Denny's Corporation
Q1 2008 Earnings Call Transcript

Published: 30 Apr 2008

[Operator:]

Ladies and gentlemen welcome to Denny’s first quarter 2008 earnings release conference call. (Operator Instructions) I would now like to turn the conference call over to Mr. Alex Lewis, Vice President and Treasurer for Denny’s Corporation. Mr. Lewis you may begin the conference.

[Alex Lewis:]

Good afternoon and thank you for joining us for Denny’s first quarter 2008 investor conference call. This call is being broadcast simultaneously over the internet. With me today from management are Nelson Marchioli, Denny’s President and Chief Executive Officer and Mark Wolfinger, Denny’s Executive Vice President, Chief Financial Officer and Chief Administrative Officer. Mark will begin today’s call with the financial review of our first quarter results. After that Nelson will provide his overview of our business and our strategic initiatives. After our prepared remarks, management will be available to answer 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 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 in this call. Such statements are subject to risk, 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 risk and factors are set forth in the company’s Annual Report on Form 10-K for the year ended December 26, 2007 and any subsequent quarterly reports on Form 10-Q. With that I’ll now turn the call over Mark Wolfinger, Denny’s EVP, CFO and CAO.

[Mark Wolfinger:]

Thank you Alex and good afternoon. I will start my comments with a quick review of our first quarter sales performance. System wide same-store sales decreased 0.4% in the first quarter comprised of a 0.7% increase at company restaurants and a 0.9% decrease at franchise restaurants. Looking at the details for company sales performance a 4.7% decline in guest counts was offset by a 5.7% increase in average guest check. Approximately 60% of the growth in guest check was attributable to pricing actions taken over the past year to offset minimum wage hikes and commodity cost pressures. The remaining 40% of the growth in guest check was attributable to favorable menu mix including a lower incident rate on our $5.99 promotional items compared with the prior year period. Looking at revenues for the first quarter the impact of our franchise growth initiative or FGI is quite apparent. Sales at Denny’s company-owned restaurants decreased $46.2 million or 21% in the first quarter due to 128 fewer equivalent company restaurants compared with the same period last year. The decline in company units resulted primarily from the sales of company restaurants to franchisees under FGI. Since the beginning of 2007 we have sold 151 company restaurants or more than 28% of the company base at that time. As a result we have increased the mix of franchise restaurants in the Denny’s system from 66% to 76% in just over a year. As the successful execution of FGI is ongoing the sequential decline in company units, company restaurant sales and company restaurant operating income is expected to continue while franchise revenue is expected to increase. Turning now to the quarterly operating margin table in our press release our company restaurant operating margin in the first quarter was 10.7%, a decline of 0.6 percentage points compared with the prior year period. Our primary costs, product and payroll had been under pressure for more than a year from record commodity inflation and minimum wage hikes. However the most significant in our first quarter P&L was a 0.8 percentage point improvement in our food cost margin. In addition to price increases taken to cover commodity pressures, we reengineered our promotional items to produce a lower plate cost while still providing a compelling offering for our customers. The food costs in our first quarter promotion this year, The Complete Breakfast Trio, was approximately one-third less than the food costs on the Mega Breakfast we promoted in the first quarter of last year. Our current promotion, Build Your Own Grand Slam, which will run through the second quarter, provides and even greater food cost margin while leveraging a powerful consumer awareness enjoyed by our Grand Slam Breakfast. Payroll and benefits costs for the first quarter increased 0.5 percentage points to 4.5% of sales due primarily to investment in management staffing in an effort to improve our customer service and operational execution and ultimately recapture guest traffic. Moving down to P&L occupancy and utilities combined were basically flat as a percentage of sales compared with the prior year period. Repairs and maintenance expenses increased 0.4 percentage points to 2.2% of sales in the first quarter due primarily to the timing of expenditures as we expect repairs and maintenance expenses to average 2% of sales for the full year. Other operating costs increased 1.6 percentage points in the first quarter due primarily to a $650,000 benefit in the prior year period from an insurance recovery. On the franchise side of our business we are experiencing an offsetting positive impact from the FGI program as equivalent franchise restaurants increased by 136 units in the first quarter compared to the prior year. This contributed to a $5.5 million or 26% increase in franchise revenue. This growth was comprised of a $2.7 million increase in franchise rental income, a $2 million increase in franchise royalties and a $700,000 increase in franchise fees. Franchise operating margin improved by $3.8 million as higher revenue offsetting $1.7 million increase in franchise costs primarily related to rental expense on properties subleased to franchisees. General and administrative expenses decreased $300,000 from the prior year period due primarily to the $600,000 in share-based compensation. Next depreciation and amortization decreased by $2.6 million from the prior year quarter due primarily to the sale of restaurant operations and real estate assets over the past year. Operating gains, losses and other charges on a net basis grew $7 million over the prior year period due primarily to a $7.4 million increase in asset sale gains this quarter compared with the prior year period. I want to take a pause here to comment on the notice in our press release regarding the review of our accounting methodology with regard to the write-off of goodwill in conjunction with the sale of restaurants under FGI. We were unable to complete this review in time to include the final financials in today’s press release. As any changes that may result from this review are non-cash and will have no impact on our earnings guidance measure of adjusted income before