Denny's Corp (DENN) 2012 Q4 法說會逐字稿

Good day, and welcome to the Denny's fourth-quarter and full-year 2012 earnings conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Whit Kincaid, Senior Director of Investor Relations. Please go ahead, sir.

Thank you, Kevin.

Good afternoon, and thank you for joining us for Denny's fourth quarter and full year 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 fourth-quarter and full-year results. I will conclude the call with commentary on Denny's full-year guidance for 2013. As a reminder, we will be filing the 10-K by the due date of March 12, 2013.

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 of 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; and good afternoon, everyone.

We are pleased to deliver another year of solid results in growth, as we generated our second-consecutive year of positive Company and franchise same-store sales. Our performance is a testament to our positioning as America's diner, emphasizing everyday affordability, compelling breakfast and beyond breakfast offerings for four dayparts, and a welcoming, come-as-you-are environment that's open to all.

In addition to generating positive same-store sales, we grew adjusted income before taxes by 26% and generated almost $50 million in free cash flow. We opened 40 new restaurants, refinanced our credit facility, and completed our FGI refranchising initiative. And though the consumer environment remains challenging, our results continue to improve.

This year we celebrate our 60th anniversary at Denny's. The recent momentum of the past few years is a testament to our loyal customers, dedicated franchisees, tireless restaurant operators, the wonderful support-center staff we have here, and the underlying and enduring attractiveness of our concept. As we continue to evolve to meet the ever-changing expectations of our guests and the needs of our franchisees, we are becoming a much more competitive player in our segment and in the industry.

Evidence from the Denny's revitalization efforts is clear as indicated by the positive results we are seeing in key states like California and Texas, where we have almost 600 locations, as well as our positive overall sales performance relative to key industry benchmarks. We are pleased with the response from our guests, at this stage; the strong partnership we enjoy with our very dedicated franchisees; and the excitement -- we are very excited about the future of Denny's.

Our greatest opportunities lie in front of us, however, as there is much work still to be done to deliver additional shareholder value through our ongoing revitalization efforts. In these efforts to increase long-term shareholder value, we will continue to work closely with our franchisees to increase sales per location, as well as growth in new locations, to drive profitability to our franchised-focused business model. The free cash flow generated by this model will be balanced between reducing our outstanding debt, repurchasing shares, and making appropriate reinvestments in the brand.

We remain focused on exceeding -- executing against our three key objectives to help Denny's grow our position as one of the largest American full-service restaurant brands in the world. Our first key objective is the revitalization of Denny's image through menu, service, and environment initiatives designed to fully leverage our competitively distinct and uniquely ownable America's diner, always-open positioning. As America's diner, or in the case of our international locations, the local diner, we emphasize attractive everyday value and core menu offerings, with improvements in our breakfast-all-day and beyond-breakfast diner platforms.

In addition, we offer consistent new product news to our compelling limited-time-only offerings, drawing from the vast array of regional diner comfort offerings, as guided by our guests. This, along with initiatives to build on our warm hospitality and improving come-as-you-are environments, makes for a great diner atmosphere.

As we head into such a landmark year, we have the opportunity to truly celebrate who we are and where we've come from. At the launch in 1953, Harold Butler promised to serve the best cup of coffee, give the best service, keep everything spotless, offer the best value, and stay open 24 hours a day. As we enter our 60th year, we revisit this promise with renewed commitment.

As the largest family dining chain, we will continue to introduce more compelling marketing modules and classic diner plates, amplifying the message of our $2, $4, $6, $8 Value Menu, while continuing to put our guests' first every day, with a focus on driving more traffic into our locations. We continue to broaden our approach from the more narrowly focused breakfast-all-day platform to become more relevant for a broader set of occasions and a broader set of customers.

Over the past few years, we have seen increases in our lunch and dinner mix, which have helped bring more balance to our tiered pricing strategy, designed to deliver both compelling new product offerings and everyday affordability, as well as drive sales beyond just breakfast. We will continue to leverage one of the most visible everyday-value platforms in full-service dining. Starting out the year, we have placed additional emphasis on the $2, $4, $6, $8 Value Menu, complete with new product news, new logo, and new advertising spots.

One of the ways we are responding to ever-changing consumer needs, and living up to Harold Butler's promise, is through our renewed efforts to offer a great cup of coffee. Frankly, the bar has been raised by quick service and fast casual, and we were falling short. Given that we sell nearly 90 million cups of coffee a year, we wanted to raise the bar for full-service dining, so we introduced a smoother, richer coffee made with higher-quality Arabica beans. With coffee commodities in our favor, timing could not have been better.

Our new coffee program is a result of almost two years of extensive product develop, consumer research, and operational testing. Part of this program involves replacing our previous pot-brewing system with all new equipment, serving accessories, and machines that brew the new blends in each of our domestic locations. Our new Signature Diner Roast and Dark Diner Roast, as well as the Signature Decaf coffee, play right into our heritage as America's diner.

Our new platform will allow us to introduce more coffee-centric beverages in the future, such as iced and frozen coffee specialties. We are now among the few full-service brands offering choice to our guests with of these three blends. We also have refreshed our core menu with 14 new additions, notables like, Build Your Own Burger platform, the Philly Cheesesteak Omelet, Grilled Sausage and Chicken Quesadillas, and the Texas Prime Rib and Egg Sandwich, are all off to a great start.

One of the other key parts of our brand revitalization effort is to deliver a consistent reliable service across all of our company and franchised units. More than two years ago, we implemented Service Management Group's Guest Satisfaction Tool in order to develop a deeper understanding of each location's performance, benchmark Denny's performance against our peers, and track operational initiatives focused on improving guest satisfaction.

We know that consistent improvements in guests' intent to return and intent to recommend can lead to improvements in guest traffic over time. There is a meaningful opportunity for Denny's to improve its relative scores against the full-service restaurant industry. We have found that direct guest feedback provides us with a common language to work with our franchisees to drive operational improvements.

