Denny's Corp (DENN) 2013 Q3 法說會逐字稿

Good day, and welcome to the Denny's third quarter 2013 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Whit Kincaid, Senior Director of Investor Relations. Please go ahead, sir.

Thank you, Vicki. Good afternoon, and thank you for joining us for Denny's third quarter 2013 investor conference call. This call is being broadcast simultaneously over the Internet. With me today from management are John Miller, Denny's President and Chief Executive Officer; and Mark Wolfinger, Denny's Executive Vice President, Chief Administrative Officer, and Chief Financial Officer.

John will begin today's call with his introductory comments. After that, Mark will provide a financial review of our third-quarter results. I will conclude the call with commentary on Denny's updated full-year guidance for 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 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 26, 2012, 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. In the third quarter, we did generated domestic systemwide same-store sales of positive 1.2% driven by positive same-store sales at both Company and franchised restaurants. We have achieved positive systemwide same-store sales in 9 of the past 10 quarters, and expect to achieve our third consecutive year of positive systemwide same-store sales. Denny's performance in the face of the ongoing challenging consumer economic environment is a testament to our focus on delivering both everyday value and new product offerings supported by improvements in hospitality and in our facilities.

We see evidence that we are moving in the right direction with our positive sales performance relative to key industry benchmarks like [MBT] family and the [Navtrack] casual. In addition, we continue to see better performance in key geographies for Denny's like California, Texas, and Arizona where we have over 670 restaurants. Most importantly, our franchise-focused business provides financial stability and flexibility while enabling us to generate significant free cash flow that can be used to further strengthen our brand and increase long-term shareholder value. We continue to evolve our strategies to better meet the needs of our guests and our franchisees.

This week, we have the Denny's annual franchise convention hosted by the Denny's Franchisee Association. We are pleased to say that our partnership with our franchisees is as strong as ever. Together, we are eager to continue to move the brand forward with our entire leadership team focused on executing against our three key objectives to increase shareholder returns, by revitalizing and growing the Denny's brand.

Our first key objective is to revitalize Denny's through menu service and facilities initiatives designed to fully leverage our competitively distinct America's diner brand positioning. We continue to balance our compelling limited-time-only offerings with our highly competitive and effective $2 $4 $6 $8 Value Menu which gives us a tiered pricing strategy with very attractive starting price points for full-service dining. The $2 $4 $6 $8 Value Menu currently features new products like our Baha Quesadilla Burger and Mini Banana Split which helped increase the incidence rate to 20%, about 1 percentage point higher than second quarter and about 3 percentage points higher than the third quarter of last year.

With the mix at the high end of our target range our value platform is providing full-service customers a place to treat themselves. We will continue to look for ways to further leverage the menu's high brand awareness which helps drive traffic into our restaurants while balancing the desire to manage check. In addition to the national media messaging supporting everyday value, we ran a coordinated local promotion with a national coupon program in time for the back-to-school period to drive additional traffic. For the higher end of our tiered pricing strategy, we featured three different limited-time-only promotions this quarter giving us a steady stream of new product news along with continued improvements to our core menu.

Our most popular core menu additions have been the Prime Rib Cobb Salad and Sirloin Steak which are premium entrées also featured as part of our limited-time-only menu. The fact that they are mixing above expectations confirms that our customers crave quality, value, and new product. After completion of our successful Red, White and Blue plate specials, limited-time-only menu in July, we brought back our build-your-own pancake promotional menu for the month of August, which provided our guests with a value-oriented margin friendly offering for the important back-to-school period.

Prior to the Labor Day holiday weekend, we launched the build-your-own omelette menu which was last offered in the fall of 2010. The menu offers both the option to build a basic omelette for $5.99 and more premium custom, or signature, build starting at $7.99. And on November 5, we will launch our final marketing module of the year as we once again partner with Warner Bros. as the exclusive restaurant brand for The Hobbit. The Desolation of Smaug. This is the eagerly anticipated sequel to last year's blockbuster and will hit the theaters on December 13.

We recently kicked off the excitement with a greatest fan contest to win a red carpet trip to see the world premiere screening. Our limited-time-menu will feature several new additions along with existing favorites from last year's menu like the Hobbit Hole Breakfast and the Shire Sausage Skillet. The combination of cravable new products for all day parts and exclusive only at Denny's content will help further differentiate Denny's in this ultra-competitive environment. In addition to our menu enhancements, we are updating our look to reflect a more contemporary diner field to further reinforce our America's diner positioning.

Of the 115 remodels completed through the first three quarters, 26 utilize our new Heritage scheme which has a significantly updated look and feel with new flooring, wall and accent colors, booth and tabletop colors and some signature touches. We are very encouraged by the positive consumer reviews and the same-store sales increases primarily in traffic which have been consistent with our historical mid-single-digit range of gains even in these more challenging times.