taxes, we decided not to delay the release and this call. We will complete our review prior to filing our 10-Q next Monday and any necessary changes to this quarter’s financials will be reflected in that filing. As detailed in today’s release the magnitude of any goodwill write-off and the impact on asset sales gains is expected to be minimal. Now back to the results as reported today. The increase in asset sale gains contributed to a $7.5 million increase in operating income in the first quarter. Excluding these gains and other charges operating income increased by $500,000 despite a $40.8 million decrease in total revenue. Although operating income interest expense declined by $2.1 million or 19% to $9.2 million in the first quarter as a result of a $94.4 million reduction in debt from the prior year period. Other non-operating expense increased by $5.6 million in the first quarter as a result of our discontinuance of hedge accounting treatment related to $150 million interest rate swap. With the change in accounting treatment we now run changes in the swap valuation through our income statement on this other non-operating expense line rather than through comprehensive income or loss on the balance sheet. As interest rates fell substantially in the first quarter the value of the swap declined as well resulting in a significant change in valuation reflected on our P&L. Going forward we will continue to reflect changes in the swap valuation on this line of our P&L, though the fluctuations are expected to be less substantial particularly as we reduce the swap by $50 million at the end of the quarter. We reported net income in the first quarter of $5 million or $0.05 per diluted common share, an increase of $3.8 million compared with the prior year period. Because of the significant impact to our P&L from non-operating, non-recurring or non-cash items, we give our earnings guidance based on our internal profitability measure adjusted income before taxes. We believe this measure best reflects the ongoing earnings of our business. Our adjusted income in the first quarter was $2.0 million or $2.1 million increase over the prior year period. We were able to generate income growth despite the difficult sales and margin environment for the restaurant industry which we believe is evidence of the progress we have made on our strategic initiatives, in particular the success of FGI, as well as our debt reduction efforts. To summarize our P&L for the first quarter, the sale of company restaurants to franchisees resulted in a $46.2 million decline in company restaurant sales and a $6.2 million decrease in company restaurant income. We more than offset this lost company restaurant income through the combination of a $3.8 million increase in franchise income, a $2.6 million decrease in depreciation and amortization expenses and a $2.1 million decrease in interest expense. We expect our P&L will continue to reflect these income and expense shifts as we transition to a more franchise-driven business model. Turning to activity in the Denny’s restaurant portfolio, the system increased by a net of four units in the first quarter as 10 new restaurants opened while six were closed. We continue to be pleased with the resurgence of growth at Denny’s led by the new restaurant development efforts of our franchisees. Over the last two quarters the Denny’s [frame] has opened 23 new restaurants and [modes] for any comparable period over the last seven years. Moving on to capital expenditures our cash capital spending for the first quarter was approximately $7 million, up $2.3 million versus the prior year. Most of this increase is due to the timing of expenditures as last year’s capital spend was heavily weighted towards the back half of the year. We expect this year’s spending to be more balanced throughout the year. Turning to our balance sheet in the first quarter we generated net proceeds of $14.4 million from the sale of 21 company restaurant operations. As the bulk of these transactions closed on the last day of the quarter, approximately $12.7 million of the net proceeds were not received until after the quarter closed and are therefore shown as a receivable on our balance sheet. Accordingly we were unable to apply any proceeds to debt reduction in the first quarter but did make a $2.1 million in our credit facility term loan subsequent to quarter-end. We may make additional mandatory and voluntary debt payments in the second quarter based on additional asset sales proceeds and operating cash flow. That wraps up my review of our first quarter results. Before I end my remarks I think it is important to note that while the operating environment may be impacting our guest traffic performance we continue to make progress on our strategic initiatives to drive system growth and optimize our business model. One of our internal objectives was to attract prominent new franchisees to the Denny’s system. In the first quarter we sold 16 restaurants to a new franchisee in Northern California. He is the largest franchisee of Jack-on-the-Box and their operator of the year. Last year we had the largest franchisee of Carl’s Jr. to our franchise base as well as several other strong new operators. In total we have sold 151 company restaurants and have signed development agreements with our franchisees to build 135 new restaurants. These development agreements have already contributed 12 new restaurants to the Denny’s system with many more expected to open over the next few years. We will continue to pursue the optimization of our business model. However the ultimate mix of company and franchise restaurants will be determined by the continuing demand for company restaurants, the commitment for growth from our franchisees and the availability of capital for our franchisees to fund both FGI transactions and new restaurant development. So far FGI has exceeded our expectations but the operational difficulties impacting our industry and the tightening of financing sources has introduced several additional uncertainty into an already competitive process. The increasing contribution from our franchise business certainly helps to lessen the volatility in our results during these difficult times. However we cannot avoid the impact of reduced consumer spending and food cost pressures that are taking a toll on the earnings of many restaurant companies. We are very pleased to have reported an increase in adjusted income for the quarter but these macroeconomic factors leave our visibility limited for the remainder of the year. With that I will turn the call over to Nelson Marchioli, Denny’s President and CEO.