Last year, we placed further emphasis on training restaurant-level staff at both company and franchise units, and we saw significant improvements in our scores, compared to 2011, as a result. We are encouraged about our progress. As a result, we have restructured both our company and franchise operations teams to allow us to continue the progress we have made so far and reinforce the best ways to deliver consistent reliable customer service to our guests.

It will take time to move to the top of the category, but it is another positive step in our effort to drive sustainable improvements in guest traffic. We are optimistic about 2013 and believe that we have the right strategy in place to build on the momentum we established in 2011 and 2012. We continue to work closely with our franchisees and encourage their participation to evolve our product offerings and our marketing strategies, as well as our operating and training initiatives, to continue to improve restaurant operations.

Our second key objective is to continue the growth of the Denny's brand through traditional and nontraditional venues, both domestically and internationally. We opened 40 new restaurants in 2012, including 6 new international locations. Our goal is to grow, both gross unit openings, as well as net unit growth.

We currently have over 120 unopened domestic restaurant commitments and are focused on building pipelines for both domestic and international development in both traditional and nontraditional formats. We have been successful in recruiting new franchisees to the Denny's family, adding seven in 2012, many who are taking advantage of our New and Emerging Markets Incentive Program to open units in underpenetrated markets in the United States.

We do have global ambitions, and are working to grow Denny's existing 98 international locations to a much larger global footprint. We believe there is a great opportunity for the Denny's brand outside of the US, as evidenced by successful openings we have had in the past few years, and that our current international annual sales volume averages close to $2 million. We are making investments in our international operations through the addition of new team members in order to provide better support to our current franchisees and to continue to attract new franchisees. In addition, we will be switching our international product distributor to the Sysco IFG company with extensive experience international food service distribution.

We continue to be pleased with our nontraditional location performance, as we opened our first university location and first airport location outside of the United States. The 13 nontraditional locations we have opened since the beginning of 2010, confirms the attractiveness of the Denny's brand and new distribution points. We have made investments in our team to help us further expand with our existing licensee opportunities and defined potential locations on military bases and airports.

Although, achieving our fourth-consecutive year of positive net unit growth is a good milestone in this environment, we want to get net unit growth higher than the positive 10-unit increase we achieved back in 2009, which excluded any Flying J conversions opened in 2010 and 2011. One of the ways we expect improve our net unit growth is, in the longer-term, is having fewer closures resulting from having a healthier system with higher average annual sales volumes.

Over the past six years, our system unit closed rate has averaged 34 units per year, or around 2% of the system. We anticipate that this rate will continue in the near term, which is not unusual for a 60-year-old brand operating some portion of its base in older trade areas. These locations tend to have average annual sales closer to $1 million versus the system average of $1.5 million. New restaurants opening closer to or exceeding the system average benefit the system now and over the longer term.

Our third key objective is to grow profitability and free cash flow through our franchised-focused business model that balances use of cash between reducing our outstanding debt, repurchasing shares, and making appropriate reinvestments in the brand. Reaching our target of being a 90% franchise system has enabled us to drive significant improvements in our financial performance and provides a great deal of stability to earnings.

We are also excited about owning around 10% of the units as we believe that owning a meaningful base of units gives us a much stronger position when working with our franchisees to plan and execute our marketing, operations, and facilities initiatives. In addition, it gives us a more powerful growth engine with more strategic options when it comes to increasing shareholder value through reinvestments in the brand, whether it is through our franchisees or through company restaurants.

Reinvesting in our facilities is important as well, as we recognize that being a 60-year-old brand means that there are a number of locations that might have more-than-average wear and tear. In the past two years, our franchisees have remodeled approximately 380 restaurants, including around 200 lighter-refresh remodels.

Over 70% of the system is on a current scheme when you include almost 290 new units opened since the end of 2008 and around 270 units that participated in the $50,000 refresh remodel program that ended in 2011. In 2013, we will be reinvesting in our company restaurants, as we have not remodeled any of our locations in almost 2 years. We will continue to work closely with our franchisees to provide the right remodel programs for them, and their restaurants, as a portion are due each year.

Our stronger balance sheet and free cash flow position is a great asset that we can leverage to the benefit of the entire Denny's system. It allows us to facilitate reinvestment, as we are able to provide short-term loans to our franchisees to support the rollout of key initiatives. For example, we have provided 12-month no-interest loans to franchisees to facilitate the recent coffee equipment upgrade. Our unique credit card program, which incorporates over 90% of our system, gives us a great mechanism to allow the Company to automatically collect the loan payments. We have also offered this type of the program to franchisees interested in transitioning to Denny's POS system.

Going forward, we are very focused on improving our same-store sales, with the goal of generating both consistent, positive same-store sales and traffic. Although we generated momentum in the fourth quarter, we expect the consumer economic environment to continue its volatile recovery throughout this year. This is especially true for the first quarter, where we are lapping our strongest sales weeks of last year, due to favorable weather of early 2012.

We are also seeing effects from the timing of tax refunds in the current quarter. We expect the elimination of the payroll tax holiday to provide a headwind for the industry, as consumers adjust discretionary spending patterns. At the same time, improvements in employment and housing continue to provide tailwinds for us, especially in states like California. We are also keeping our eye on the minimum wage discussions going on in Washington.

As we continue to make investments in Denny's revitalization, we anticipate growing adjusted earnings per share by at least 10% and generating close to $50 million in free cash flow in 2013. We will continue to balance our use of cash between reinvesting to both grow and strengthen the brand, strengthening our balance sheet, and to return value to shareholders via our share repurchase program.

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

Thank you, John; and good afternoon, everyone.

We achieved record adjusted income before taxes and record free cash flow during 2012, driven by our franchise-focused business model. Our growing profitability and free cash flow has enabled us to further strengthen our balance sheet through debt repayments, while also returning value to shareholders through share repurchases.

