Denny's Corp (DENN) 2016 Q3 法說會逐字稿

Good day and welcome to the Denny's Corporation third quarter 2016 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Curt Nichols, Senior Director of Investor Relations. Please go ahead, sir.

(Operator Instructions)

Thank you, Tom. Good afternoon everyone and thank you for joining us for Denny's third quarter 2016 earnings conference call. 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. Please refer to our website at investor.dennys.com to find our third quarter earnings press release, along with any reconciliation of non-GAAP financial measures mentioned on the call.

This call is being webcast and an archive of the webcast will be available on our website later today. John will begin today's call with his introductory comments. Mark will then provide a recap of our third quarter results along with brief commentary on our annual guidance for 2016. After that, we will open it up for questions.

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 notes 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 30, 2015, 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 Chief Executive Officer.

Thank you, Curt, and good afternoon everybody. Let me start by providing a sense of the energy and enthusiasm generated last week at the annual Denny's Franchisee Association Convention.

The growth and progress of this brand is resonating as we had our largest convention turnout ever. I've never had so many franchisees express their support for the returns on the quality investments we're making to continually improve our food, our service, and our atmosphere. We are thrilled to be working with such a talented and passionate group of franchisees, vendors and employees.

In addition to the excitement from the convention, this collective team and our Company's efforts to effectively execute against our strategic initiatives resulted once again in a positive same-store sales during the third quarter.

Furthermore, in the third quarter, our revenue growth coupled with our disciplined focus on costs drove significant improvement in both Company and franchise operating margins, and led to approximately 6% growth in adjusted EBITDA and approximately 15% growth in adjusted net income per share.

This consistent performance reflects the ongoing momentum generated by the brand revitalization initiatives launched in 2011. Our vision remains to become the world's largest, most admired, and beloved family of local restaurants serving classic American comfort food at a good price around the clock.

We believe our ongoing brand revitalization provides a significant tailwind with less than 50% of our system currently reflecting our successful heritage-remodeling program. We remain committed to executing against four key strategic areas to drive our future success.

The first is to deliver a differentiated and relevant brand achieving consistent same-store sales growth supported by profitable gains in guest traffic. Delivering system same-store sales growth in 13 of the last 14 quarters demonstrates the success of current strategies as does our consistent strong performance against other full-service and family dining benchmarks.

We will continue to optimize our menus to match our guest needs by responding to their desire for better quality and more craveable products. The latest example of our ongoing investment in product quality improvements was the launch of our new pancakes during the quarter. As a reminder, we completely revamped and improved our pancake recipe by adding fresh buttermilk, real egg, and a hint of vanilla to produce a fluffier, tastier, better buttermilk pancake. The consumer response has been very positive as 35% of our guests purchased the new pancakes compared to 29% of our guests who were purchasing pancakes before we made the change.

Our latest limited-time only menu maintains focus on our improved buttermilk pancakes by featuring seasonal flavors including the Pumpkin Cream Pancake Breakfast, the Sticky Bun Pancake Breakfast, and the Salted Caramel and Banana Cream Pancake Breakfast.

In October, we launched our latest core menu which includes the new Super Blackberry Pancakes, a Honey Jalapeno Bacon Sriracha Burger, and a Chili Cheese Burger. Since 2014, we have replaced or improved nearly half of our core menu items.

Our continued focus on food innovation and product quality enhancements will be supported by strong brand engagement initiatives in improving guest experience and enhanced atmosphere. To that point, our heritage-remodel program continues to perform well. We completed an additional 62 remodels in the third quarter including six Company units bringing the heritage image to approximately 49% of the system.

We are also on track to complete over 200 remodels in 2016 ending the year with over 50% of the system on the heritage image. Remodels will continue to be a significant tailwind for the brand over the next few years as we expect approximately 75% of the system to have a new image by the end of 2018.

Our second key strategic area is to consistently operate great restaurants with a primary goal of achieving satisfaction scores in the upper quartile of full-service brands. Our focus on field training and coaching initiatives is critical to delivering our mission, and to be a model franchise owner, which includes assessment and coaching to running great restaurants.