[Nelson Marchioli:]

Thank you Mark and good afternoon everyone. During the first quarter and really over the last six to nine months, the success of our strategic actions has helped to offset challenges to our restaurant business. We have made considerable progress in a relatively short time in our efforts to optimize our business model, energize growth across the Denny’s system and strengthen our financial position. Through the first full year of FGI we have increased our franchise mix from 66% to 76% and expect that will increase to more than 80% by the end of this year. We have signed a record number of development agreements and are beginning to see them realized in new restaurant openings and we have substantially reduced our debt and increased our financial flexibility which is a considerable benefit during these difficult economic times. As franchising is becoming a key driver of our earnings growth we have undertaken a comprehensive process to evaluate the service and support we offer as a franchisor. We engaged a consultant that has an extensive background in helping design and improve franchise companies, both in and out of the restaurant industry. We expect to utilize the findings from this work to become a stronger, more attractive franchisor. The first step in our organizational transformation was the recent realignment of our leadership structure with senior executives reporting directly to me. We named Janis Emplit to the new position of Chief Operating Officer with responsibility and oversight for all Denny’s restaurants, whether they are company or franchised. In addition to changing the structure of our operations group, we also made changes within our support functions by adding several areas of responsibility to Mark Wolfinger, our CFO and now Chief Administrative Officer as well. Additionally we named mark Chmiel as our Chief Marketing and Innovation Officer with responsibility for all marketing, brand, product and innovation activities. Together we will move this organization forward and remain committed to the success and growth of the Denny’s brand. As we stated on our fourth quarter call, we expect to complete our franchisor best practices review and begin any further organizational changes during the second quarter. We will communicate our plans in this regard prior to our during our second quarter conference call in July. While we anticipate revisions to our corporate structure and that these changes should provide cost benefits, the primary goal of this process is to offer our franchisees both current and prospective, a stronger franchisor to partner with as they build their individual businesses. We expect this will require a shifting of resources as we look to provide valuable services and support to our franchisees while also maximizing our company restaurant operations. It’s important to remember that today, many of our G&A functions support all 1,550 Denny’s restaurants both company and franchise. When this process is completed I’m confident we will continue to operate a support structure that compares favorably on a cost efficiency basis with our peers. As both a restaurant operator and a franchisor our biggest challenge remains driving profitable guest traffic. We are confronting this fundamental objective with more enthusiasm, more resources and more talent than at any time in my tenure here at Denny’s. This isn’t an easy problem to address particularly under these difficult consumer conditions but we do not have the luxury to wait for the economic headwinds to die down. For Denny’s to remain relevant and to attract new guests we must continue to innovate by investing in new products, new facilities and new operating models. As we develop and test many different opportunities we are focusing our consumer messaging on Denny’s core attribute; real breakfast. Our current marketing campaign aggressively differentiates the real breakfast experience offered at Denny’s from the less appealing breakfast available at many of our quick service competitors. Building on this, our current promotion, the Build Your Own Grand Slam, is a new approach to our most recognized menu item allowing our customers to have the Grand Slam the way they want it creates an unbeatable combination of customization and compelling value. In two weeks we will launch Denny’s All-Nighter, a new campaign focused on re-energizing our late-night business. In an effort to win back late-night customers we are creating a whole new vibe in our restaurants’ after 10 pm. The demographics of our late-night business usually skew towards a younger 18 to 30 year-old customer. We are reaching out those guests with a new attitude and a new atmosphere. One of the major drivers of this program will be a tie-in with several musical groups popular with this particular age group. We are inviting our partner bands to come into our kitchen to design their own late-night fare, which will be marketed under their name. There will also be numerous cross-promotional activities that can be followed on the new website, dennysallnighter.com which will launch on May 13th. As always the success of a restaurant promotion rests with the food so we are launching a new lineup of crave-able product offerings designed specifically for our late-night guests such as [Potachos] which are potato chip nachos loaded with all the trimmings; Sweet Ride Nachos which are cinnamon sugared chips with fruit and chocolate toppings; Smoking’ Q Four Pack which are mini barbequed cheeseburgers with bacon and onion rings and many other items to let our guests to get their crave-on only at Denny’s. You won’t be able to find these items anywhere else, particularly not at the drive-thru. We are supporting this program with a strong marketing campaign, including television and online advertising. Late-night is a vital part of our business and we are rejoining the fight for this [inaudible] more aggressively than ever before. I want to thank our employees, our franchisees for all their hard work to improve and grow the Denny’s brand. I’d also like to thank our shareholders for their ongoing support. These are difficult times but we are encouraged by the opportunities ahead of us and the commitment of our team and our franchisees to capitalize on them. As always thank you for your interest in Denny’s. I will now turn the call back to Alex.