We are pleased that we successfully completed our Franchise Growth Initiative program, which we call FGI, that was launched back in 2007. This refranchising strategy took the Denny's system from 66% franchised to 90% by selling 380 restaurants to existing and new franchisees. The proceeds from FGI helped us to reduce our total debt by over $360 million, or 66%, since early 2006. The FGI program enabled us to reinvigorate restaurant growth; restructure our field and corporate operations; strengthen our relationship with our franchisees; and create a much stronger business model, capable of growing earnings and generating stable cash flow.

Our fourth-quarter performance was highlighted by positive same-store sales at both franchise and company restaurants, a 16% increase in adjusted income before taxes, and we generated $7.2 million of free cash flow. In the fourth quarter, system-wide same-store sales increased 1.7%. This is the seventh-consecutive quarter that system-wide same-store sales have been positive.

Same-store sales at Company restaurants increased 0.5%, compared with the prior-year quarter. The increase was driven by a 1.3% increase in the guest check average, which was offset by a 0.8% decrease in same-store guest count. The higher guest check average included a 1% increase from menu pricing and mix shifts to more premium-priced items. Same-store sales at franchise restaurants increased 2% and was primarily driven by around a 1.5% increase from menu pricing and mix shifts to more premium-priced items, offset by negative same-store guest counts.

Denny's total operating revenue, including Company restaurant sales and franchise revenue, decreased $14.2 million, compared with the prior-year quarter, primarily driven by a decrease in company restaurant sales in the quarter. Sales at company restaurants decreased $16.6 million, primarily due to 49 fewer equivalent company restaurants, reflecting the impact of selling company restaurants to franchisees.

In the fourth quarter, Denny's opened 12 new franchise restaurants and 1 new Company restaurant. A total of 12 Denny's restaurants were closed in the quarter, including 11 franchise restaurants, leading to net growth of positive 1. During the quarter, eight Company restaurants were purchased by franchisees, and the Company acquired one franchise restaurant.

I will now review the quarterly operating margin table provided in our press release. The fourth-quarter Company restaurant operating margin of 13.5% represents a 0.7 percentage point increase compared with the prior-year quarter and was primarily impacted by lower payroll and benefit costs, lower other operating costs, which were primarily offset by higher product costs. The increase in product costs was primarily due to the impact of product mix as customers traded in the higher-priced lunch and dinner entrees. Gross profit from our Company restaurant operations decreased $1.6 million to $11 million, on a sales decrease of $16.6 million.

For the fourth quarter of 2012, Denny's franchise and license revenue increased 7.5% to $34.2 million. The $2.4 million increase in franchise revenue was primarily driven by a $1.5 million increase in royalties from 55 additional equivalent franchise restaurants and the effects of higher same-store sales in the quarter. In addition, occupancy revenue increased $1.1 million, which was primarily the result of collecting rent on restaurants sold to franchisees during the past year.

Franchise operating margin increased $1.5 million to $22.3 million in the fourth quarter. This increase was primarily driven by the items previously mentioned, but was partially offset by a related $900,000 increase in occupancy costs. Franchise operating margin, as a percentage of franchise and license revenue, decreased 0.3 percentage points to 65.2%, compared with the prior-year quarter, primarily due to the increase in occupancy margin, which carries lower percent margins compared with our Royalty and Licensing business.

The franchise side of our Business contributed 67% of the total operating margin in the fourth quarter, which is $11.3 million more than our Company restaurants. As we have emphasized in the past quarters, the income shift to our franchise-focused business model gives us much greater stability and predictability in our earnings. In addition, it enables us to generate above average EBITDA margins for a Restaurant company. For the quarter, adjusted EBITDA margin, as a percentage of total operating revenue, was 15.2%.

Total general and administrative expenses for the fourth quarter increased $1.4 million from the prior-year quarter, primarily due to an increase in performance-based compensation accruals relative to the prior-year period. Depreciation and amortization expense declined by $1.5 million, compared with the prior-year quarter, primarily resulting from the sale of Company restaurants over the past two years. Interest expense for the fourth quarter decreased by $1.8 million to $2.8 million as a result of a $30.4-million reduction in total gross debt over the last 12 months and lower interest rates under our new credit facility.

In the fourth quarter, our provision for income taxes was $2.5 million, reflecting a 36.4% annual effective income tax rate. In the prior-year quarter, we recorded an $89.1 million net deferred tax benefit, resulting from the release of a substantial portion of the valuation allowance on certain deferred tax assets based on our improved historical and projected pre-tax income. Due to the use of net operating loss carryforwards, we only paid approximately $200,000 in cash taxes this quarter. We will continue to utilize additional net operating losses and income tax credit carryforwards to eliminate the majority of our cash taxes for the next several years.

Moving onto capital expenditures, our spending was $15.6 million in 2012, with much of our spending focused in the fourth quarter, due to the opening of the new Company restaurant in Las Vegas. In addition, we acquired a franchise restaurant located in San Diego from a single-unit franchisee in the fourth quarter. We paid approximately $1.4 million for the restaurant, which has around $2 million in annual sales and close to $300,000 in annual Company EBITDA. About 20% of our Company restaurants are in Los Angeles and San Diego, allowing us to leverage our existing field G&A in this acquisition.

We have a right of first refusal on all franchise-to-franchise transactions. Given that we have a meaningful base of Company restaurants, we will review opportunities to reinvest our excess cash and leverage our existing infrastructure where appropriate. Although we have 93 single-unit franchisees and 113 with between two and five units, we do not think there are a significant number of locations that meet our criteria for geography, profitability, and returns.

We generated $7.2 million of free cash flow in the fourth quarter, and we generated $48.8 million of free cash flow in 2012. The free cash flow has allowed us to continue to strengthen our balance sheet, as we repaid $6 million in term loan debt in the fourth quarter, bringing our total term loan debt repayment for the year to $28 million. Since 2011, we have repaid $70 million of term loan debt, and now, have $190 million of total debt, including $170 million of term loan debt.

Our total debt to adjusted EBITDA ratio is around 2.4 times. As reminder, the next total debt ratio threshold in our credit agreement is 2.0 times, or 2 times, which we anticipate achieving sometime in 2014. Achieving this will lower our interest rate by another 25 basis points and enable us to maximize our availability for returning cash to shareholders.