Our Pride review program covers all aspects of the guest experience as well as a review of each restaurant facility. Each store receives a Pride score based on the execution of brand standards as well as coaching on specific areas of focus. We have completed nearly 4,800 Pride reviews and are observing continued steady improvement in the performance scores.

Additionally, our guest satisfaction surveys continue to trend positively and maintain all-time highs since we began measuring overall guest satisfaction in 2011. While we are encouraged by this progress, we recognize the need to continue to invest in strategies to further elevate the Dennys experience.

Our new pancakes launch make the first major initiative supported by our newly structured and systematic launch process which included unprecedented levels of training, ongoing monitoring, and coaching efforts. While generally pleased with the pancake launch, we learned from this exercise and are continually refining our training strategies and execution. We believe our investments in training, talent, and systems to support our strategies will drive long-term sales growth.

Our third key strategic area is to grow the global franchise expanding Dennys geographic reach of domestic and international locations. Coming out of the annual Dennys Franchisee Association Convention, we believe we can build upon our development pipeline as we look to both expand our global reach and continue to develop in many domestic markets that we believe are ripe for growth.

While it will take some time, the inertia and proof of concept is resonating. During the quarter, we opened an additional 13 restaurants including three international locations resulting in 38 gross openings for the year. For the moderate number of closings, we are very encouraged by net unit growth of 18 restaurants here today.

This year we have grown our international portfolio by a net 10 restaurants, or over 9%, for the opening of two restaurants in Mexico and one in the United Arab Emirates during the third quarter. Additionally, in October, we announced the opening of our first restaurant in the Philippines.

With a pipeline of approximately 90 new international restaurants, we look forward to gaining further momentum outside of North America. Our strong performance continues to drive interest in the brand attracting new franchisees, building the real estate pipeline, and adding new development commitment.

Our fourth key strategic area is to drive profitable growth for all stakeholders with a goal to grow margins and profits. The continued expansion of our highly franchised business will drive consistent profit growth by providing a lower-risk profile with upside from operating a meaningful base of high-volume Company restaurants.

Our third quarter results continue to demonstrate our ability to leverage revenue growth and a disciplined focus on costs to increase margins and grow key profitability metrics. During the quarter, we generated $24.9 million of adjusted EBITDA, and $3.7 million of free cash flow after interest, taxes, and capital expenditures.

We completed the acquisition of four high-volume units from a Southern California franchisee we had previously announced and added two more units during the quarter. Mark will provide more details on these transactions in few moments.

For the year, we have acquired a total of 9 restaurants which has been partially offset by six re-franchised restaurants. We remain confident in our strategy to own and operate a base of Company restaurants representing approximately 10% of the system.

Our strong free cash flow generation creates significant flexibility to support brand investments including these opportunistic and accretive acquisitions of high-volume franchise restaurants. We expect to generate between $50 million and $52 million of free cash flow this year and remain dedicated to returning cash to our shareholders.

From 2010 through the third quarter of this year, we generated over $290 million in free cash flow of which over $230 million, or 80%, has been invested in share repurchases. We currently have approximately $118 million authorized for ongoing share repurchases.

In closing, we remain focused on our brand transformation and building a sustainable foundation to grow around the world. By consistently growing same-store sales and expanding our global reach, we will continue to grow the Dennys brand while returning cash to shareholders through our ongoing Share Repurchase program.

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

Thank you, John, and good afternoon everyone. Our third quarter highlights include growing domestic system-wide same-store sales by 1%, adjusted EBITDA by 5.9% to $24.9 million, and adjusted net income per share by 15% to $0.13 a share, while generating $3.7 million in free cash flow.

During the quarter, franchisees opened 13 restaurants including 10 domestic locations and three international locations. In addition, we acquired six franchise restaurants. Our system restaurant count increased by eight to 1,728 restaurants as five franchise restaurants were closed during the third quarter.