We have worked closely with our franchisees to finalize the elements and we will be introducing our new remodel program to our franchisees this week at the Denny's annual franchise convention. Although Denny's has opened around 300 new restaurants since the end of 2008, around two-thirds of our domestic restaurants utilize an older scheme. As a result, we believe executing a full remodel cycle will be an important part of the Denny's brand revitalization. We also believe that executing continued improvements in our menu, service and facilities will enable us to revitalize the Denny's brand with the goal of generating further improvements and systemwide same-store guest traffic and sales.

Our second key objective is to increase the growth of the Denny's brand both domestically and internationally through traditional and non-traditional venues. Franchisees opened nine new restaurants in the third quarter including one non-traditional location and three international locations. Our most recent non-traditional all-nighter location was opened on the campus of Wright State University in Dayton, Ohio in partnership with the Compass Group. We are very pleased that Denny's entered into two new countries during the quarter with our first opening in El Salvador and Chile. The restaurant in San Salvador was opened by our franchisee based in Honduras who opened their first Denny's in Honduras in November of 2009.

Our first restaurant in South America is located in the Las Condes section of Santiago, Chile. Our local partner, the Musiet Group, has a development agreement to open 10 locations there over the next 15 years. This is a great milestone for the brand as it makes Denny's the first American family dining chain to expand its footprint into Chile and South America. Denny's now has 100 restaurants outside of the US and has the largest number of international American family dining chain locations. We think family dining can do well in most parts of the world, especially Asia, Central and South America and the Middle East.

Our efforts are focused on finding the right well-capitalized franchisees to build our international pipeline and increase our international footprint. Our third key objective is to grow profitability and free cash flow through our franchise-focused business, balancing capital allocation between reinvesting in the growth of the brand, returning cash to shareholders, and reducing outstanding debt. Given that we have a meaningful base of Company restaurants, we will look to reinvest in our restaurants and are on track to complete at least 20 full remodels this year.

And with our attractive free cash flow, we are also reviewing the opportunity to accelerate remodels at the Company restaurants. In addition, we will continue to opportunistically look at acquiring franchise restaurants we can generate attractive returns. In the third quarter, we acquired a location in the Columbus, Ohio market. We have generated around $35 million of free cash flow and through the first three quarters after capital spending and acquisitions. So far this year, we have repurchased around 3.8 million shares.

As we move forward, we will continue to work closely with our franchisees to increase restaurant level performance and new restaurant growth while also balancing our capital allocation between reinvestments in the brand and returning value to shareholders via our share repurchase program.

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 third-quarter results were highlighted by increasing domestic systemwide same-store sales by 1.2%, opening three international restaurants, growing adjusted net income per share by 5% and generating $11.6 million of free cash flow. Denny's opened nine new franchised restaurants and closed 13 franchised restaurants in the quarter. In addition, we acquired one franchise restaurant located in the Columbus, Ohio market and sold two Company restaurants located in Hawaii to a franchisee during the quarter.

As a result, we ended the quarter with 164 Company restaurants and 1,522 franchise restaurants bringing the total restaurant count to 1,686. Denny's total operating revenue, including Company restaurant sales and franchise and license revenue, decreased $3.7 million to $117.3 million. The decrease was primarily driven by a decrease in Company restaurant sales in the quarter resulting from our franchise growth initiative refranchising program completed in 2012. Same-store sales of domestic franchise restaurants increased 1.3%. The increase was primarily driven by an increase in same-store guest check average, partially offset by a decrease in same-store guest traffic.

Denny's franchise and license revenue decreased by $500,000 to $33.9 million in the third quarter. The decrease in franchise and license revenue was primarily driven by a $600,000 decrease in occupancy revenue and a $300,000 decrease in initial fees. These decreases were primarily offset by a $400,000 increase in royalties which were favorably impacted by nine additional equivalent franchise restaurants. Franchise operating margin of $22.3 million was flat to the prior-year quarter with a $200,000 increase in royalty and licensing margin offset by a $200,000 decrease in occupancy margin. Franchise operating margin as a percentage of franchise and license revenue increased 0.9 percentage points to 65.8% compared with the prior-year quarter due to both the increase in royalty and licensing margin and the decrease in occupancy margin, which has a lower percent margin compared to the royalty and licensing margin.

Sales at Company restaurants decreased $3.2 million to $83.4 million, primarily due to 12 fewer equivalent Company restaurants, which reflects the impact of our refranchising strategy that was completed at the end of 2012. Same-store sales at Company restaurants increased 0.7% compared with the prior-year quarter. The increase was primarily driven by an increase in same-store check average which was partially offset by a decrease in same-store guest traffic. The third quarter Company restaurant operating margin of 12.3% represents a 2.4-percentage-point decrease compared with the prior-year quarter which was driven by the following factors.