We currently have an annual spending cap of $34.8 million for share repurchases and dividends, which will be eliminated with a total debt ratio below 2 times. At that point, the only restrictions on returning cash to shareholders will be the $19 million annual debt amortization and a $20 million minimum availability on our revolver.

Deleveraging remains important to the Denny's brand due to the history we once had as an over-leveraged company. One of the ways we have made a Denny's a stronger franchisor is by strengthening our balance sheet, which is important for attracting new franchisees, facilitating franchisee growth, and making brand investments.

John mentioned that we are providing direct loans to franchisees to support the rollout of our new coffee program. In addition, we have been facilitating third-party lending to our franchisees by providing loan guarantees. We had $7 million of third-party loan guarantees outstanding at the end of the year, related to the third-party loan pool we facilitated for the Flying J conversions. Our guarantee obligations have decreased from over $15 million, as most franchisees who took advantage of the program have quickly satisfied or reduced their loan obligations.

Since November 2010, we have been returning value to shareholders through share repurchases in addition to repaying debt. In the fourth quarter of this year, we used $11.5 million of cash to repurchase 2.4 million shares. Since initiating our share repurchase strategy in November 2010, the Company has repurchased 11.5 million shares for $47.6 million, and now has 3.5 million shares remaining in the current authorized share repurchase initiative. In 2013, we will continue to balance the use of our free cash flow for both debt repayment and share repurchases, as we seek to make us a stronger franchisor and return value to our shareholders.

That wraps up my review of fourth-quarter results. I will now turn the call over to Whit who will comment on our guidance for 2013.

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. The following estimates for full year 2013 are based on 2012 results and management's expectations at this time. We expect full-year franchise and Company restaurant same-store sales to perform between flat and positive 2%. As John mentioned before, we expect the consumer economic environment to continue its volatile recovery, especially as we comp over the favorable weather in the first quarter of last year, move through the timing shift of the income tax season, and face headwinds from higher payroll taxes. Regardless, we believe that we have the right strategies in place to build on our 2012 results.

We expect commodity inflation to continue to impact our Business in 2013. In 2012, commodity inflation was around 2%. Based on our current thinking, we believe that commodity cost pressures will be in the 2% to 4% range this year and are currently locked into more than 50% of our needs. As a result of the commodity increases we were seeing, we did take around a 1% price increase with our new January core menu.

We expect to open between 40 and 45 new restaurants this year, 100% of which will be opened by our franchisee and licensee partners. We expect the majority of the restaurant openings will come from our domestic pipeline of 124 unopened restaurant commitments, and at least 5 new locations will be either international or nontraditional locations.

We currently expect to achieve net system unit growth between 5 and 10 units, as we anticipate that around 35 system units will close this year. This is a closure rate around 2% of the system and is consistent with what we have seen over the last six years. We expect our Company margin to range between 14% and 15%, as we face commodity headwinds. We expect our franchise margin to be approximately 65%, as the favorable impact from new unit growth and same-store sales increases will be offset by not receiving front-end fees from the FGI program, as we did in 2012.

Our adjusted EBITDA estimate for 2013 is between $76 million and $80 million. As a reminder, there is a carryover effect from the FGI program, as it places downward pressure on our adjusted EBITDA, and we lose EBITDA from Company restaurants that were sold in the prior year.

We expect depreciation and amortization expense to decline this year and be between $20 million and $21 million. This decrease is primarily driven by the result of the sale of Company restaurants last year. We expect net interest expense to decline in 2013 and be between $10.5 million and $11.5 million, with net cash interest expense to be between $9 million and $10 million. This decrease is driven by the $28 million of term loan repayments in 2012 and the refinancing of our credit facility, which occurred in the second quarter of 2012.

In 2012, our effective tax rate was 36.4%, and we currently expect our effective tax rate for 2013 to be between 35% and 40%. As Mark mentioned, we will continue to benefit from certain deferred tax assets and expect our cash taxes to be between $2.5 million and $3.5 million.

Turning to capital expenditures, in 2012 our cash capital expenditures were $15.6 million, which included the construction of the flagship Company restaurant in downtown Las Vegas and the acquisition of one franchise restaurant. Our estimate for 2013 is between $17 million and $19 million, which includes remodeling approximately 20 to 25 Company restaurants, as we have started back into our full-remodel cycle. In addition, we have around $1 million of carryover capital expenditures from 2012 that will be paid this year.

Our free cash flow guidance for this year is between $46 million and $49 million. Please refer to the historical reconciliation of free cash flow to net income in today's press release. As Mark mentioned, we will continue to balance our use of cash towards both debt repayment and share repurchases in 2013.

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)

Will Slabaugh, Stephens.

This is JR Bizzell on the call for Will. Congrats on the quarter. First off, on 4Q same-store sales, just wondering if you could speak to that traffic and sales dynamic throughout the quarter -- did you see choppiness month-to-month -- just fill us in on that?

JR, this is John. Say hello to Will for us.

Let's talk about fourth-quarter momentum first, and I think this will help answer the question. One of the things we had a strong fourth quarter, yet we built momentum during the quarter. If you look back at what happened there, we had a 1.8% increase in check that was driven by both pricing, but also, some real strong mix change, but we also, compared to fourth quarter of the year before, moved our $2, $4, $6, $8 Value proposition from 16% [entities] up to 19%, so while we are building this broadening effect is taking place, we have the value seekers coming in higher numbers, but you also had people responding to the diner options and the higher check-building strategies as well. Certainly, The Hobbit played a nice role for us there.

So, we took that momentum into the first quarter -- obviously, the first quarter being a tougher comparison, as Whit pointed out, from weather of last year, and then we do have this delayed tax returns and the FICA tax, which affects the middle and lower-middle income consumers, as a percentage of their spend, a little bit more than others. In our consumer base, a good 50% of those are in that $50,000 household income and lower bracket. So, it is a headwind for us in the first quarter. We have not been in the habit of commenting about how a quarter unfolds, but I think suffice to say, our guidance of flat to 2% is -- we are confidence in that. We do think our initiatives that we have in place for both value and check-building strategies and broadening and frequency strategies are pretty solid, and we feel, all in all, good about 2013 at this stage.