Dennys total operating revenue, which includes Company restaurant sales and franchise and licensee revenue, increased by 3.7% to $128.4 million due to higher Company restaurant sales and franchise royalties.

Franchise and licensing revenue grew 2.2% to $35.3 million due to a 1% increase in same-store sales, a greater number of franchise restaurants, and a higher average royalty rate compared to the prior-year quarter, which was partially offset by lower occupancy revenue. Franchise operating margin of 70.9% improved by 180 basis points due to higher royalties and improved occupancy margin.

Moving to our Company restaurants, sales grew by 4.3% to $93.1 million due to an increase in the number of Company restaurants over the last 12 months and a 1% increase in same-store sales.

Company restaurant operating margin of 17.2% improved by 130 basis points compared to the prior-year quarter. This was driven by higher sales, lower incentive compensation, lower product costs, and lower occupancy expenses.

Total general and administrative expenses of $17.6 million increased by $1.6 million compared to the prior-year quarter. Lower incentive and stock-based compensation expenses were offset by a $1.2 million market valuation change and our non-qualified deferred compensation plant liabilities. A corresponding gain on plant assets is reflected in other non-operating income and as a result, these valuation changes have no impact on net income.

Adjusted EBITDA increased by $1.4 million, or 5.9%, to $24.9 million. Depreciation and amortization expense was $200, 000 higher, at $5.6 million, primarily due to capital expenditures associated with Company remodels, and new and acquired Company restaurants. Interest expense increased by $800,000 to $3.1 million due to a higher revolver balance, and a greater number of capital leases, compared to the prior-year quarter.

The provision for income taxes was $5.3 million reflecting an effective income tax rate of 35.2% due to the use of net operating loss and tax credit carryforwards. The Company paid approximately $200,000 in cash taxes during the quarter.

Adjusted net income per share grew 15% to $0.13 per share.

Free cash flow after capital expenditures, cash taxes, and cash interest was $3.7 million, compared to $12.4 million, in the prior-year quarter due primarily to higher capital expenditures. As a reminder, prior-year third quarter capital expenditures included $700,000 for acquisitions of franchise restaurants while the current year quarter included $8.5 million for acquisitions of franchise restaurants.

Cash capital expenditures of $18.1 million included the remodel of six Company restaurants, facilities maintenance, and the acquisition of six franchise restaurants. For the year, we invested $12.4 million to acquire nine total restaurants with average unit volume annual sales of approximately $2.3 million each which is slightly higher than the overall Company portfolio average.

Transactions such as these are consistent with our strategy of selectively acquiring high-volume franchise units that fit well with our Company-operated field infrastructure and are accretive to earnings per share at a 4 1/2 to 5 1/2 times multiple.

During the quarter, we allocated $11.9 million towards share repurchases excluding the previously announced $50 million accelerated Share Repurchase Agreement. At the end of the third quarter, basic shares outstanding total 74 million shares, compared to 81.9 million at the end of the prior-year quarter, for a total reduction of 7.9 million shares.

Since beginning our Share Repurchase Program in late 2010, we have repurchased over 33 million shares and reduced our share count by approximately 30%. We ended the quarter at approximately $118 million in remaining share repurchase authorization.

Our quarter in leverage ratio was 2.4 times. At the end of the quarter, we had $228.5 million of total debt outstanding including $203 million under our revolving credit facility.

So now let me take a few minutes to expand on the business outlook section of our earnings release which excludes the impact from our pension plan liquidation. Based on our current expectations for the remainder of the year, we are raising certain annual guidance parameters as follows.

We now expect total operating revenue of $506 million to $509 million, including franchise and licensing revenue of $139 million to $140 million. Due in part to an unprecedented commodity deflation unique to the current year, we are raising our Company restaurant margin expectation to between 17.5% and 18%. Likewise, we are increasing our franchise operating margin estimate to between 69.5% and 70% primarily due to higher royalty revenue.

We are raising our guidance range for general and administrative expenses at this time to between $66 million and $68 million due to higher deferred compensation, and payroll and benefits expense estimates. The midpoint of this revise range for 2016 approximates the total general and administrative expenses recorded in the previous year, 2015.