Product costs increased 1.3 percentage points due to higher commodity costs and the unfavorable impact of product mix in the quarter. Payroll and benefit costs increased 0.8 percentage points primarily driven by higher benefit costs. The increase included $200,000, or 0.3 percentage points, of unfavorable workers compensation claims development compared to the prior-year quarter. The current quarter included $1.5 million of unfavorable workers compensation claims development and the prior-year quarter included a similar $1.3 million adjustment. Although occupancy expense was flat compared to the prior-year quarter, it included a $400,000 unfavorable general liability accrual adjustment.

The 0.3-percentage-point increase in other operating costs was primarily driven by an investment in California enterprise zone hiring tax credits. Total general and administrative expenses for the third quarter decreased $1 million from the prior-year quarter, primarily due to a $600,000 decrease in incentive compensation and a $300,000 decrease in professional fees. For the third quarter, adjusted EBITDA decreased $500,000 to $19.2 million, primarily driven by a $2.5 million decrease in Company restaurant operating margin. Adjusted EBITDA as a percentage of total operating revenue was 16.3% which was flat to the prior-year quarter as the decrease in Company margin was primarily offset by lower G&A expense in the quarter.

Depreciation and amortization expense declined by $100,000 compared with the prior-year quarter primarily resulting from the sale of Company restaurants from last year. Interest expense for the third quarter decreased by $600,000 to $2.5 million, resulting from a $21.2 million reduction in total debt over the last 12 months and lower interest rates under our refinanced credit facility. In the third quarter, our provision for income taxes was $4.3 million reflecting a 38.0% effective income tax rate. Due to the use of net operating losses and income tax credit carry-forwards we have only paid $1.8 million in cash taxes through the first three quarters of this year.

At the end of the third quarter, the deferred tax asset on our balance sheet was $55.8 million. 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. Cash capital expenditures of $4.9 million increased [$1.3] million compared to the prior quarter. The increase was primarily driven by the remodeling activity at our Company restaurants, as we completed seven remodels during the quarter. In addition, we acquired one franchise restaurant in the quarter for approximately $800,000.

Free cash flow was $11.6 million in the third quarter and decreased $1.3 million compared to the prior-year primarily due to the higher cash capital expenditures. We repurchased 1.8 million shares in the quarter for $10.2 million as part of our ongoing share repurchase program. Since November 2010, we have used approximately $69 million to repurchase 15.3 million shares. As of September 25, we had a total of 9.7 million shares authorized and remaining in our ongoing repurchase program.

We ended the third quarter with $175.3 million in total debt including $97 million outstanding on our revolving credit facility, $58.5 million outstanding on the $60 million term loan, and $19.8 million of capital lease obligations. Total debt to adjusted EBITDA ratios was 2.3 times at the end of the quarter. As John noted, we will opportunistically use cash to purchase franchise restaurants that enhance our Company restaurant portfolio. That wraps up my review of our third quarter results. I will now turn the call over to Whit who will comment on our updated annual guidance for 2013. Whit?

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 year-to-date results and management's expectations at this time. We continue to expect full-year domestic systemwide same-store sales to perform between flat and positive 1%, with domestic franchise same-store sales between flat and positive 1%, and Company same-store sales between negative 1% and flat.

We expect new restaurant openings to be at the lower end of our initial guidance range of 40 to 45 franchised restaurants. We currently expect to achieve net restaurant growth between zero and five restaurants as we anticipate that 35 to 40 restaurants will close this year. We expect that commodity cost inflation will end up around 2.5% this year, in line with our guidance range of 2% to 3%. We are currently locked into approximately 90% of our needs for the year. Based on our current thinking, we anticipate that the increase in commodity costs for 2014 will be less than the 2.5% increase we anticipate seeing this year.

We are currently locked into around 10% of our needs for next year and are in the process of making further commitments for 2014. We expect our franchise percent margin to be towards the upper end of our initial guidance range of 65% to 66%. We expect our Company percent margin to be less than our initial guidance range of 14% to 15%, primarily due to the $1.5 million unfavorable impact from workers compensation claims development through the first three quarters of this year.

Our updated annual guidance for total G&A expense, including share-based compensation, is between $57 million and $59 million, primarily driven by lower payroll and benefits costs including lower performance-based compensation accruals, and lower professional fees. We continue to anticipate that adjusted EBITDA will trend towards the lower end of our initial guidance range of $76 million to $80 million which includes the impact from unfavorable workers compensation claims development through the first three quarters of this year.