Great, thanks. Switching gears, with respect to the free cash flow guidance of [$45 million] to $49 million, it seems to be flat year over year -- or, it is kind of flat, year over year -- just wondered if you could break down the components there?

Yes, JR, this is Whit speaking. For the free cash flow guidance, the primary drivers there, really, you have slightly higher cash taxes. We ended the ended the -- last year was $2 million, our estimate for this year is $2.5 million to $3.5 million. Obviously, you pick up some of the interest expense -- the cash interest expense savings, we expect, which was in our guidance. So, this year $9 million to $10 million. Then, part of this is, obviously the CapEx, our guidance range of $17 million to $19 million. Last year, so this is in 2012, we had very little, if any, remodel capital dollars in that $15.6 million. It has been almost two years since we have done full remodels at company restaurants, so that is the biggest difference when you go from 2013 versus 2012. That range for remodel capital for 2013 -- it's probably for the 20 to 25 restaurants that we called out -- it's about $7 million to $9 million. That is going to be the biggest driver.

The other piece is, obviously, the EBITDA guidance -- you have headwinds year over year, due to -- with the FGI program that ended, the front-end fees that we got for those units were $40,000 per unit. We obviously do not expect to refranchise any stores this year, so that was about a $1.4 million year-over-year loss. Then obviously, you lose the EBITDA from selling those company restaurants, even last year, you get some of that carryover effect into 2013.

This is John, again. One quick correction, you mentioned $45 million -- the guidance was $46 million to $49 million.

That was very helpful. Thanks, guys.

Michael Gallo, CL King.

Couple questions, if I may, just on the value platform. John, it seems that you had been on message here, early in January, with the emphasis around $2, $4, $6, $8, as well as the $8.99 skillets. I was wondering when you think about the $8.99 complete meals, whether you start to think about that more broadly, as a platform that you can really use to leverage your, particularly lunch and dinner program, because I think if I look across the category, that would be one of the most compelling values out there. Help me understand what you're seeing with that, in terms of incidence, and whether you think about whether complete meals at that kind of price point might be a platform you might think about for the regular menu at Denny's. Thank you.

It's a great question, Michael. Clearly, consumers think about value in different ways and value is associated with every transaction whenever you make a decision to go to lunch, dinner, late night, or breakfast -- whatever the occasion, it is how best does this place meet my needs, so we are trying to broaden the number of ways in which people think about Denny's with our breakfast and beyond-breakfast strategies. One of those is price value through $2, $4, $6, $8 Value Menu, but also abundant value, like the skillet bundle meals. So, we believe it does play a role. We had versions of it last year that came through a testing process, and we are excited about the consumer response and how well it is mixing in the early going.

Sounds like still some work to be done, but you are encouraged by what you see?

It's the quarter I'm in a little, Michael, as I just said, we are confident with our guidance for the year, and I don't want to get into (multiple speakers) questions. But, I would say that this is, if I can tip my hand at all, it's that this would be one of those types of modules that provides check growth versus breakfast, but high value scores and high incident rates, so --

Right, and you still have $2, $4, $6, $8 that you're really on message with as well. It seems like it is on message.

Second question I have is for Mark. Mark, I guess when I look across your peer group, we've seen a number of your competitors recently reprice their credit facilities in January, essentially, eliminate all the amortization, get some interest savings -- both of them in similar franchise models, both of them at much higher leverage ratios than you're at, and also get extensions on maturity. I was wondering as you look at your current credit facility, and you look at the marketplace, do you think you can potentially even maybe eliminate the amortization currently, based on where the market is, potentially extend maturities, and potentially get some further interest-rate reduction? Thank you.

Michael, this is John, again. Before Mark answers that, I want to take exception to the fact that those questions are always directed at the Chief Financial Officer (laughter).

Point is taken. If you want to take a stab at it first, John, I'll let you (laughter).

A little bit on the credit facility, and again, this -- we talked about the credit facility, and I think, as I made in my comments -- some of my comments, we call it the new credit facility because it is only about 10 months old. It was done, obviously, April of 2012. A little bit of the history here -- I think we've mentioned this before, we have refinanced three times and repriced twice, really, since the 2006 timeframe. Clearly, the Company has been very active in the financing markets. I think when we put that deal together, that was very important to us for a couple of reasons. One is that we had, I think, a very attractive pricing grid. We are currently paying slightly under 3% on our debt, and I go back in time, and just a few years ago, we were paying, certainly, above 8% for the total debt cost. Clearly, part of those terms and conditions and the ability to buy back shares was wrapped around the amortization amount, which was the 10% piece.

To answer your question from the standpoint of the current marketplace, I've read the literature, as well. We see a lot of stuff going to the press. It clearly continues to be a strong marketplace out there, and I think, just from our standpoint as a company, as I mentioned up front, we haven't hesitated to go to the credit markets at whatever point in time makes sense for us from a company perspective, and revise whatever deal is out there. As I mentioned in my comments, we have this 2014 timeframe, where we think we will probably come under the 2-to-1 leverage ratio, so sometime the next fiscal year. That is a key point for us -- it drops our pricing grid by another 25 basis points and it frees up even more cash from a shareholder perspective.

Again, I think, from our perspective, we like the financing deal we put together 10 months ago. It continues to benefit us in a lot of ways, and we will continue to watch the credit markets appropriately for whatever next action might suit us.

Thanks very much.

Tony Brenner, ROTH Capital Partners.

I wonder if you can talk about to what extent, if any, consumers -- or your consumer traffic, rather, is being affected by higher taxes, higher fuel prices, currently? It, seemingly, from your guidance at flat to higher same-store sales, it's not awful, but I wonder if you could just expand a little bit?