[Alex Lewis:]

Thank you Nelson, before we go to Q&A I would just like to remind you as to what Mark said in his remarks, that we will be filing our 10-Q if not before, definitely by Monday, May 5th. So be sure to pick that up and you’ll see if there are any changes in both our P&L and our balance sheet. You’ll need to get those out of the 10-Q when we file it. And with that, we’ll now begin the Q&A.

[Operator:]

(Operator Instructions) Your first question comes from Brian Hunt - Wachovia Capital Markets

[Brian Hunt:]

I was wondering if you could talk about the financing environment in detail. Have you had any franchisees delay openings because of lack of financing or have you had a potential franchisee back away from a transaction because of lack of financing?

[Mark Wolfinger:]

On the financing side I think I’ll start with the franchise growth initiatives, FGI as we call it, we have not seen anything, I think you used the term back away yet. We haven’t seen that type of reaction yet in the marketplace. But at the same time clearly it is getting tougher. I think the credit standards across the board on third party financing really has started to increase about 12 to 15 months ago we clearly saw that. The requirements as far as the percentage of cash or equity down payment, those things had already started to increase about a year ago. Clearly there is more pressure out there but we haven’t seen that at this point impact our activity and again if you look at the 21 stores we sold in the first quarter, and I think our guidance for the year was 75 to 100 as far as refranchises. The other part of your question was on new stores builds, and again we have not seen any kind of material impact there. At this point we know those pressures are out there in the marketplace and clearly the pressure that we reference is more the pressure on the consumer and what is going on across the country in the economy. But yes, it’s certainly more challenging on the financing side but it hasn’t had a material impact on our go-forward progress at this point.

[Brian Hunt:]

I know you have put a lot of energy into new products, to-go options as well as the express format, could you talk about maybe the successes and the challenges you’ve had so far. I know you were testing six to-go options you talked about last quarter and as well as premium coffees and rolls and wraps at the express format, could you just talk about those in detail, how those efforts are progressing.