Our annual guidance for free cash flow remains between $43 million and $46 million. Please refer to the historical reconciliation of free cash flow to net income in today's press release. 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.

Thank you.

(Operator Instructions)

Michael Gallo with CL King.

Hi, good afternoon.

Hi, Mike.

I just want to drill in a little bit on the Company margins, a little bit of a tough quarter on the margins. Commodities, obviously, have not been a huge factor this year, so I was wondering if we could drill down a little bit as to what the driver there was. I know you mentioned $2 $4 $6 $8 was up a few points. There was some couponing, obviously, and, I guess, the same-store sales on the Company side at 0.06% wasn't enough to really leverage the operating costs, but I think it was down 240, 250 basis points year-over-year.

So I was wondering if we could just sort of talk about the factors there, and then going forward whether we should look to see some adjustments on either pricing or product food costs, et cetera, or, I guess, where the most pressure was? Thank you.

Hi, Mike. It's John. Talk about product costs first for just a second. The product costs are up about 100 basis points from last year, as you know. We've gone from about 25% to 26.1% in this quarter of one point -- I think we are up 1.3% quarter-over-quarter, about 1.1% year-to-date, if memory serves me right. And about 2.5% commodity increases is where we are through three quarters. So as you know, we also took price, we carried a little price in the year, we took price in January, small in July, about 1.5%. So it's not covering everything. So we think in this more challenging economic environment growing full service transactions is a little bit tougher. We are reluctant to price all the way around at this point. So it does give us a little bit of a higher overall cost of sales in that 26% range, higher than our historical.

Also we saw in this quarter our $2 $4 $6 $8 jumped up 3.17% to 3.20% quarter-over-quarter and then jumped up 19 to 20 last quarter to this quarter, year-over-year three points. So we've improved, we've steadfastly improved the quality of these products to improve our taste and quality scores and to improve our guest satisfaction scores, which we think long term drives stronger overall transactions. So the key overall for us, we believe, is primarily coming from growing the top line, has been our priority, but, obviously, we are very focused on those kinds of promotions that are margin friendly. So when we start talking about 2014 and I know you didn't ask a question there, but I think what you see is our focus now on the balance of check and margin and, obviously, continue to grow the top line. But certainly this quarter was little more challenging than it's been.

Just a follow-up there, if I heard you right we should expect a little more focus on being balanced as opposed to, I guess, more traffic driven and not enough to cover price, is that right?

That's right. We're very proud of how the guests have responded to some of these initiatives. In my comments, I talked about the Mini Banana Split and the Baja Quesadilla Burger, so these things were, you could say they were very successful, and in some ways you could argue they were too successful. But they played a role in our brand continuing to be one of the higher performing full-service brands out there, but at the same time, trying to get to balance in all these things is what we have to focus on now. Then there's also a little commentary on the workers comp, obviously, and how it affected the quarter.

And that, as you mentioned, Mike, is a $1.5 million impact of the quarter, and, again, sort of going back a little bit in time, we went through, obviously, a real aggressive refranchising process as we down-sized the number of Company restaurants we had. And we actually saw a significant favorable impact going back in time -- if you went back between 2008 and 2010 time frame the whole workers compensation change for us was favorable probably $7 million to $8 million in that time frame, so a significant positive impact.

But in the most recent few years, I would say the last two or three years, we've seen some loss rates increase primarily in California where we operate a big chunk of our Company restaurants and actually the adjustment that occurred, this $1.5 million adjustment occurred in the current quarter, most of that, virtually all of it was pre-2013. It's a little bit of a history moving through, but we do have some claims activity that we will need to take a real hard focus on primarily in the State of California. So we recognize that is an opportunity for us.

Thank you.

Will Slabaugh, Stephens Inc.

I want to ask you about the remodels, if you could talk a little bit more about what that entails? I just wanted to revisit the lift you were speaking to earlier. Was that a mid-single-digit traffic or total sales that you referred to? I wasn't sure if I heard that correctly.

Hey, Will, this is John. We were talking about sales, but we did mention that it has been primarily sales driven by traffic, so both are correct. You see consumers responding, lunch, dinner, really all day parts, when a stare has been refreshed. So we are pleased to say that this mid-single-digit in light of what we're seeing out of other brands, in light of the current economic environment, is good news, that we continue to see a positive consumer response to these remodel efforts. And the debut of these new elements are just taking some modern treatments to our space. We have what we call our Heritage program, we are debuting at our franchise conference this year. We have had consumers tell us they like it, they were involved in helping us design it along with a franchise council and now we are going to share that with the balance of our system.

Sorry, go ahead.

We also have the potential to accelerate the Company, that we are studying that. That was in my comments, as well. We will do 20 this year and our franchisees, I believe, will do 125 to 135 this year.

Got you.