Tony, this is John. Historically, big picture, macro, unemployment, consumer confidence are a little bit more correlated to full service, and that would include Denny's as well, so we track full-service patterns, and those affect us more than gas prices. But, you never know when historical patterns no longer apply, if you have the trifecta of FICA tax, or a delay in tax returns, and also, higher gas prices. Obviously, we watch all of these things closely, but on a historical trend, gas is usually not quite so -- regardless of how it feels in your wallet, it seems to not affect the number of times you need a value-oriented meal or a meal priced in the $9 or under $9 range. It may affect other categories more than us, but it has not been a strong correlator, historically.

Okay. Have you raised coffee prices with the new coffee program?

Yes, we did. We took a small increase. Commodities are actually in our favor now. Long term, Arabica beans are going to cost more than our historical program, so we did do an upgrade, but the impact of that upgrade is actually in our favor this year. We took about $0.10 a cup increase; and of course, we have a bottomless-cup program at Denny's, like any other full-service concept would. And, it has gone well so far. There's those customers that do not like change, but on the whole -- so, you will hear a little bit of that, but on the whole, this has 6,000 customers participate and two years of research, and it was highly endorsed as a nice step forward for the brand. Now, as I mentioned earlier in my comments, this is new equipment, filters, training programs, thermal pots, much better management of overall coffee and coffee culture, as well as an upgrade in taste and flavor.

And then --

Who is your supplier of the coffee?

S&D is our supplier. They are a fairly big player in the restaurant business, as you may know. Then, I guess, most remarkable, and probably the most difficult for a full-service operation is the trickiness of getting choice to the table. In a fast casual or quick -- or even, C-store environment, it is easy to pass the bold -- the [foo-foo] flavor of the month and the milder or medium blends, but in full-service, that's really not been the option. So, for us to offer choice to our consumers, we think is a pretty big deal in our price range, and it is virtually impossible to satisfy someone seeking bold, someone seeking mild, when you don't have a choice. So, we are pleased to be able to do this.

One other question -- in your G&A and adjusted EBITDA guidance, does it assume that share-based compensation for the year will be higher than it was in 2012?

Yes, I think it -- yes, the [subset] will be similar to 2012.

Okay, thank you.

Mark Smith, Feltl and Company.

First question, with no expected company restaurant openings, can you talk about your long-term appetite for opening restaurants on the company side?

Mark, it is Mark Wolfinger. On the company opening aside, we have consistently said this, really, as we got heavily into the FGI refranchising process that a majority of our openings are going to be done by the franchise [side]. We've got great franchisees that want to develop this brand, and we're going to be relatively selective, from a company-development perspective -- the opening I mentioned, the store that opened in the fourth quarter, from a company-operation perspective, in Las Vegas, again, everything along the strip in Las Vegas is company operated. This particular location is down off of Fremont Street in the Neonopolis area. So, it is those kind of unique locations where we'll be putting our company-operated new-store capital.

I think, as Whit mentioned in his guidance, the focus this year, 2013, from a CapEx standpoint on the company side, is the remodel activity. We are targeting, I think, 20 to 25 remodels this year on the company side; and again, these are strong, high-volume restaurants, heavy-traffic restaurants, which it's time from a remodel-cycle perspective to put the capital there.

Is it safe to say that you might get better returns, or you will be opportunistic on acquiring franchise restaurants? It seems like this is the first time you have talked about that in quite some time?

It is, and as I mentioned in my comments, we clearly are a high-free-cash-flow type of model; and as these opportunities do come along, and I would say it is opportunistic in nature, but they really have to fit the criteria relating to geography, so it has got to fit into our field-management structure from a company-operated perspective, certainly, from a volume perspective, and obviously, fit the profitability perspective. We do have right of first refusal on franchise-to-franchise transactions, and this particular one came up, and we liked what we saw and went ahead and executed on the deal.

Would the same thing apply refranchising -- we know FGI is done, but you may still be opportunistic there?

Sure, absolutely. We certainly have brought the program to the end as we know it, and I would deem it to be highly successful for this brand. If something would come along that would make sense to sell an asset into the franchise community, certainly we will take a look at that. Right now, we enjoy the fact that we have 10% of our system company operated, a little bit over 160 stores that average almost $2 million average unit volume.

I wanted to confirm in the guidance -- on the comp guidance of flat to 2% growth, is there any difference between company-operated and franchised restaurants in that comp guidance, or do expect both of them to be between zero to 2%?

Looking at last year -- kind of a recap of 2012, there started to be a larger separation between franchise and Company performance, and highlighting the fourth quarter, the franchisees finished the year 1.5% positive and the Company 0.2% positive. So, you had a little bit of a separation, primarily based on a little bit higher pricing, the Company was at or around 1%, franchisees about 1.5%, and that was supported because of the considerable number of remodels under the last couple of years the franchisees had versus Company. We expect the gap to narrow, and in some markets, pass franchise performance in 2013 because of the Company remodel program closing the gap, looking more like the rest of the franchise system.

I think the last question -- can you talk about -- I know you don't want to guide through Q1, but can you talk about the reception from customers, as we see some macro headwinds, but the reception or any pushback on the price increase that you took in January?

I would say it is just true to form, sort of Restaurant 101. You get pricing -- in this environment, I'd say there is not a lot of pricing power, in general, in full-service why you see bundled meals and dealing going on. Nevertheless, because commodities continue to move to some degree, we all take some. And, I think we have learned in the last two or three years to take a couple of modest increases per year, rather than shock the consumer with a lot of new aggressive prices. So, this would be, like our last couple of rounds, at or under 1% and not a lot of commentary from our consumers. Whereas, going back three to four years, when we had more aggressive pricing, we did hear a little bit of a louder cry at new menu launch, and we have not seen that sort of rejection at this point.

Again, this is Mark to add to John's comment, the great thing we have, obviously, is $2, $4, $6, $8, so some of those historical price increases we've taken, which were higher than the 1%, and $2, $4, $6, $8 was introduced in 2010, so that is a great offset, obviously, and from a value standpoint.

Great, thank you.

Michael Halen, Sidoti.