Adjusted EBITDA is now estimated to be between $97 million and $99 million, while free cash flow is anticipated to be between $50 million to $52 million after cash capital expenses of $33 million to $35 million. We are increasing our range for cash capital expenditures by approximately $4 million primarily due to include the acquisition of two additional franchise restaurants.

We will continue to allocate capital towards investments in our brand and Company restaurants while also returning capital to our shareholders through our ongoing Share Repurchase Program.

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

Thank you, sir. (Operator Instructions) Michael Gallo; CL King.

Hi, good afternoon. My question, John, the bigger-picture question on the remodels; you're at 49% right now. I think somewhere around this level is usually where you start to get the brand-halo effects of having a substantial portion of the system reimaged. Obviously the impact has been greater at lunch and dinner as you certainly improved the atmosphere towards that.

I was wondering now, as you start to launch and change dinner items, whether you see a stronger or bigger response rate than maybe you would have in the past, if you're at that point where you start to see that brand image where people start to say hey, Dennys is a good place to go for dinner, and you have you some more legitimacy at being able to really drive product innovation in those day parts? Thanks.

Thanks, Mike. I think it's a great question, and I think it's consistent with how we feel about this, but it is only a feeling. The evidence is really fairly consistent from the beginning of the Remodel Program watching those that lap over and go into second year, and all those that are in markets where they're getting their first round.

It's been consistent. Really, the ugliest stores get the strongest response, and they all hover around the average by the time they get to a year, and the second year, they continue to build momentum. So it's good news no matter how you look at it, but we do believe there has to be a value where you reach a tipping point where the lapsed user or the, I haven't been since college crowd, finally goes maybe we ought to give this another try. So, we think it's a tailwind no matter how you describe it.

Clearly the equities in family dining and the equities in Dennys are around vacation, weekend, that's where our heaviest day parts are; that's consistent among our peers to a large degree. There are some exceptions to that.

So there's both marketplace evidence of stronger dinner day part uses of our category, Mike, and then there's evidence in our brand that we're still really largely the weekends and on vacation. But we do get the night's lift and really strong guest commentary around the dinner day part post-remodel.

So the ability to build on that with initiatives that appeal specifically to those day parts, we think is in the cards for the future. We don't want to get ahead of our skis here in how we talk about those initiatives too early, but until you get past the 50% mark, it would have been too early to launch some of them.

As you know, we changed our tag lines, and we've been talking about America's Diner for about five years. A number of the investments we made in burger categories, sandwiches, now Spinner entrees, diner items has stepped up through time. We've addressed a good portion of the menu. But we're still largely chasing the transactions in and around where we traditionally seen the strongest use of our category.

A long answer aside, we think it's a tailwind to have momentum in those areas, but it's still a bit early.

Okay, great. Then just a follow-up question for Mark; Mark, the CapEx number, is that a net CapEx given the - what do you expect for the proceeds from re-franchising, or I know you acquisition numbers in there, but do you have re-franchising proceeds in there as well? Thanks.

Yes, it's the gross number, Mike. So just a little bit further explanation on that; obviously we increased the guidance range. We talked about that from the standpoint of the acquisitions. I mentioned a number that's sort of in that $12.5 million range on the acquisitions, and then we're estimating, probably this year, with 25 remodels. It will probably be about $6 million spent on remodels.

So when you back those out and obviously back out -- we've also mentioned the fact we did a scrape-and-rebuild down in South Florida, so I think as we mentioned before, we look at this as growth capital. So when you look at that $33 million to $35 million, obviously, probably more than half of that is really on the growth capital side this year.

Okay. Thank you.

Alton Stump; Longbow Research.

Thank you, and good afternoon everyone. Great job on the quarter. I noticed that (inaudible) in the third quarter rush, you're up ever so slightly from Q2 sequentially and there are certainly a lot of casual dining names that have reported a pretty sharp deceleration. I just think about what are the biggest one or two drivers of (inaudible) performance to miss the tough, overall casual space. Is it new products, is it heritage, all the above, or is there anything else that maybe you didn't mention so far in your comments that might be driving that?