And of those, of that total, a small portion of those are the modernized scheme.

And if you were to decide to accelerate that process, can you talk about what that time frame might look like? At least as far as the Company units you would be able to control yourself, and if there were any franchisees, as far as what that attraction would look like to them as far as maybe stepping it up and doing that more quickly than we may have thought?

On the franchise side, we are just now sharing the idea with a broader audience, so I think it's too early to comment there, but clearly on the Company side as we prepare for next year we are taking all things into consideration.

Okay. And one more follow-up there, can you talk about the opportunity you mentioned of potentially purchasing franchised stores for purposes of remodeling them, or other, and just maybe how big that opportunity might be? And if that would be something that you would see as an ongoing process or maybe a slug of stores next year or the next? Or how you would envision that happening?

Hi, Will, it's Mark, how are you?

Doing well, thank you.

I will take that question and maybe go back a little bit the remodel question on the Company side. I think what I would try to wrap together in all of this is just the flexibility and the cash flow generation that this model produces and what we can do with that cash flow. So to John's point, as we go through this remodel activity, if we choose to do it we can bring forward and accelerate remodels on the Company side, it was part of your question earlier, and certainly would be open and flexible to do that. I think also on the flexibility of how we use cash, clearly, we have continued to repurchase shares and went through the authorization. We are sort of in our final 10 million share authorization that I mentioned in my comments. So that's another opportunity.

And to your other question here, the opportunity to repurchase or acquire franchise locations. We have the right of first refusal on all franchised or franchise transactions and we have done that selectively, I will say, over the last 12 months. We did one last year and a couple of this year, bought some real estate, as well. I think to your question, we see that as an opportunistic use of our cash, to repurchase franchise locations. Those locations would have to fit into our G&A span, our field G&A from a Company standpoint. And if you look at the ones that we repurchased sort of over the last 12 months, one was in Southern California, one was in South Florida and one was in Ohio, and that's where we also have a Company base. So I don't really want to speak to the size and scale of that, but we do think that it fits the right parameters. We will continue to utilize part of our cash in that manner, as well. I think what you're hearing from me is all the different avenues we can go down because of the flexibility of our model and what we can do with our cash.

Thanks, guys.

Michael Halen, Sidoti & Company.

Good afternoon. Can you please break down the Company stores between guest count, check and mix?

Yes, Mike, this is Whit. Same-store traffic at Company was a negative 0.4%, so, yes, check would have been up 1.1% for the quarter.

Okay. In terms of the remodels, how much will it cost on average?

Our remodels -- this is John -- remodels running $150,000 to $250,000. I would say a fairly consistent range for about a seven- or eight-year period now, fairly consistent.

Okay. Thank you. And how many days will the units be closed on average for the remodel?

About one week, on average.

Okay. And can you give us any more color into how some your bigger geographies did in terms of Texas, Florida, California?

Sure, California traffic's positive, and in a follow-up to Whit's answer to your question about the breakdown between check and transactions, bear in mind, the Company had a fairly substantial sequential improvement over Q2, so we are pleased by all means with momentum.

Okay, great. And I guess the last one in terms of the momentum, can you give us the monthly cadence of the comps?

Mike, we don't generally -- tend to share kind of the detailed comps, but performance has been relatively consistent for us, and the big geographies like California, I think we would also add Arizona and Nevada, certainly the South/Southwest have been relatively consistent throughout most of the year, and certainly this last quarter was the same.

Great. Thanks very much.

Thank you.

Tony Brenner, ROTH Capital Partners.

Thank you very much. A couple of questions. I wonder if you could isolate the effect of the 3% change in the Value Menu mix on product costs in the quarter year-over-year? If, for example, those had remained at 17% instead of 20% of the mix, would there have been any increase in product costs?

Tony, this is John. That's a very good question. What we have had there, typically when you drive that up historically it's been margin neutral or margin friendly the way that menu is designed. But we have taken some trouble to refresh that menu, this Baja Quesadilla Burger is one call out. And so driving the mix up then you also see that it's impact on labor because it drives check down. So overall margin, we would say requires some study on balancing once you get at the higher end of the range. We like it in that 15% to 18% range, and then the trades, of course, to the higher quality items, the rollout sirloin steak, a Prime Rib Cobb Salad, some of those things, again, we are delighted to see the customer interest but they have a margin impact.

Arguably it drives traffic a little bit, as well. Makes it even more complicated. Could you quantify what, I think, 10 stores that were remodeled through the third quarter for the nine months, what kind of a sales bounce you're getting in those?