[Nelson Marchioli:]

Well two things, one on the six carry-out items; we really didn’t have the demand in the 32 locations where we tested them that we expected. The fact of the matter is people came in more for our full breakfasts versus a portable product. I don’t think people realized that we can be and are a great place for a portable offering. The reality is they continue to come in for full breakfasts for carry-out and in fact in I believe its June 10th, we roll with a nation-wide carry-out program including national media for the first time for Denny’s. Moving on to Fresh Express, we continue to test those items and we’re encouraged by customer feedback. But right now it is about brand visibility and recognizing the Fresh Express trademark. It really is underneath if you will as a support to the Denny’s brand itself. So that continues to be R&D and we continue to be very optimistic about pulling that forward as well as items from Fresh Express into the base brand.

[Operator:]

Your next question comes from [Unidentified Analyst] - Lehman Brothers

[[Unidentified Analyst]:]

On the same-store sales front, obviously significant price menu upward movement and downward movement on traffic, is this the right combination that you were looking for under the circumstances or is this something that you need to recalibrate for a slightly different mix going forward?

[Nelson Marchioli:]

We have to make mid-course corrections all the time and this particular environment with the economy causes us to understand very clearly that the customer wants value so everything we talk about has to be value. Our late-night offering that I talked about a little while ago that launches on May 13th, a week later it launches on MTV and digital is about value and experience as well. So I would tell you the consumer wants value, we are addressing that. We continue to refine the offerings. Obviously we still have to make money and so I don’t regret making any of the decisions we’ve made thus far as it relates to price increases to cover commodity costs or the repositioning of our menu to make sure we get the right menu mix as Mark mentioned earlier.

[[Unidentified Analyst]:]

But for this particular quarter it seems your sales came out as you were hoping for or slightly different?

[Nelson Marchioli:]

Well I would have hoped for much more as we go forward in all our promotions however the headwinds in the economy were such that where we wound up I ultimately, I hate to say I was satisfied with it, but the reality is under the circumstances I was pleased we were as close to flat as we were.

[[Unidentified Analyst]:]

Okay and then on the menu item reengineering, is this something that can be sustainable obviously it had a very positive impact on food cost ratios but I don’t know if it offers enough value and whether you think this is sustainable going forward.

[Nelson Marchioli:]

Well it’s a gas break methodology. You continue to tweak it and there are times when in fact you enjoy the benefits of that. We believe we can manage the menu mix on a go-forward basis. We’re very careful about it. It’s really about driving more customers into the restaurants. The incidents levels on what we’re offering are meeting our expectations, if not exceeding it at times. The issue really is about getting more customers into the restaurants. Guest traffic is not where we want it to be and unfortunately it isn’t with most of the industry although there are exceptions.

[Operator:]

Your next question comes from Brian Moore - Wedbush Morgan Securities

[Brian Moore:]

A question for you Nelson, given the, really on the media calendar, given your comments regarding the Denny’s All-Night beginning May 13th, and I guess in the past it seems you’ve talked about when you moved away from breakfast promoting other items, dinner or other types of items, sales have suffered. Could you kind of walk us through the media calendar for the next few months?

[Nelson Marchioli:]

Well we’re certainly going to be focused on our next event obviously is late-night as I mentioned. We are going to be investing approximately $5 million into our late-night effort. We have not invested in our late-night effort before. We’ve tested some things. We have run the same ads on Letterman and Leno with limited success. This really is about carving out that customer and focusing on that customer and reaching out to them in ways that they communicate and they receive entertainment. As it relates to breakfast underlying all this is of course our Build Your Own Grand Slam offering which will include beginning sometime after mid-June the inclusion of “now you can get real breakfast to go” in a very high quality way in new packaging that we’re offering. So we’ll continue to talk about breakfast but we felt with the erosion of our late-night business which is very important to us, we felt we really needed to carve out a special effort to frankly bring those customers back and remind them that we are 24-7 and we are a great place after the party or after work.

[Alex Lewis:]

The only thing I’d say to that is clearly we are putting television dollars behind the late-night campaign and that’s a strong commitment that we are proving to that [day part] but as you know that demographic, the online and all the other ways we’re going to go about targeting that demographic through the band promotions, viral marketing if you will, all the things we’re going to do there I think really can play a big role as well as hitting that demographic.

[Brian Moore:]

Since we’re on sales, if I look back to 2001 comps it appeared that June, July, August traffic trends appeared to accelerate from basically negative to positive 3%, 4%, I’m wondering what drove that. If you think that rebates back in 2001 had an impact and what your thoughts are and perhaps the potential impact as checks go out currently.

[Alex Lewis:]

I wish I could say I think that’s what drove the traffic back then, but I couldn’t quite remember back then. But in ’01 and really in ’02, during the summers both of those years we heavily promoted on TV the $2.99 Grand Slam and that really was the traffic driver there. In fact if you go back and look at our quarterly release we said while that promotion was on we did have traffic. Well that promotion came off in the middle of August and that was really when the tax rebate checks were getting fired up in ’01 and then of course after the tragedy on 9-11 business went down for all of us but I don’t think at that point in time we saw any benefit worth calling out from the tax rebate checks and I’d say we’re all very excited about the checks going out, but I think we’re all a bit realistic that those checks are probably going to be spent on catching up on one mortgage payment or putting gas in the tank. Love to see a fringe benefit at restaurants but we’re certainly not planning for it.

[Brian Moore:]

Okay I guess given then in this current quarter Q2 being your most difficult comparison of the year, how should we think about that in the relationship to the guidance you’ve previously given and then perhaps if you might consider some companies, many others have broken protocol and actually provided mid-quarter updates on sales trends.

[Alex Lewis:]

I don’t think we’re going to break protocol and I don’t think we’re even going to go to talking about [inaudible] I mean again because we do so many things during the year to Nelson’s point on gas break, we really target ending the year at where we plan to end the year and promotions and timing of media calendars and all of those things can play into that. So clearly it’s going to be a challenging quarter. It might be a challenging year as we’ve seen but our guidance will continue to annual.

[Brian Moore:]

So it’s safe to assume that the negative two to flat comp guidance remains in place?

[Alex Lewis:]

Well I think Mark just said we have limited visibility at this point so.

[Brian Moore:]

I guess on G&A and I could appreciate your mid review and you’ll be talking about this in the coming months, but given you mentioned some benchmarking you’ve done and perhaps a favorable relative comparison to peers, I’m wondering what you’ve looked at in terms of benchmarks, what you define as best-in-class, how we might think about the $65 million to $67 million in nominal G&A perhaps coming down over time at least from preliminary take.

[Mark Wolfinger:]

Again I think as we indicated in our comments and Nelson’s specific comments obviously we continue to do this analysis and the work. We are not going to comment on any kind of change in our G&A structure at this point in time. As far as peer group or analytics, we looked across the board at both food and non-food type of players because obviously there’s a lot of franchise systems out there that are not food related and we wanted to make sure that we looked at all sides and we’ve done a lot of work. There’s still more work to be done which again is why we obviously don’t have any significant update to talk about today.

[Brian Moore:]

Okay, on the FGI and the previous guidance of 75 to 100 units, I certainly appreciate all the color there regarding the credit markets, but looking at proceeds and the trend there remaining relatively stable and thinking about I guess at this point it would appear you’d be selling perhaps higher margin units, wondering how that might impact stability of franchisees to get credit, how you weigh that in terms of dollar proceeds per store and just trying to get a sense as to your comfort level with the 75 to 100 unit goal as well.

[Mark Wolfinger:]

You’re saying higher margin units; you’re talking about the average sales price?

[Brian Moore:]

It appeared I guess you were selling the bottom two.

[Alex Lewis:]

If you go back to last year, we sold one-third out of quintile three, one-third out of quintile four and one-third out of quintile five so there’s plenty of all of those still in the pool and still being marketed every day so we’ll probably continue to say the average will be the average. Every quarter it might change, but over a year period, the average is going to hold.

[Mark Wolfinger:]

Again on each individual quarter, each individual month it depends on the type of transaction or where that transaction is going to occur in the country perhaps. Our annual guidance that we provided was 75 to 100 FGI transactions or units sold through FGI companies who were sold through FGI, and obviously at this point we’re not changing our guidance or accommodating further that it’s 75 to 100 is what the annual guidance number was.

[Brian Moore:]

One final question for Nelson on staffing levels at stores, a call or two ago you talked about putting more labor in the stores, maybe an update on that.