Yes, Alton, I think those are great questions, and obviously, we stare at this all the time. Where is their momentum and why, and then what initiatives can we implement that hit the sweet spot of where the consumer expects us to take our brand?

I think there are some tailwinds that favor us. First of all, the geography; we certainly are -- for the four states, represent about half of our system, and they are in the south. We have little to no weather challenges there, and generally the economy has recovered a little quicker than the national averages. We have a full quarter of our system in California which has had a fairly strong economy.

Defiant employment numbers are still over 6% unemployment; nevertheless, the economy is really strong. So it's an in interesting set of pieces of detail there that's unusual to see unemployment this high, yet disposable income growing faster than employment recovery. I guess, those that are participating are going out to spend money.

But we've done really there with 400 restaurants there in California. So I think geography favors is a little bit of a -- put that in the plus column for Dennys.

I think when it comes to initiatives, the building in an everyday-value equity in our brand; you don't have to shop price. You know there's a deal at Dennys all the time or cut a coupon. Our $2 $4 $6 $8 Value Menu has played a role for some 15% of our transactions, and that's been as high at 22% transactions over the coming out of the recession over a couple of years ago.

You know that starting late in 2014, we engineered that down a little to create a little less dependency on that end of the menu. We've been able to sustain that through this year, maybe with some traffic consequence to pushing that down so far so fast. But the fact that that last 5% in the door that might be a little more price- or affordability-conscience for that last occasion of the month, it may favor us in strategic efforts over time to build those equities.

I think also in terms of managing a marketing calendar when you have that flexibility inside each marketing quarter, the ability to push that lever. We plan some of these things a year in advance on the marketing calendar and so many decisions get made a long time ago. It's hard to work in real-time based on how consumers are acting around Olympics or changes in marketing calendars from elections, or sensitivities in value wars being played out by QSR.

Those kind of things affect all of us in the full-service space, but the ability to uphold those levers very fluently and conveniently with the $2 $4 $6 $8 equity out there is maybe been a benefit for us. It's hard to really know for sure. Now those are less valuable in super-prosperous times.

So at the risk of giving way too long an answer here, I'd say one more thing is that we do have -- we're nicely in that $9 to $10 per person range that certainly also may favor our category. Fast casual is that $9 to $10 range, so is family dining, so that may also put a little bit more of a buoyancy to our positioning than other positioned brands.

That's great, John. Thank you.

We also like to think we've done a pretty good job executing, but anyway I apologize for the long answer.

Yes, of course. No, that's (inaudible), a lot of color. I don't - I just want to follow up with the six acquired franchise stores. I think it's the biggest number in the quarter in my recent memory, I think you might have bought four a couple quarters back, but is that a sign that you guys may be more than just a little bit opportunistic when it comes to buying back stores, or is it just a matter of as six pop up, it made sense for you guys to do? I wouldn't read into that being any sort of an ongoing rate.

Well, I think, on this, Mark, we, if you recall, in our previous quarter, we talked about a six-store transaction that we had lined up out west, and as it turned out, some of those stores, just from a timing standpoint, ended up closing in the third quarter, obviously very close to the second quarter, but closed early third quarter.

And so I was going back and looking at the restaurants we've acquired this year, and four of those were in California, two in Arizona, one in Florida; so you can see the geography, how it fits into our Company base. And we had a couple up north that actually fit into Company markets as well.

But I think to answer your question, we obviously have the right of first refusal anytime a franchisee has contracted to sell our store to another franchisee or stores from another franchisee, but at the same time, we also get many cases approached directly by a franchisee that might want to go ahead and monetize their investment in the brand.

So, it's not really a predictable process, as much as we want to make sure that strategically it fits into our geography where we have a Company base; we have infrastructure already. I mentioned the averaging in volume of these stores we've acquired as actually above our current Company average. They're averaging about $2.3 million. Those are the acquisition stores.