In terms of the remodels, do you plan on doing the remodels by DMA or region?

The Company base is scattered about pretty well, so as much as we'd love to be able to pull off a total-market scenario, that is not how it will unfold. They will be based on when they are due.

Okay. What kind of sales lift have the remodels -- the franchisee remodels seen?

We have been seeing the industry norm. We have stores that are above it, stores that are below, but mid-single digits is about what our habit and pattern has been.

Okay. How many of the franchised units still need to be remodeled?

About 70% of the system is on the current scheme. That's about 290 new units opened since 2008, and then there's 270 that were refreshed at some level, a good portion of which were on that lighter scheme. Now, we're back into the full-remodel cycle, the little bit -- not the cheaper version, but the full-remodel program. These run for about seven years, so I want to say, 30% then -- so, if 70% are in cycle or current, then 30% are not.

Okay. When do the franchisees really start to bump up against those remodeling requirements? Is that this year, 2014 -- when are we going to see the full remodels coming through for the franchises?

It is fairly steady. We have a few spikes, so you can't divide the whole system by seven exactly, but it is basically a pretty smooth, consistent portion per year.

Okay. Can you also talk about anything -- I don't know if this is something you're willing to share -- anything that you are doing in terms of trying to boost traffic at the restaurants?

Certainly, in post holiday, this is more of the value season, so we have our bundled-meal program, and we refreshed our $2, $4, $6, $8 with new coffee, more pictures, new items, new news, and new campaigns, so they are all fresh. And, those in our cycle, we also try to speak to Boomers, Millennials, Hispanics, and families out with kids, with different kinds of messaging and social-media efforts. There is a fairly robust and comprehensive set of criteria we have for each marketing module. It has to -- value needs to come through, diner comes through, new news comes through -- you speak to four different groups, you have an abundant-value and a price-value message. So, the answer to that question is, somewhat complex, but there is a lot going on to drive transactions.

Okay. Last one, can you give us any color about how you look at deploying excess cash? When you might be more willing to buy back shares versus the debt pay down, and vice versa?

Mike, it's Mark. I think some of the comments we've made during the discussion, here, today is, obviously, we have been able to blend really the two. Our term loan has a 10% AM rate to it, so it requires $19 million a year in amortization, so clearly, that is going to the debt pay down. We, obviously, have exceeded that kind of AM rate, historically. And, as I mentioned, that brings us into -- when we get under the 2-to-1 level, that brings us into a more attractive pricing grid on the debt by another 25 basis points.

At the same time, we've repurchased a lot of shares -- and just as a reminder, the share repurchase program has only been in place since November of 2010. So, call it a little bit longer than 24 months, and as I mentioned in my comments, we repurchased slightly under $50 million of stock in that timeframe, about 11.5 million shares, and there's about 3.5 million shares left in the authorization from our Board. It's really been a blend of the two, and I think the last piece that John mentioned in his comments up front is, we are also focused on reinvesting appropriately in the business, and certainly the 20 to 25 company remodels is, I think, a real strong example of that.

All right, great. Thanks, guys. Have a good night.

Nick Setyan, Wedbush Securities.

Just a little bit more on the remodels, how should we think about the timing in terms of how many remodels per quarter? And then, maybe some details around how -- during the remodel, how long it takes -- whether a portion of the store is closed? And then, once the remodel is finished, does it immediately go into the comp base?

We close 7 to 10 days with these remodels. They immediately go into the comp base. They do not go non comp, so they get folded right into the regular reporting at Denny's, and that has been consistent through time. I would say that the fourth quarter, or the tail of the fourth quarter, is the least likely to see a complete remodel. People don't want to miss the holidays, and they worry about reliability of contractors, and otherwise it's largely -- then, there is a slow start in January, for the same reasons. Other than that, it is fairly consistent throughout the year.

Got it, so even including starting in Q1, we should see about an even number of remodels starting in Q1?

Yes, late Q1 you'll start to see the normal pattern kick in, and some completions will be done in Q1.

Got it. Just on the Q4 and The Hobbit promotion, it seemed like you were doing a lot of promotional activity that was tied to that with couponing that it seemed like it was directed at driving some repeat transactions at a slightly lower average check. I was a little bit surprised that the average check held up as much as it did and traffic didn't bounce back up a little bit more. Can you give us some commentary around how you thought about it going into it, whether that was a little bit surprising to you? And how perhaps, you are thinking about structuring promotions, going forward to maybe drive a little bit more transactions?

We had, call it a 1.4% or so improvement in transactions from third quarter to fourth quarter on the company base, and franchisees also had a very strong fourth quarter in transactions, so it did benefit us. Bear in mind, when you have, call it a couple years ago, 55%-ish of your transactions go into breakfast all day, and today, a 5- or 6-point lift from two years ago in the number of the incidents where people are buying lunch or dinner items versus breakfast items. So, that raises check, so you are able to -- this broadening strategy, beyond-breakfast initiatives, allows us to satisfy value seeker, at the same time offer incentives for guests to try us. If those incentives are toward items that are not the lower average check breakfast -- the $6.50 Grand Slam, for instance, then it is still in our favor from a check standpoint.

Got it --

Whereas competitively, you wouldn't see people add breakfast, it would lower their check, right? So, it's a --

Got it, that's helpful. Lastly, I've grown up with the Denny's brand here in LA, and I still live here in LA, so I go in from time to time, and I actually really believe that you guys have improved the menu quite a bit in recent years. Are you guys really thinking about maybe changing the messaging around media to communicate that to your customer base more effectively? How are you thinking about, perhaps, communicating that message a little bit than you have in the past?

One of the things that is always interesting about the full-service business is how, compared to very large, top four or five QSR brands, is the difference in shop power. So, if you have a new coffee initiative or cinnamon roll in brand X, Y, or Z, the top two or three deepest global-penetrated brands, everybody in the world knows about it with multiple contact points. There might be 6, 7, 8, 10 merchandising pieces just in restaurant billboard campaigns, radio, television, broadcast support and so forth. In our business, there is not 28 or 30 different pieces of creativity here -- there is five modules.