When you look at the whole brand performance, we are delighted to see the whole brand continue on the average of all remodels to be in that mid-single-digit range. Our brand continues to perform in a very consistent pattern. We are, as we've been saying for a few quarters now, we are into the full remodel cycle and we have -- we are pleased to see the consumer responding in a very positive way. We think, obviously, through the course of time, with fuller employment and more consumer confidence, this continues to lay the foundation for a revitalized brand and ultimately leading to consecutive quarters of positive sales and traffic growth.

Lastly, do you have an estimate for the number of Company stores that might be remodeled in 2014?

A little too early to guide. I think we are happy to share today is the consumer likes this new scheme. We have 20 Company remodels this year and we now have the opportunity to study, stepping up a few more than -- that would be ahead of the normal pace and we will guide more thoroughly on that very soon.

Thank you.

Mark Smith, Feltl and Company.

First, Whit, can you just repeat the breakdown in your comp guidance between Company and franchised?

Yes. So to the franchised guidance, the annual guidance would be the same as the domestic system, they are just flat to plus 1%. Company negative 1% to flat. That's an annual number and year-to-date Company a negative 0.4% and system would be positive 0.5% through the first three quarters.

And then can you guys talk about the price increase that you took in July, how well that was received, and your ability to take price going forward?

We did take a price increase in July and we think that early next year with commodities, we think, will be a favorable year, better than this year. We think it will be under 2.5%. We think there are some wage pressures, particularly in California with the $10 minimum wage which will go into effect from its current $8 to $9 this coming July. So we think we will take a little in January and then see what we need to do. We will re-evaluate the effects of the Affordable Care Act and so forth. So it leaves room, a little in January, and then we are leaving the door open for the following July, particularly in California.

We think we do have room and permission from the consumer at some modest level as long as we are not aggressive. And then based on Q3 sequential improvement over Q2 and year-to-date, I think that answer the question about our pricing strategy what happened in July.

Let me get an update on day part mix and where you guys stand, any delta that we have seen there? And also in product mix between breakfast and dinner, if you guys are seeing any change as you go through and continue to have some menu evolution?

It is surprisingly consistent. Breakfast and late night initiatives are rampant throughout the industry. One would think that, that would affect brands like Denny's, but we have been surprisingly consistent, while we have been working very hard the last few years to exploit the diner positioning more fully, meaning that we have credibility for lunch and dinner items rather than just breakfast all day. As those grow, our breakfast also grows and stays consistent. So we think that through the due course of time we have the opportunity to give more reasons for more people come to Denny's more often, frankly, but we expect we always to have at breakfast, lunch, dinner and late-night a good portion of our sales coming from the breakfast category. And that's been fairly consistent, it moves around by 2 to 3 basis points and that's about it.

Last question, just want look at use of cash, and as we look out the next year or two, where you guys stand on your thought process on buybacks, dividend, repurchasing, buying some franchisees, any menu change in your thinking?

Hi, Mark, it's Mark Wolfinger. There really, I would say there is no change in our thinking as much -- as in my earlier comments on the question previously, I think it's the flexibility of our thinking. Up until just the last 12 months, we really had not taken some of that cash and repurchased franchise restaurants. Didn't see the opportunity to do that and the right kind of criteria to do that and we have [to utilize] some of the cash in that manner. We utilized some of our cash to buy real estate which is, again, something new for us in the last 12 to 18. I think back on your question we, obviously, have tremendous flexibility under our current bank agreement for use of cash either to repurchase shares or to pay dividends.

We continue to be active and consistent in the market on share repurchases. In the third quarter itself we were extremely active, I think it was 1.8 million shares and we were $10 million in the third quarter alone. We've gotten, certainly received great feedback from many of our top shareholders on the share repurchase plan. I think it might be more articulation that we might say in our year end mid-February 2014 call, but at this point in time, I think you will sort of hear that consistent theme. And to John's earlier comments, we might take some of that cash and if the opportunity presents itself we might accelerate some of the Company remodels.

I don't think there's any different message there as much as a balance between all of those opportunities. I think the other piece for us that perhaps we didn't fully realize is as we went through this debt reduction process and the change in the model is that when the franchiser's' balance sheet and cash flow metrics have improved as dramatically as we've seen our own improvement, that feeds through the entire system and the perception of the brand by third party lenders -- our ability to go in and do loan pools and [backstop] loans and do the kinds of things that are really very beneficial and positive to grow entire brand.

So that's another piece of our cash use, or balance sheet use that, again, we've gotten great feedback on. So we're certainly not hesitating to say that share repurchases are very, very important to us and will continue to be, but there's also, obviously, other uses of our cash which we have demonstrated over the last 12 or 18 months.

Great. +Thank you.

Thanks, Mark.

Nick Setyan, Wedbush Securities.