And we're very disciplined as far as the multiple. I mentioned that 4 1/2 to 5 1/2 range, but call it around a 5 multiple, and we are quite disciplined at sticking in that range as far as the way we run our numbers.

Hopefully, I've answered your question. We, again, believe this is a long-term strategic opportunity for us. I'll go back to John's comment though. We really like this 90:10 model, so 90% franchise, 10% Company-operated base that we have, and there's always a little bit of give and take there. We talked about some of the re-franchises we've done too, but we liked the blend of this portfolio. It seems to be working pretty well for us right now.

Great. Thanks, Mark.

Will Slabaugh; Stephens Inc.

Yes, thanks, guys. I would like to go back to your first comment on the pancake quality change. Can you remind us what you did with the pricing of your pancakes as you improved the quality? And then on the back of that, what the customer response from that improved quality tells you in terms of the opportunity around the rest of your menu to continue adding quality, adding transparency on the ingredient side?

Well, those are great questions, Will. The first are, it was just pennies, so I don't think you could -- it was really nominal. It was just enough to break even with some of the ingredient changes.

I'm not sure it would be all that detectable given that overall menu prices over the last couple of years have been in that 2 1/2 range for two years in a row from higher meat prices or Avian flu, and obviously, we're in a deflationary environment now, but it would have been small compared to the overall other menu adjustments.

Yes, I think that the customer of today, and we assign this to millennials, but I think it's all customers that come of age, we want food that our body knows what to do with. We want real food. So anytime you have a dehydrated or derivative of, we're moving to make it real; buttermilk and eggs versus egg parts or dehydrated milk fat, and those are just better products. They're fluffier; they taste better, they're maybe a little more complicated once you get through the training for the cook, but once you get it down, everybody's got a lot more pride in serving those products.

I think we went to 100% real food claim. There's a number of things we've done to the menu; fresh vegetables versus frozen; fresh avocados versus frozen that we had a few years ago. So quarter-by-quarter, menu-print by menu-print, we've been making these steadfast improvements.

Now we do think there's a limit where the customer says affordability matters to me too, on a relative basis at the grocery store to look attractive, and restaurants can lose some share, at least for a season, until lifestyles and salaries readjust. So we think it's important to keep that balance that Dennys is not trying to become the Four Seasons.

We're an everyday affordable place and pretentious; come as you are. We understand what consumers expect from family dining, so pricing and value is really important. But modest bumps in price to have real food, I think consumers really appreciate.

Great. Thank you.

Tony Brenner, ROTH Capital Partners.

Thank you. With a 1% same-store sales increase, it seems likely that customer traffic was down about 1.5%. Is that correct?

That's right, Tony. So the whole system, it was negative traffic for the quarter. The Company stores were down 0.4% and franchisees, just a little bit more than 1% negative. Again, the Company stores have a bigger percent remodel, and then so, over time, that will reverse itself.

That was on the quarter, and then on the year-to-date, a similar story. So the full year, you're looking at about 2.5%-ish to 2.6% pricing; you're looking at about flat mix change. You know what our sales guidance range is and the difference is traffic.

So it is a little bit of a correction on our value menu which has a little bit of a traffic consequence for the year, but I think we're pleased with sticking with the strategy of being a little less value menu dependent at the moment knowing we can always push that if we need it.

It would seem that, at least in California, where the minimum wage goes up again, or does it? It doesn't go up this year, right, in January? It skips a year.

It stays the same.

Okay.

It goes up in 2017 again by $0.50, Tony.

Okay. Then, presumably, you'll be raising prices again to offset that and, at the same time, inducing, through marketing customers, to focus on the value menu, $2 $4 $6 $8, to a greater extent. I'm just wondering, putting all those components together, what the effect on margins would be as your costs come up, you try to offset that as best you can through pricing, and at the same time, you're inducing consumers to trade down a bit in the mix?

Yet, it's been interesting. California's been positive in traffic. I think we had a negative-traffic quarter for the first time in a while in Q2, and it went right back to positive traffic in California in Q3. So it's been a real positive story for us in spite of the fact we've had more aggressive pricing out there.