[Nelson Marchioli:]

We have reached our highest staffing levels on management that we have probably in the history of the company and we’re beginning to see the benefits of that through better service attribute information coming back to us and I feel good about where we have staffed our franchisees are I believe following suit and delivering improved service so I think the investments have been made and I think the results should be forthcoming.

[Operator:]

Your next question comes from Eric Wold - Merriman Curhan Ford & Co.

[Eric Wold:]

A follow-up on one of the ones that came out just now on the mix of the franchise units that have been sold and you Alex just kind of saying the one-third, one-third, one-third last year, looking at the 4.2% increase in average sales you had in Q1 in best one quarter jump in a year and a half or so, is it safe to assume that the majority of that gain obviously is by selling off refranchising kind of the lower end units and then how should we think about going forward in terms of what’s possibly in your pipeline in terms discussions you’re having, what units are likely to be sold, should we continue to see that number go up as the kind of lower end units remains the lower echelon and kind of get sold out.

[Mark Wolfinger:]

The 4.2% is the first quarter AUV for company restaurants. Is that what you are quoting there?

[Eric Wold:]

Correct.

[Mark Wolfinger:]

I think what we have said and what Alex referenced is the fact that it was sort of a one-third, one-third, one-third split in those three quintiles last year so in general the average quintile is a quintile four as far as the company [so that it was sold] and yes, clearly I think as we laid out the game plan strategically for FGI it tends to be obviously the lower volume stores that are being sold and yes we obviously hope and expect that that’ll impact positively, the AUV of the remaining company stores. So going back to our various external presentations we talked about that and obviously there’s a reflection of that in the first quarter despite the fact that it was a very challenging comp sales type of quarter fro us. But again we can’t make predictions or comments on an outgoing basis on that AUV.

[Eric Wold:]

Would you assume from what you know or what you want to assume that the units that will be refranchised over the next 12 months are likely to kind of still be in that same mix or will it shift one way or another?

[Mark Wolfinger:]

We would hope that it would be in the same mix obviously subject to market conditions and demand and supply and all those other factors that I’ll always mention to you. But clearly it’s strategically that’s what we are hoping to do and obviously concentrate our company base in specific markets.

[Eric Wold:]

Okay and then the 75 to 100 that you are still looking for this year, your 21 is obviously is clearly in that range, was that, as you started the year whenever you came up with the 75 to 100 was that 21 obviously I know you had some knowledge of that when you gave the 75 to 100 but would that have been higher than you might have expected in the first quarter, was there any kind of stuff that didn’t close in Q4 that kind of looped into Q1 to get that number or was that kind of inline with what you thought it was going to be.

[Alex Lewis:]

Well transactions take awhile sometimes and that big 16 unit one was in the pipeline I’d say, but all the transactions closed the last week of the quarter or the week prior to that so nobody really loped over from December. As we said on the fourth quarter call, we had to really sort of step back and get going again and so all those transactions, that’s why probably you’ll have some challenges in your math and that’s all [inaudible] equivalent units because all those transactions happened right at the very end of the quarter.

[Operator:]

Your next question comes from Dean Haskell - Morgan Joseph Securities

[Dean Haskell:]

My question comes down to the marketing on the late-night, you are spending $5 million, I estimate you’ll system-wide, probably spend about $90 million on advertising, that $5 million is that going to be all TV?

[Nelson Marchioli:]

No and we spent $72 million overall both on working and non-working creative, $50 million approximately goes on media. Of the $5 million I referred to candidly is going to be on MTV, internet and digital. We are after that 18 to 30 year-old that is our customer and has chosen in recent months to not go out and we’re going to give them a reason to come back to Denny’s.

[Dean Haskell:]

Okay and then Mark, if you were to sensitivity analysis on your swap, a 1% change in interest rates generates what kind of change in the swap impact?

[Alex Lewis:]

There is no impact because they don’t change obviously but the valuation really has been hopefully written down as far as it will go because the rates in the markets frankly even have come back up from where they were at quarter-end so what you’ll see going forward will actually be income as that swap liability bleeds off so actually come back through the other way.

[Dean Haskell:]

Are you using LIBOR base or are you using a prime or some other base rate on that?