Hello, gentlemen. Thanks for taking the question. I think I heard pricing was about 1.5% in the quarter, is that a level that's appropriate to think about going forward, or could we see it a little bit higher than that given the labor pressure that we expect, particularly from the California minimum wage hikes?

I think the ongoing balance of the full-service environment right now of moving -- keeping an eye and ear on all parts of the model, the guest dynamic transaction, keep an eye on transactions, Keep an eye on check, and, obviously, keep an eye on margin. Between every quarter I would say we intentionally review the mix and the drivers of all three, and so the pricing is certainly one consideration. This coming January, of course, we expect to review it again. That's when we print new menus, in January. We expect around 1% pricing then on top of the pricing we've taken year-to-date.

Okay. Does that imply an acceleration, if it is another 1% or is there some drop off that, that's going to cover?

No. We would be lapping some pricing that we took last January of about 0.6%, I believe. And then, of course, we took pricing in July that does carry into next year. I would keep us --

Got it, got it. Okay. And then just some of the costs that you guys can't control in terms of G&A and the franchise costs, are there any other opportunities where we can maybe see a G&A run rate that's a little bit lower than $58 million next year and maybe franchise costs that are -- a continued improvement in the margin there on the franchise side?

In general, we've taken a lot of costs out of our business model and so I think the discussion of growing Company margins primarily will come from top line growth and, obviously, growth in units and additional leverage.

And the last question. (multiple speakers) On the topic of dividend.

(multiple speakers)

Go ahead. Sorry, I interrupted you.

You were going to ask a question about dividend, please?

Yes, so on the dividend, when you guys think about it, what are some of the pros and the cons that you guys think of that come into the consideration when you discuss that subject. We haven't seen a dividend so far and sort of what are, I guess, the advantages of not going with the dividend, I suppose?

I think part of it is flexibility, Nick, I think certainly flexibility and valuation, again, I look at it and look at the share buyback program that we have had in place for about three years now, and I think it certainly been beneficial and we've got strong from investors along those lines. And that, again, gives us flexibility to move the grid around and our buyback program around depending upon the volatility that is in the equity markets. I think on the dividend side, we, clearly, are aware that's another opportunity or flexible point use of our cash. It certainly is a situation, I think, from a dividend standpoint that once you put that dividend in place, obviously, that changes your flexible approach to things.

And at the same time, we look at it that, again, the share buyback has been successful for us, but also reinvesting in the brand and things like the repurchase of franchise stores, purchase of real estate, investing in the Company base, our Company remodel platform that John mentioned, that, that's also a great use of cash. We know that dividends continue to be on the radar screen and clearly that is a topic that is discussed by a lot of other brands out there, not just in the restaurant sector. But at this point, our use of cash is primarily focused on share buyback, but also investing in other aspects of our brand.

Thank you.

Conrad Lyon, B. Riley & Company.

Good afternoon, everybody. Question about units. It's been a couple years since franchise closures have out paced those that opened. The question is that more of a blip or is there something more to that, or kind of the second part of the question is should we still expect net unit openings to be positive going forward in the next several years?

This is Mark. I think, Conrad, what we said in our comments was that the range, I think, for openings this year is 40 to 45, towards the lower end of that range. The closing number of sort of that net unit opening number is sort of, I will say, low, the midpoint is sort of low-single-digits. On the closure side, we've gone back and looked at probably the last five or six years and that closure rate, as far as number of units closed, has sort of ranged in that low 30 type of number for our franchise system. It has moved a little bit but part of that could be timing on leases.

We did have some non-traditional closings this past quarter. So I don't think there is a specific factor that has moved it in any specific direction, but clearly we are focused on net unit growth, to your point, your comment. In general, the stores that are closing, obviously, tend to be lower volume stores, so the ones that we are opening are better volume stores, so there's a positive movement there, as well. But I think in a brand that is 60 years old -- this is our 60th anniversary -- a closure rate that is sort of in that 1.5% to 2% of total units is not uncommon, I think, when you look at the underlying lease structure, trade areas and things along those lines.

Okay, so nothing really different?

Nothing different.

Okay. (multiple speakers)

Go ahead.

Okay, no, I'm good with the units. The second question regarding the margin dynamic this quarter, was it similar for franchisees, as well? With the mix that is.

Yes. I would say that franchisees will be experiencing a similar result through their P&L.

My next question is, does the suggestion box fill up abnormally more or is it kind of the status quo, so to speak?

No. That's a great question. I think franchise relationships and to be a model franchiser, which is clearly our desire to do so, we have to have the best interest of our franchise community at heart. And we think that having 10% of the base owned by Company and feeling the benefit of our initiatives, as well as the difficult economic times is part of maintaining a good guided set of initiatives in collaboration with our franchise community.