It's sort of the cat gets the mouse and the mouse gets away. The price goes up and we chase it with a little bit of price increase, and then we get back ahead of it and then it goes up again, and we chase it. You can't get it all in one price increase up there.

Margins will compress on the labor line, but food costs have been real favorable. When you marry it all together, our California stores are doing quite well, and there will be a $0.50 impact again in January; the following January will be $1.00 a year, until it hits $15.00, and then it will be pegged to inflation, I think, after that. California won't be the only state. You'll see other states follow, I presume, and there will be some states that address tip credit in a different way than its addressed today.

So I think what's interesting about this is it all happens to everybody at once. And in California, if you were to say we would automatically, because of higher costs, push people toward the value menu, that may not be necessarily so. It could be that people are benefiting from making $1.00 more an hour, and you take a price increase in the menu, but the disposable income is rising, and people are spending it eating out instead of brown bagging it.

So it could be that on a relative basis, we actually have a more favorable menu pricing there even though it's going up faster than in other states, compared to some competitors. You just have to read it in real-time.

I think the important part of the question though, especially if you're looking ahead or trying to model, is that for the 59 Company restaurants that operate there, it is on a year-to-date basis about a 200 basis points headwind to the Company P&L on the labor line offset by, call it 1.5%-ish in food cost benefit from commodity deflation. It doesn't take a ton of price increasing at a 2% price increase, and you're still ahead with margins expanding and the consumer has been willing to take that 2% to 2.5% price increase out there.

There is wage inflation. There's lodging deflation. And overall, we still have expanding margins, both year-to-date and guided for the full year.

Thanks. Both Christmas and New Year's fall on a Sunday. I guess New Year's falls into the first quarter for you this year, but will that be a headwind?

Yes, there is a fourth quarter slight holiday adjustment, slight negative holiday adjustment, even though it will still be our easiest comparison quarter for the year and because of the day Christmas falls on. We actually calculated that. Give me a second, and I'll give you precisely what that is. I might have to come back to you in a minute on that.

Okay.

Mark Smith; Feltl and Company.

Hi, guys. First, can you guys give us inside into how the comps trended sequentially during the quarter?

Yes. July was toughest. We had a little bit of a holiday flip there with the way July 4th weekend fell, so it started out tough and then it improved all the way to the end of the 3rd period of the quarter, progressively improved.

And then just really a big-picture question, how do you feel about the consumer, and what are you guys seeing from the consumer right now? Do you feel like maybe you get a bump as we get through some of the election noise? Or do you feel like the consumers (inaudible)? Any insight you can give would be great.

Well, I think, overall, employment is improving and real disposable income is improving; nonfarm and payroll is usually fairly well correlated to dining out, especially full-service.

So I'd say that, on paper, it looks like we should find the bottom and start to have an improving environment. Customer (inaudible) also plays a pretty big role in full-service dining and, particularly, in the casual segment, and so it would be hard not to associate some of the challenges this year with sort of the nasty politics that will be over soon.

I think, yet, there's a couple other things that make this year tough by comparison. We talked about the value wars that were launched by all-day breakfast; Q4 McDonalds roll out. This spurred some sandwich pricing wars that spilled over and carried over the year. I think that played a role in dining out, having some tougher comparisons.

And then I think midyear -- Also, housing starts improvement with 2027 projected to be at about 1.3 million housing starts, the best in the last 10 years. That's good news. It puts people back to work and they usually eat out.

So I'd say, overall, the environment looks pretty positive on paper, but again, midyear, last year, 2015, you had big sort of like skyrocket car sales and then that settled down a little, then you have the housing starts and durable goods jumps up quite a bit. And then midyear this year, not big bucks, but online shopping had 20% plus increases June and July; the best in like 20 years. I think some of that money came out of dining out. My sense of it is, as all that settles down, we get back to a pretty good environment.

