-4-6-8. So that's what you are seeing right now. And if you have the favorite team that you're watching then you would notice it a little bit more, but it's fairly normal for how we wrap up the module.

Great, thanks, guys.

Our next question comes from the line of Michael Gallo with CL King.

Hi, good afternoon. Congratulations on the good results. John, question for you. You've been there now for about a year. I was wondering where you see some of the real low hanging fruit and opportunities now. You mentioned some opportunities on customer service gaps versus some of the peers. I was wondering if you could elaborate on that and also what you're doing to address that? Thank you.

Sure. I wouldn't say there's anything low hanging. We've got a 59-year-young brand that has a little bit of a gap as we willingly admitted in this call, as in our comments. But we are closing the gap. We've seen some fairly substantial improvements since we started taking measure of how we perform along the key quality measures, whether it be speed, taste, quality, intent to return, and so forth. So we are making progress and the approach of that is just basic blocking and tackling.

Mark mentioned and his comments that we had a road rally at the earlier part of the year, that we did not have in the first part of this same time last year. That was designed specifically to go work on fundamentals in the restaurant. So, these are the kinds of things that we work on all the time so I wouldn't call it low hanging fruit, but we're just trying to get more focused, a commonly language, a way in which we can measure consistently across the brand, and we think we're getting benefit and traction from those efforts.

Okay, that's very hopeful. Also, John, I was wondering if you could comment on the trend through the quarter. Obviously, as gas prices moved up as you got into March, several of the peers certainly indicated to see some softening in traffic. Can you talk at all about the trend through the quarter? Obviously, Denny's, probably from a system-wide standpoint was probably less weather impacted in some of the Northeast focused concepts or Midwest focus concepts. But any kind of helpful color on how the quarter ended versus started would be helpful.

Sure. I think what's easier to talk about is if we talk about the second quarter, which I'm not in a position to do so. What I would say though which really behind the question for me is, how much weather, probably a little bit less, with our brand with California, Arizona, Florida. No doubt about it. We're not all concentrated in the Midwest so we wouldn't have had quite the favorability in Q1. But no question that there's the earliest part of the year. There's a little bit more of a weather benefit and then gas prices affected. You saw that as a lot of our peers start talking about how the year unfolded.

What may be in reading between lines a little bit is directionally how are things going. And I would say that we're pleased that momentum remains at a comfortable level for us. So we're very comfortable with our guidance.

Great. Thanks very much.

Our next question comes from the line of Tony Brenner with Roth Capital Partners.

Thank you. I'd like to ask about two things. One, again, regards guest counts. I'm a little puzzled why since the institution of the 2-4-6-8 Value Menu, your America's Diner campaign appears to have traction and is generating, I gather, some positive momentum. You've got now a number of remodels that have been completed, but still you're unable to sustain any sort of consistent increase in guest counts. And I'm wondering if you might comment on why that is, and what you might do to improve that trend?

One of the things -- I think we'll let Whit speak to this a little bit more specifically -- but no question, the gas prices as mentioned earlier hit a lot of people pretty hard, the consumer pretty hard. And then also because of how we report comps, you might recall Mark's comments from just a few minutes ago, we rolled over at 12 months, we report stores on a comp basis. So that's something that I don't know all of our peers do. There was an impact associated with that. Whit, do you want to --?

Yes, Tony, I'll add to John's comments. Certainly, I think on a relative basis, there were fewer small percentage of Flying J conversions opened -- this is as a percent in the franchise world. But when you back away around 2% pricing in the franchise, same-store sales, and then the [product] mix benefit, franchise traffic was slightly negative. So they're benefiting, as John mentioned before, from having done a number of remodels and refreshes in the fourth quarter of last year and then in the first quarter of this year, there was some carryover. We did about 80 remodels and refreshes. About 50 of those were actually refreshes that were carryover from last year's initiative. So there are a number of pieces that are different so hopefully that gives you a sense for the details.

Okay. Secondly, I wonder if, John, you might comment since you mentioned the guest score deficit, what areas is Denny's particularly deficient in?

It is not one area. It's across the spectrum so you wouldn't be able to look at it, Tony, and the say, if you fix your steak, you've got it covered, or dinner entrees, or any one particular thing. And they are -- they're not as materially behind as maybe where we started. We really closed the gap.

But we're not in the top category at this stage so we continue to close the gap and we're pleased with the progress.

Okay. You're still anticipating taking a price increase in June, are you not?

No, not at this point.

Okay. Thank you.

Our next question comes from the line of Mark Smith with Feltl and Company.

Hi, guys. Just a couple of quick ones. First, in your other restaurant operating, did you get some benefit from natural gas this quarter? Did that help that? I know that Mark walked though it a bit in his comments but is there anything else we should be looking at into the other piece?

Yes, Mark, in the other, I think the biggest benefits obviously in the quarter was the other other, which is where [free] opening costs [fly] and obviously that was impacted in the prior year quarter by the opening of the Flying J conversion units at the end of 2010, the first quarter 2011. But yes, we're definitely seeing lower natural gas rates in the Company units and certainly expect, obviously, benefit from that throughout the year to some degree. And then, obviously the benefit, the year-over-year benefit I would say, on the pre-opening you would continue to see to some degree as well, certainly more so in the first half than the back half.

What's the timing for the one Company restaurant?

It is going to be at the end of the year. Right now, we're looking at fourth quarter.

Okay. And then last, real quick. Anything you guys can say on international growth initiatives and what we can look forward to there?

This is Mark. Obviously, we continue to focus on that. I think John certainly referenced in his comments. He mentioned the opening in the Dominican Republic which we're very excited about. I think we've said in the past, we believe this brand's got great transformation and value outside the US. We continue to work on that and continue to focus resources on that. Hopefully, further updates will be coming.

Great. Thanks, guys.

Your next question comes from the line of Conrad Lyon with B. Riley and Company.

Good afternoon, guys. Question about social media. I've never really delved into this with you guys. How do you feel that's working for you versus, say, other forms of marketing? Advertising? Do you feel pretty good about it? Do you think there's more opportunity to generate traffic and so forth?

This is John. We all may answer it slightly differently, but I'd say all of us would give it a thumbs-up positive directionally. Certainly, broadcast is no bargain. There's lots of cable channels and we all have to learn how especially Millennials use social media. I'd say if there's one thing common, a great social equalizer, is that everybody rich or poor has some sort of way in which they can text and stay connected.

There are a number of things going on, one, the number of hits we had from our Cesar Millan Skillet Whisperer episode. I think it was a little bit over a million on YouTube. Then we have our Second Year and our CollegeHumor efforts with a number of quite talented stars stepping up to want to participate with Denny's because it's cool to be in these dinersodes. Jessica Biel, over 500,000 hits already. It was just launched a few weeks ago. So we're really pleased with the cool factor, the talk value. We think this translates to butts in seats ultimately and that's the goal.

Got you. That's helpful. Kind of a different question on that tune. I'm not sure how much franchisees have to get involved with that, but has there ever been any kind of sticky points where franchisees might say, I'm not so hot on that. Or are they pretty much on board with social media as well?

I'd say that the way we manage this relationship, our franchisees are very much involved, engaged from the onset. And if there were vetoes, concerns, sensitivities, they would be vetted out long before we got to the trigger.

Got you. Hopeful.

Question for Mark. Regarding the debt EBITDA, paying down debt. I think you said 24 months. You'd like to get down to 2 times. If you have the opportunity to get down there quicker, would you prefer to do that over share repurchases?

That's sounds like a yes or no question. I think the great news here, as I look at it, is when you take a look at our debt structure, capital structure, and the improvements we made. It's obviously quite significant over the last few years. We're at 2.6 times levered today. I think in my comments I mentioned getting to 2.5 either in the second or the third quarter. So either in the quarter we're in today or the third quarter of this year. I think that 2 levered ratio obviously is something that if we had talked about that a few years back, that would have been difficult to even to imagine that. But clearly, as I mentioned in the cash flow commentary for the quarter, we continue to generate terrific free cash flow.

But I also said -- and this really answers your question -- that we're going to balance that focus between continued debt reduction and obviously returning value of shareholders as well through share repurchases. We continue to like the balance of those two items as far as use of our cash.

Fair enough. Appreciate it.

You're welcome.

Thanks.

(Operator Instructions) Our next question comes from the line of Sam Yake with BGB Securities.

Good afternoon.

Hi, Sam.

I think that most of my questions have been answered. I was wondering, when you talk about share repurchase, did you mentioned a number of like 2 million shares this year in 2012?

Yes, Sam, I think there's 2.3 million shares left on what was the second authorization. The initial authorization was $6 million and there's 2.3 million shares left on that authorization.

Okay. I certainly can't find fault with paying down more debt but when I do look at your -- you mentioned, Mark, your free cash flow generation. Your stock's selling at a little over 7.5 times this year's free cash flow per share and then I look at what you're paying for debt. It is a little hard to understand why you might not be a little more aggressive on share repurchase but I can't fault you for paying down debt.

I think that, Sam, if you look at last year 2011, we talked about 2012 in the first quarter and the fact that there were no share repurchases because obviously the focus was on the refinancing. But last year, to your point, that would be fiscal 2011. We maxed out our share repurchase plan last year. So under our debt agreement last year and the restrictions and combinations thereof that we had, we basically bought all the shares we could buy.

Okay, thanks so much.

You're welcome.

There are no further questions at this time.

All right, thank you, Heather.

I'd like to thank everyone for joining us on our first quarter call today. We look forward to our next earnings conference call to discuss our second quarter 2012 results. Thank you and have a great evening.

Thank you. This concludes today's Denny's first quarter 2012 earnings release conference call. You may now disconnect.