So, we invest in the general-value messaging. We first, through menu merchandising, table tents, and the like, socialize new items. We use -- we leverage our servers quite a bit, with the power of suggestion, and then as these things hook and catch on and become a little bit heavier in mix, then we are willing to do a little investment spend in telling the world. If you get that out of order, you don't get the benefit -- people don't think about your brand that way, so you can investment spend and it can go -- so, it is a longer, slower process to evolve how people think about a brand, but we are getting good traction from these initiatives, and I appreciate you noticing that in your store visits.

Great, thanks very much.

Conrad Lyon, B Riley Caris.

I have got a really -- more of big-picture, long-term macro question -- probably gear it for John. First, you have done an excellent job in effectuating your game plan, here -- taking down debt, buying back shares, keeping EBITDA cash flow, for the most part steady, give or take a few million here or there. How do you see, say call it the next five years, maybe even longer, shaping up? Might you, gosh, take a look at another chain? Is it just simply building out that franchise piece globally? Any insight you can speak to, to that end?

I think for -- the first part is easy to answer, the near term, which is sort of leads to the longer term. We obviously are making more investments as -- both Mark and my comments, and then also in Whit's guidance, and we have made some investments in the support for our franchise system -- excuse me, support for growing our franchise base. We think there is more to be done with our current licensees in nontraditional; we think there's more to be done in military and airports; we think that there is opportunity for global -- for continued traction in global growth. We have had some very good results, but they're not material, fast-growing achievements at this stage. We think the globe's a big place, and there's lots more opportunity there. So obviously, we'd like to step up or achieve a higher net unit opening, with slower closings and more domestic, international, traditional, nontraditional efforts playing out through time. That is one obviously, goal for the Organization.

We also think sustainable -- we have seven-consecutive quarters, so we expect to continue to grow comps through check, through broadening strategies, and obviously, expect to ultimately turn traffic positive and remain that way. The core brand strength and performance in the mid-scale category, and then in the overall full-service category, that revitalization is our primary effort, near term, and then where that leads us longer term.

We also believe that there is tremendous opportunity to continue with our share repurchase program. Again, without getting into longer-term guidance, I think you can safely see from the near term, as Mark commented, just since late 2010, with the first authorization, we've repurchased considerable number shares, and near $50-million commitment toward that end. We have 3.5 million shares remaining, and we have free cash flow to continue to execute against that value-creation strategy. I think, at least near term, I know we've not given longer-term guidance, but at least near term, I think you can see where we are headed with the brand.

Maybe I can sort of frame it this way -- it is probably going to be tough for you answer this given you don't want to give too much about where you want to go with share repurchases. I [envision] the Company in a few years, almost probably no debt, significantly lower share count, to the extent where you might be in a position where you have the luxury of saying -- hey, do we continue to buy back shares, or is it time to put the cash into a whole other strategic alternative? I don't know if it is fair to ask that question at this point, but I will.

Conrad, it's Mark. I think you're really driving home some key points here because there has been a dramatic conversion of this model into this the $50 million approximate free cash flow type of model. We have been fortunate to move accordingly in that fashion. I look at that use of cash -- you talked about the debt reduction, which is very important, and we talked about that new pricing, the grid, as far as getting under 2-to-1 in leverage, so that is still in front of us for 2014. The share buyback piece -- we've received very strong, positive feedback from our stakeholders, as far as that program; and again, that is only a couple years old at this point.

Then, I look at the quarter and look at some of the other uses of cash that John mentioned in his comments up front -- one of those, obviously, was the buy back, or the purchase of this franchised unit and we talked about some of the metrics there; the use of cash, as far as franchisee loan pools, to again drive growth -- the example we gave was the Flying J growth opportunity and setting up the loan pool for that; and then, the other piece was the coffee program, which I think is a great expansion of the existing brand inside our existing stores, and we've committed loans to our franchisees for that, interest-free loans, that, again, we are able to leverage our credit-card program and collect against those loans with virtually no losses at all.

I look at that and say there's a number of ways that we have been utilizing cash now that, if you just step back a couple years, that wasn't even on the radar screen for Denny's. I know that we haven't answered your question specifically long term, but it sort of describes the flexibility we have today, in our balance sheet, in our cash use to, obviously, reward our stakeholders quarterly, but also reinvest in the business, both on the franchisor and the franchisee side.

That's fair enough. Okay. Last question, getting more down on the operation standpoint -- back of the house, from a kitchen-equipment standpoint. Going forward, do you feel like you might need to add some equipment to get some more compelling, say LTOs -- really, what the question is stemming to -- I think I was talking to Whit at one point, and I keep on forgetting that you really don't have true ovens, right? And, even in the back of the house, it's more like Turbo Chefs, and so might there be an opportunity to put baked goods in there? Or, would you even want to do that, or get in that realm?

I think those are great questions. We have, essentially, grills and fryers, and we have -- anything you can do on that, we do a pretty good job of, and it does create some limitations to where the menu could go. So, we are experimenting all the time with ways in which we can continue to broaden the menu and where there is a payback on different types of line-efficiency opportunities, consolidation-to-prep opportunities, higher-producing-menu-item opportunities, and then baked goods, certainly, is one of those.

In our downtown, Fremont Street, Vegas unit, we put in a series of new pieces of equipment there, including Turbo Chefs, just to test that range. We have a number of new items in test there from steak, lasagna, baked goods, baked items -- they're selling really well. So, those are interesting questions, and how they might play out over time is just way too early to tell; but obviously, you'd expect us to be involved in testing those ideas.

Sure. Okay, fair enough. Thank you.

There are no further questions at this time. I'd like to turn the conference back over to Whit Kincaid for any additional or closing remarks.

Thank you, Kevin. I'd like to thank everyone for joining us on our call today. We look forward to our next earnings conference call to discuss our first-quarter 2013 results in late April. Thank you, and have a great evening.

This does conclude today's conference. We thank you for your participation.