[Alex Lewis:]

It’s a LIBOR so we’re paying a fixed 4.8925 as LIBOR on that. But the one note that we did make and probably want to make sure that we clear up is on the last day of the quarter we terminated $50 million of the $150 million swap so now we have $100 million fixed at 4.8925 plus 2% for our premiums, so 6.89 and then have $50 million floating on LIBOR plus 200 and LIBOR is probably around three today, a little under three. So we’ll actually pick up some interest savings going forward by having bought out of that swap at least in part. And we have exactly well just post quarter-end we have exactly $150 million out on the term loan right now; $100 million that’s swapped at 6.89 and $50 million that’s floating.

[Dean Haskell:]

Okay and you expect to pay-down somewhere in the neighborhood of $10 to $15 million in debt from the proceeds that were received post end of the first quarter?

[Alex Lewis:]

When we have a voluntary basket, the biggest problem is the first quarter is always a strong negative working capital quarter. We have our note payment that we made on April 1 so we held back some of the proceeds as we’re allowed to do under the agreement to do that and as the quarter progresses we’ll make our normal decisions on how to pay down and how much to hold back.

[Dean Haskell:]

Okay so hopefully we’ll see a bigger change in the second quarter.

[Operator:]

Your next question comes from Nicole Torraco – Unidentified Company

[Nicole Torraco:]

I think on the last call you’d given EBITDA guidance of $83 million to $89 million for 2008, is that still where you are today?

[Mark Wolfinger:]

Yes, that was part of our annual guidance and again there’s been no comment today about changing any of the components of our annual guidance at this point in time.

[Nicole Torraco:]

Okay just to go back to G&A if you exclude share-based compensation it looks like G&A is actually up or G&A is actually up this quarter over last. You’re first quarter thought, is that something that you could speak to or is that something you want to talk about next quarter once the G&A [inaudible]?

[Alex Lewis:]

Well again we talked about this, that was the part of the change in there but the three we didn’t comment on what the $300,000 difference was year-over-year. There’s a lot of things going in and out of G&A that were positives and negatives but we didn’t give any more detail.

[Operator:]

Your next question comes from [Unidentified Analyst] - JP Morgan

[[Unidentified Analyst]:]

Can you elaborate a little bit more about your plans for debt reduction?

[Alex Lewis:]

Well I don’t think we’ve specifically given any guidance on that other than our track record of turning asset sale proceeds into debt reduction and we’ll continue to do that. Some of its mandatory under the credit facility as we sell assets and some of it last year I think we made $30 million in voluntary payments last year so it’s something we are definitely committed to and it will ride on operating cash flow and asset sale proceeds during the year.

[[Unidentified Analyst]:]

And what is your target leverage for 2008, is that still 3x?

[Alex Lewis:]

Yes, I don’t think we have a target that we’re out with right now. I mean clearly we want to continue to reduce debt and we’re pleased with where we are at and we want to keep moving forward.

[[Unidentified Analyst]:]

Have you seen performance differing materially by geography say in California?

[Nelson Marchioli:]

California clearly has been the hardest hit with unemployment and foreclosures and so we do see California taking the brunt of what I believe is a recession, closely followed by Florida and then I’d suggest the rest of the country is in pretty much the same place. We actually see a little strength in the North East but clearly California is the most difficult operating environment for the reasons I mentioned followed closely by Florida.

[Operator:]

Your final question is a follow-up from Dean Haskell - Morgan Joseph Securities

[Dean Haskell:]

Day part analysis, you have four day parks, you’re pushing forward on the late-night have you seen the late-night be your strongest or weakest period, is that why you’re focused on this and talk about the other three periods as well.

[Nelson Marchioli:]

Well as you probably heard me say before Dean, late-night is one of our most profitable day parts and we have been losing traffic so we want to focus on that as well as breakfast and that’s the two places we are going to focus on. Obviously we don’t want to get too spread out. As you know my goal here has been to create menu products that will be desirable, crave-able in all day parts and we are getting closer to that and you’ll hear more about that soon.

[Operator:]

Mr. Alex Lewis, I’ll turn the conference back to you for closing remarks.

[Alex Lewis:]

Thank you everyone for joining us. As always if you have any follow-up questions, feel free to call me and again be looking out for the Q later in the week or Monday. Thanks a lot, take care.