So our franchisees work alongside with us on designing modules -- how much to put on the gas for transaction growth. Ultimately, if you maintain share, or grow share, or stock decline in share, any of the above, ultimately, you can turn that customer into a profitable customer. So the balance of transactions versus flow-through is something that we keep top of the mind in all conversations. And as I mentioned earlier, the focus now throughout the balance of this year, from back-to-school period now into next year, obviously, is to have a good discussion about the balance of those initiatives.

I was going to say that in answer to your first question about units, of course, we do expect to grow net units and gross units, and we do have this complication of closings but, obviously, we do expect as a management team to continue to grow on what we've been able to accomplish so far.

Got you. Okay. Thank you very much.

Thanks, Conrad.

Amit Kapoor, Gabelli & Company.

Hi, thanks for taking my question. So just to go back to the remodel of Company-owned stores, can you guys talk about the length of the cycle, the overall cycle, should we think about 20 a year for 160-odd stores? So a seven- or eight-year cycle. Is that a good way to think about the remodel cadence?

Yes. If you stand back far enough you can basically divide everything by seven. But during the recession, we had a program we put in place that give a little time off to create a franchise-friendly approach to remodels, and we created a lighter scope. We had a significant number of stores, around 300 that signed up for that, and then they were part of that program created a little bit of a different remodel cycle for that group of restaurants, a one-time difference.

So you can't divide the whole system by seven or the Company base by seven. The company took advantage of the program we offered our franchisees. And so we had -- we sort of cut up our whole system at that point. Now, based on this continued good performance of the overall remodel program that our franchisees have been executing at a little bit faster pace than the Company, you see they start to outpace the Company in overall sales results, and the Company is starting to close the gap now that we've got some remodels underway for the first in a few years. So, again, if you step back far enough you could sort of divide it by seven, but up close it's a little bit different per year. About 70% of the system, 2014 through 2018, is due a remodel and 2016 and 2017 are the bigger years of that. That will give you some idea how that -- and that's mostly because of those 300 stores completed during that system.

Right, to John's point, that change in the approach on remodel put five years onto the remodel cycle from the point in time they did that lighter refresh or remodel, and most of those were done 2011, 2012 time frame. And the Company side did it in late 2010. So if you add five years to that you get to that life cycle that John described. Sorry.

Thank you. What was the average spend on the refresh in 2011 and 2012, or 2010 and 2011?

The light refresh?

Yes.

I'll call it sort of $50,000 to $60,000 range.

Thank you. And just on a different subject, what kind of run rate on share repurchases can you execute? The 1.8 million was a fairly respectable number for the quarter, but are there logistical issues or windows that would keep you from buying this number every quarter, or how do you think about the run rate for the remaining 10 million shares?

Sure. This is Mark. We did, you're right, the third quarter we repurchased 1.8 million shares at $10.2 million. Year--to-date I think we're at about $21.6 million, around $22 million of shares that have been repurchased. Actually, that number is pretty close to, as I recall, what we repurchased all of last year. I think the last couple of years annually we bought back around $22 million of our stock, and that's only coincidental, so don't tie those numbers together. One is an annual number, one is the first three quarters. We have a limitation of a sort of total use of cash and share buyback and dividend, I want to say it's around $44 million to $45 million under our bank agreement.

You asked about limitations, obviously, one limitation is to make sure that we are timing our use of cash with share repurchases, and our ability to generate cash depending upon the seasonality of our business. But our view is that, again, we've repurchased over 15 million shares of stock since we started in 2010. I certainly would look at our movement in share price the last 18 to 24 months and one of the drivers has been our repurchase plan. We continue to believe in that repurchase plan and continue to look at our underlying valuation and look at other comparables and say, certainly, there's certainly still an opportunity there but we are going to be, obviously, analytical and selective as to how we repurchase shares, but ultimately we believe it's a strong use of our cash.

But I don't want to shy away from or eliminate from our earlier comments that it's also very good use of cash to invest in this brand, invest in our business, and clearly that's the Company remodel program that John mentioned. It's the repurchasing of franchise stores, and it is certainly allocating a certain portion of our balance sheet to help our brand grow, to help our franchisees grow in such things as loan pools, or direct loans that, again, three or four years ago at Denny's that was not even contemplated as a possibility with the lack of flexibility we had in our debt structure and our balance sheet. Today we can do that and we will continue to do that. We certainly are very satisfied with where we are today and what we continue to be able to do with our cash generation.

Great. Thank you.

It appears there are no further questions at this time. Mr. Whit Kincaid, I'd like to turn the conference back to you for any additional or closing remarks.

Thank you, Vicki. I'd like to thank everyone for joining us on today's call. We look forward to our next earnings call in February of next year to discuss our fourth-quarter results and detailed annual guidance for 2014. Thank you. Have a great evening.

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