The other thing that's going on, I think, is the Texas/Florida dance. So many national chains have big footprints in both Texas and Florida, and those have been a little bit diminished; when Texas is down, and Florida, tourism goes down. Texas has been softer for us. We're about, I think, its 190 basis points behind. The system number, that was down, I think, 0.9 in the quarter in Texas. Improving, it's still soft.

So I think that would be true for many of our competitors as well. My sense of it is all those things continue to find their bottom and recover, if they haven't found the bottom sometime soon.

And then, any hurricane impact to call out?

We're so nationally well-distributed. We had, I think, yes, 112 stores close, but for many of those, less than 24 hours. We wouldn't call any attention to it as being a material factor in the quarter.

I do have Tony's answer. It looks November benefits by way of holiday shift by about 0.3, and December down 1.2, but again the guidance is the best number to follow. It should be a good quarter predicted.

Nick Setyan; Wedbush Securities.

Hey, guys. This is Colin Radke on for Nick. My question was just on the unit development and specifically the franchise development domestically. John, you kind of touched on it at the beginning of your prepared remarks in terms of optimism amongst the franchise community. At the same time, I think you also mentioned some inertia, but you also took the unit development guidance up for this year today. So I was just wondering if you could talk about where franchisees stand, what their appetite is for unit development, and if we could start to see a pickup from here next year and going forward?

Well, first I'd say, my hats off and congratulations, and commendations go to our franchise community that's developing in the full-service environment. They're bullish on our brand, and we're proud of them; we're proud of that.

We had been one of the top growers in the full-service segment for a number of years in a row, but we've been missing the number we had hoped to achieve. So this is hard turf to get to this 50-unit gross numbers a year and we haven't quite gotten there. But it is at the high end of our guidance finally, in the 45 to 50, so that's a proud moment and milestone for us.

That's really what's behind the comment. It's momentum, working very hard for the day that we can say that and put it in the guidance numbers. It is at the high end of our guidance range, but nevertheless, conceivable. And then the net numbers are also solid this year compared to the last several years.

So that's momentum for us, but momentum or not, it's still among those stronger growing full-service brands.

Okay. Is that the development rate that we should expect going forward, nothing that's changed significantly there?

That's right, yes. Though we don't guide long-term, one of the things we consistently said is that our goal is to get to that 50 gross number. Obviously, I don't want to get into 2017 guidance, but the fact that we could get there this year, you'd expect that there would be some consistency with that goal.

Okay. Then, where are we running in terms of pricing following the October menu update? What's that look like for Q4 and into 2017?

For year-to-date, we're at about 2-1 Company, 2-6 franchise pricing, Q3; that's Q3 over Q3. The full year should look pretty similar to that number, and I'm checking if I need to revise that, I'll get back to you in a moment, but I think that's pretty dead on.

Okay. Then, just the last one for me, I know you don't want to get too specific in terms of 2017, but any kind of initial outlook in terms of big commodity outlook? Are you expecting another year of deflation, or any kind of general color there?

It's Mark. On the commodity side, it's been an interesting year certainly; especially the second half of this year. For 2016, we're talking about a deflation number for the entire year somewhere between 4% and 5%. We're locked into about 70%, and when I say locked in, that's pretty much maxed out as to what we can lock into. And again, that deflation number is even bigger in the second half. So in the first half, I think we talked about it in Q1 and Q2, how much backend-loaded deflation was going to occur, and if you recall, last year we had the egg crisis or egg problem last year, and that really hit us in the second half of 2015.

In 2015, I think overall, our inflation number was in that 2% range; call it low 2% type of range, for commodity inflation. We really haven't talked about 2017 as of yet, and I really don't want to go there as of yet because you'll hear more from us, obviously, on that when we do our new guidance in mid-February. So I'll just leave 2017 out there without a comment at this point in time.

All right. Thank you very much.

Mr. Nichols, there appears to be no more questions in the queue at this time.

Thank you, Tom. I'd like to thank each one of you for joining us on today's call. We look forward to our next earnings conference call in February to discuss our fourth quarter of 2016 results.

Thank you, all, and have a great evening.

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation.