Denny's Corporation
Q4 2012 Earnings Call Transcript

Published: 21 Feb 2013

[Operator:]

Good day, and welcome to the Denny's Fourth Quarter and Full Year 2012 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Whit Kincaid, Senior Director of Investor Relations. Please go ahead, sir.

[Whit Kincaid:]

Thank you, Kevin. Good afternoon, and thank you for joining us for Denny's Fourth Quarter and Full Year 2012 Investor Conference Call. This call is being broadcast simultaneously over the Internet. With me today from management are John Miller, Denny's President and Chief Executive Officer; and Mark Wolfinger, Denny's Executive Vice President, Chief Administrative Officer and Chief Financial Officer. John will begin today's call with his introductory comments. After that, Mark will provide a financial review of our fourth quarter and full year results. I will conclude the call with commentary on Denny's full year guidance for 2013. As a reminder, we will be filing the 10-K by the due date of March 12, 2013. Before we begin, let me remind you that in accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, the company 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 28, 2011, and in any subsequent quarterly reports on Form 10-Q. With that, I will now turn the call over to John Miller, Denny's President and CEO.

[John C. Miller:]

Thank you, Whit. Good afternoon, everyone. We are pleased to deliver another year of solid results and growth as we generated our second consecutive year of positive company and franchise same-store sales. Our performance is a testament to our positioning as America's Diner, emphasizing everyday affordability, compelling breakfast and beyond breakfast offerings for 4 day-parts and a welcoming come-as-you-are environment that's open to all. In addition to generating positive same-store sales, we grew adjusted income before taxes by 26% and generated almost $50 million of free cash flow. We opened 40 new restaurants, refinanced our credit facility and completed our FGI refranchising initiative. And though the consumer environment remains challenging, our results continue to improve. This year, we celebrate our 60th anniversary at Denny's. The recent momentum of the past few years is a testament to our loyal customers, dedicated franchisees, tireless restaurant operators, wonderful support center staff we have here and the underlying and enduring attractiveness of our concept. As we continue to evolve to meet the ever-changing expectations of our guests and the needs of our franchisees, we are becoming a much more competitive player in our segment and in the industry. Evidence from the Denny's revitalization efforts is clear as indicated by the positive results we are seeing in key states like California and Texas, where we have almost 600 locations, as well as our positive overall sales performance relative to key industry benchmarks. We are pleased with the response from our guests at this stage, the strong partnership we enjoy with our very dedicated franchisees and the excitement -- we are we are very excited about the future of Denny's. Our greatest opportunities lie in front of us, however, as there's much work still to be done to deliver additional shareholder value through our ongoing revitalization efforts. And these efforts to increase long-term shareholder value, we will continue to work closely with our franchisees to increase sales per location, as well as growth in new locations to drive profitability through our franchised-focused business model. The free cash flow generated by this model will be balanced between reducing our outstanding debt, repurchasing shares and making appropriate reinvestments in the brand. We remain focused on exceeding, executing against our 3 key objectives to help Denny's grow our position as one of the largest American full-service restaurant brands in the world. Our first key objective is the revitalization of Denny's image through menu, service and environment initiatives designed to fully leverage our competitively distinct and uniquely ownable America's Diner is Always Open positioning. As America's Diner or in the case of our international locations, the local diner, we emphasize attractive everyday value in core menu offerings with improvements in our breakfast all day and beyond breakfast diner platforms. In addition, we offer consistent new product news to our compelling Limited Time Only offerings drawing from the vast array of regional diner comfort offerings as guided by our guests. This, along with initiatives to build on our warm hospitality and improving come-as-you-are environments, makes for a great diner atmosphere. As we head into such a landmark year, we have the opportunity to truly celebrate who we are and where we've come from. At the launch in 1953, Harold Butler promised to serve the best cup of coffee, give the best service, keep everything spotless, offer the best value and stay open 24 hours a day. As we enter our 60th year, we revisit this promise with renewed commitment. As the largest family dining chain, we will continue to introduce more compelling marketing modules and classy diner plates, amplifying the message of our $2/$4/$6/$8 Value Menu, while continuing to put our guest first everyday with the focus on driving more traffic into our locations. We continue to broaden our approach from the more narrowly-focused breakfast all-day platform to become more relevant for our broader set of occasions and a broader set of customers. Over the past few years, we have seen increases in our lunch and dinner mix, which have helped bring more balance to our tiered-pricing strategy designed to deliver both compelling new product offerings and everyday affordability, as well as drive sales beyond just breakfast. We will continue to leverage one of the most visible everyday-value platforms in full-service dining. Starting out the year, we have placed additional emphasis on the $2/$4/$6/$8 Value Menu, complete with new product news, new logo and new advertising spots. One of the ways we are responding to ever-changing consumer needs and living up to Harold Butler's promise is to our renewed efforts to offer a great cup of coffee. Frankly, the bar has been raised by quick service and fast casual, we were falling short. Given that we sell nearly 90 million cups of coffee a year, we wanted to raise the bar for full-service dining. So we introduce a smoother, richer coffee made with higher quality arabica beans. With coffee commodities in our favor, timing could not have been better. Our new coffee program is a result of almost 2 years of extensive product development, consumer research and operational testing. Part of this program involves replacing our previous pot brewing system with all new equipment, serving accessories and machines that brew the new blends in each of our domestic locations. Our new signature diner roast and dark diner roast, as well as the signature decaf coffee play right into our heritage as America's Diner. Our new platform will allow us to introduce more coffee centric beverages in the future, such as iced and frozen coffee specialties. We are now among the few full-service brands offering choice to our guests with these 3 blends. We also have refreshed our core menu with 14 new additions, notables like, Build Your Own Burger platform, the Philly Cheesesteak Omelet, Grilled Sausage & Chicken Quesadillas and the Texas Prime Rib & Egg Sandwich are all off to a great start. One of the other key parts of our brand revitalization effort is to deliver consistent, reliable service across all of our company and franchise units. More than 2 years ago, we implemented service management groups' guest satisfaction tool in order to develop a deeper understanding of each locations' performance, benchmark Denny's performance against our peers, and track operational initiatives focused on improving guest satisfaction. We know that consistent improvements in guests intent to return and intent to recommend can lead to improvements in guest traffic over time. There is a meaningful opportunity for Denny's to improve its relative scores against the full-service restaurant industry. We have found that direct guest feedback provides us with a common language to work with our franchisees, to drive operational improvement. Last year, we placed further emphasis on training restaurant-level staff at both company and franchised units, and we saw significant improvements in our scores compared to 2011 as a result. We are encouraged about our progress. As a result, we've restructured both our company and franchise operations teams to allow us to continue the progress we have made so far and reinforce the best ways to deliver consistent, reliable customer service to our guests. It will take time to move to the top of the category, but it is another positive step in our effort to drive sustainable improvements in guest traffic. We are optimistic about 2013, and believe that we have the right strategy in place to build on the momentum we established in 2011 and 2012. We continue to work closely with our franchisees and encourage their participation to evolve our product offerings and our marketing strategies, as well as our operating and training initiatives to continue to improve restaurant operations. Our second key objective is to continue the growth of the Denny's brand through traditional and nontraditional venues, both domestically and internationally. We opened 40 new restaurants in 2012, including 6 new international locations. Our goal is to grow both gross unit openings, as well as net unit growth. We currently have over 120 unopened domestic restaurant commitments and our focused on building pipelines for both domestic and international development in both traditional and nontraditional formats. We have been successful in recruiting new franchisees to the Denny's family, adding 7 in 2012, many who are taking advantage of our new and emerging markets incentive program to open units in under-penetrated markets in the United States. We do have global ambitions and are working to grow Denny's existing 98 international locations to a much larger global footprint. We believe there's a great opportunity for the Denny's brand outside of the U.S., as evidenced by successful openings we have had in the past few years, and that our current international annual sales volumes averages close to $2 million. We are making investments in our international operations through the addition of new team members in order to provide better support to our current franchisees and to continue to attract new franchisees. In addition, we will be switching our international product distributor to the Sysco IFG Company who has extensive experience in international food service distribution. We continue to be pleased with our nontraditional location performance as we opened our first university location and first airport location outside of the United States. The 13 nontraditional locations we have opened since the beginning of 2010 confirms the attractiveness of the Denny's brand and new distribution points. We have made investments in our team to help us further expand with our existing licensee opportunities and to find potential locations on military bases and airports. Although achieving our fourth consecutive year of positive net unit growth is a good milestone in this environment, we want to get net unit growth higher than the positive 10 unit increase we achieved back in 2009, which excluded any Flying J conversions opened in 2010 and 2011. One of the ways we expect to improve our net unit growth is, in the longer term, is having fewer closures resulting from having a healthier system with higher average annual sales volumes. Over the past 6 years, our system unit close rate has averaged 34 units per year or around 2% of the system. We anticipate that rate -- that this rate will continue in the near-term, which is not unusual for a 60-year-old brand operating some portion of its base in older trade areas. These locations tend to have average annual sales closer to $1 million versus the system average of $1.5 million. New restaurants opening closer to or exceeding the system average benefit the system now and over the longer term. Our third key objective is to grow profitability and free cash flow through our franchised-focused business model that balances use of cash between reducing our outstanding debt, repurchasing shares and making appropriate reinvestments in the brand. Reaching our target of being a 90% franchise system has enabled us to drive significant improvements in our financial performance and provides a great deal of stability to earnings. We are also excited about owning around 10% of the units as we believe that owning a meaningful base of units gives us a much stronger position when working with our franchisees to plan and execute our marketing, operations and facilities initiatives. In addition, it gives us a more powerful growth engine with more strategic options when it comes to increasing shareholder value through reinvestments in the brand, whether it's through our franchisees or through company restaurants. Reinvesting in our facilities is important, as well as we recognize that being a 60-year-old brand means that there are a number of locations that might have more than average wear and tear. In the past 2 years, our franchisees have remodeled approximately 380 restaurants, including around 200 lighter refresh remodels. Over 70% of the system is on a current scheme when you include almost 290 new units opened since the end of 2008, and around 270 units that participated in the $50,000 refresh, remodel program that ended in 2011. In 2013, we will be reinvesting in our company restaurants as we have not remodeled any of our locations in almost 2 years. We will continue to work closely with our franchisees to provide the right remodel programs for them and their restaurants as a portion are due each year. Our stronger balance sheet and free cash flow position is a great asset that we can leverage to the benefit of the entire Denny's system. It allows us to facilitate reinvestment as we are able to provide short-term loans to our franchisees to support the rollout of key initiatives. For example, we have provided 12-month no interest loans to franchisees to facilitate the recent coffee equipment upgrade. Our unique credit card program, which incorporates over 90% of our system, gives us a great mechanism to allow the company to automatically collect the loan payments. We have also offered this type of program to franchisees interested in transitioning to Denny's POS system. Going forward, we are very focused on improving our same-store sales with the goal of generating both consistent, positive same-store sales and traffic. Although we generated momentum in the fourth quarter, we expect the consumer economic environment to continue its volatile recovery throughout this year. This is especially true for the first quarter where we are lapping our strongest sales weeks of last year due to the favorable weather of early 2012. We are also seeing effects from the timing of tax refunds in the current quarter. We expect the elimination of the payroll tax holiday to provide a headwind for the industry, as consumers adjust discretionary spending patterns. At the same time, improvements in employment and housing continue to provide tailwinds for us especially in states like California. We're also keeping our eye on the minimum wage discussions going on in Washington. As we continue to make investments in Denny's revitalization, we anticipate growing adjusted earnings per share by at least 10% and generating close to $50 million in free cash flow in 2013. We will continue to balance our use of cash between reinvesting to both grow and strengthen the brand, strengthening our balance sheet and to return value to shareholders via our share repurchase program. With that, I'll turn the call over to Mark Wolfinger, Denny's Chief Financial Officer and Chief Administrative Officer.

[F. Mark Wolfinger:]

Thank you, John, and good afternoon, everyone. We achieved record adjusted income before taxes and record free cash flow during 2012 driven by our franchise-focused business model. Our growing profitability and free cash flow has enabled us to further strengthen our balance sheet through debt repayments, while also returning value to shareholders through share repurchases. We are pleased that we successfully completed our franchise growth program -- initiative program, which we call FGI. It was launched back in 2007. This refranchising strategy took the Denny's system from 66% franchised to 90% by selling 380 restaurants to existing and new franchisees. The proceeds from FGI helped us reduce our total debt by over $360 million or 66% since early 2006. The FGI program enabled us to reinvigorate restaurant growth, restructure our field and corporate operations, strengthen our relationship with our franchisees and create a much stronger business model capable of growing earnings and generating stable cash flow. Our fourth quarter performance was highlighted by positive same-store sales at both franchise and company restaurants, a 16% increase in adjusted income before taxes and we generated $7.2 million of free cash flow. In the fourth quarter, system-wide same-store sales increased 1.7%. This is the seventh consecutive quarter that system-wide same-store sales have been positive. Same-store sales at company restaurants increased 0.5% compared with the prior year quarter. The increase was driven by a 1.3% increase in the guest check average, which was offset by a 0.8% decrease in the same-store guest count. The higher guest check average included a 1% increase from the new pricing and mix shifts to more premium-priced items. Same-store sales in franchise restaurants increased 2.0% and was primarily driven by around 1.5% increase from menu pricing and mix shifts to more premium-priced items, offset by negative same-store guest count. Denny's total operating revenue, including company restaurant sales and franchise revenue, decreased $14.2 million compared with the prior-year quarter, primarily driven by a decrease in company restaurant sales in the quarter. Sales at company restaurants decreased to $16.6 million, primarily due to 49 fewer equivalent company restaurants reflecting the impact of selling company restaurants to franchisees. In the fourth quarter, Denny's opened 12 new franchise restaurants and one new company restaurant. A total of 12 Denny's restaurants were closed in the quarter, including 11 franchised restaurants, leading to net growth of positive 1. During the quarter, 8 company restaurants were purchased by franchisees and the company acquired one franchise restaurant. I will now review the quarterly operating margin table provided in our press release. The fourth quarter company restaurant operating margin of 13.5% represents a 0.7 percentage point increase compared with the prior year quarter and was primarily impacted by lower payroll and benefit costs, lower other operating costs, which were primarily offset by higher product costs. The increase in product cost was primarily due to the impact of product mix as customers traded in the higher-priced lunch and dinner entrées. Gross profit from our company restaurant operations decreased $1.6 million to $11.0 million on a sale decrease of $16.6 million. For the fourth quarter of 2012, Denny's franchise and license revenue increased 7.5% to $34.2 million. The $2.4 million increase in franchise revenue was primarily driven by a $1.5 million increase in royalties from 55 additional equivalent franchised restaurants and the effects of higher same-store sales in the quarter. In addition, occupancy revenue increased $1.1 million, which is primarily the result of collecting rent on restaurants sold to franchisees during the past year. Franchise operating margin increased $1.5 million to $22.3 million in the fourth quarter. This increase was primarily driven by the items previously mentioned, but was partially offset by a related $900,000 increase in occupancy cost. Franchise operating margin as a percentage of franchise and license revenue decreased 0.3 percentage points to 65.2% compared with the prior-year quarter, primarily due to the increase in occupancy margin, which carries lower percent margins compared with our royalty and licensing business. The franchise side of our business contributed 67% of the total operating margin in the fourth quarter, which is $11.3 million more than our company restaurants. As we've emphasized in the past quarters, the income shift to a franchise-focused business model gives us much greater stability and predictability in our earnings. In addition, it enables us to generate above-average EBITDA margins for a restaurant company. For the quarter, adjusted EBITDA margin as a percentage of total operating revenue was 15.2%. Total general and administrative expenses for the fourth quarter increased $1.4 million from the prior year quarter, primarily due to an increase in performance-based compensation accruals relative to the prior-year period. Depreciation and amortization expense declined by $1.5 million compared with the prior year quarter, primarily resulting from the sale of company restaurants over the past 2 years. Interest expense for the fourth quarter decreased by $1.8 million to $2.8 million as a result of a $30.4 million reduction in total gross debt over the last 12 months and lower interest rates under our new credit facility. In the fourth quarter, our provision for income taxes was $2.5 million, reflecting a 36.4% annual effective income tax rate. In the prior-year quarter, we recorded an $89.1 million net deferred tax benefit resulting from the release of the substantial portion of the valuation allowance on certain deferred tax assets based on our improved historical and projected pretax income. Due to the use of net operating loss carryforwards, we only paid approximately $200,000 in cash taxes this quarter. We will continue to utilize additional net operating losses and income tax credit carryforwards to eliminate the majority of our cash taxes for the next several years. Moving on to capital expenditures. Our spending was $15.6 million in 2012, with much of our spending focused in the fourth quarter due to the opening of the new company restaurant in Las Vegas. In addition, we acquired a franchise restaurant located in San Diego from a single-unit franchisee in the fourth quarter. We paid approximately $1.4 million for the restaurant, which has around $2 million in annual sales and close to $300,000 in annual company EBITDA. About 1/5 of our company restaurants are in Los Angeles and San Diego, allowing us to leverage our existing field G&A in its acquisition. We have a right of first refusal on all franchise-to-franchise transactions. Given that we have a meaningful base of company restaurants, we will review opportunities to reinvest our excess cash and leverage our existing infrastructure where appropriate. Although we have 93 single-unit franchisees and 113 with between 2 and 5 units, we do not think there are significant number of locations that meet our criteria for geography, profitability and returns. We generated $7.2 million of free cash flow in the fourth quarter, and we generated $48.8 million of free cash flow in 2012. The free cash flow has allowed us to continue to strengthen our balance sheet as we repaid $6 million in term loan debt in the fourth quarter, bringing our total term loan debt repayment for the year to $28 million. Since 2011, we have repaid $70 million of term loan debt and now have $190 million of total debt, including $170 million of term loan debt. Our total debt-to-adjusted-EBITDA ratio is around 2.4x. And as a reminder, the next total debt ratio threshold in our credit agreement is 2.0x or 2x, which we anticipate achieving sometime in 2014. Achieving this will lower our interest rate by another 25 basis points and enable us to maximize our availability for returning cash to shareholders. We currently have an annual spending cap of $34.8 million for share repurchases and dividends, which will be eliminated with a total debt ratio of below 2x. At that point, the only restrictions on returning cash to shareholders will be the $19 million annual debt amortization and a $20 million minimum availability on our revolver. De-leveraging remains important to the Denny's branded due to the history we once had as an over-leveraged company. One of the ways we've made Denny's a stronger franchisor is by strengthening our balance sheet, which is important for attracting new franchisees, facilitating franchisee growth and making brand investments. John mentioned that we are providing direct loans to franchisees to support the rollout for our new coffee program. In addition, we've been facilitating third-party lending to our franchisees by providing loan guarantees. We had $7 million of third-party loan guarantees outstanding at the end of the year related to the third-party loan pool we facilitated for the Flying J conversions. Our guaranty obligations have decreased from over $15 million as most franchisees who took advantage of the program have quickly satisfied or reduced their loan obligations. Since November 2010, we have been returning value to shareholders through share repurchases in addition to repaying debt. In the fourth quarter of this year, we used $11.5 million of cash to repurchase 2.4 million shares. Since initiating our share repurchase strategy in November 2010, the company has repurchased 11.5 million of shares for $47.6 million and now has 3.5 million shares remaining in the current authorized share repurchase initiative. In 2013, we will continue to balance the use of our free cash flow for both debt repayment and share repurchases, as we seek to make both -- make us a stronger franchisor and return value to our shareholders. That wraps up my review of our fourth quarter results. I'll now turn the call over to Whit, who will comment on the guidance for 2013.

[Whit Kincaid:]

Thank you, Mark, and good afternoon, everyone. I would like to take a few minutes to expand upon the Business Outlook section in today's press release. The following estimates for full year 2013 are based on 2012 results and management's expectations at this time. We expect full year franchise and company restaurant same-store sales to perform between flat and positive 2%. As John mentioned before, we expect the consumer economic environment to continue its volatile recovery especially as we comp over the favorable weather in the first quarter of last year, move through the timing shift in the income tax season and face headwinds from higher payroll taxes. Regardless, we would believe that we have the right strategies in place to build on our 2012 results. We expect commodity inflation to continue to impact our business in 2013. In 2012, commodity inflation was around 2%. Based on our current thinking, we believe that commodity cost pressures will be in the 2% to 4% range this year, and are currently locked in to more than 50% of our needs. As a result of the commodity increases we are seeing, we did take around a 1% price increase with our new January core menu. We expect to open between 40 and 45 new restaurants this year, 100% of which will be opened by our franchisees and licensee partners. We expect the majority of the restaurant openings will come from our domestic pipeline of 124 unopened restaurant commitments, and at least 5 new locations will be either international or nontraditional locations. We currently expect to achieve net system unit growth between 5 and 10 units as we anticipate that around 35 system units will close this year. This is a closure rate around 2% of the system and is consistent with what we have seen over the last 6 years. We expect our company margin to range between 14% and 15% as we face commodity headwinds. We expect our franchise margin to be approximately 65% as the favorable impact from new unit growth and same-store sales increases will be offset by not receiving front-end fees from the FGI program as we did in 2012. Our adjusted EBITDA estimate for 2013 is between $76 million and $80 million. As a reminder, there is a carryover effect from the FGI program as this places downward pressure on our adjusted EBITDA, and we lose EBITDA from company restaurants that were sold in the prior year. We expect depreciation and amortization expense to decline this year and be between $20 million and $21 million. This decrease is primarily driven by the result of the sale of company restaurants last year. We expect net interest expense to decline in 2013 and be between $10.5 million and $11.5 million with the net cash interest expense to be between $9 million and $10 million. This decrease is driven by the $28 million of turmoil and repayments in 2012 and the refinancing of our credit facility, which occurred in the second quarter of 2012. In 2012, our effective tax rate was 36.4% and we currently expect our effective tax rate for 2013 to be between 35% and 40%. As Mark mentioned, we will continue to benefit from certain deferred tax assets and expect our cash taxes to be between $2.5 million and $3.5 million. Turning to capital expenditures. In 2012, our cash capital expenditures were $15.6 million, which included the construction of the flagship company restaurant in downtown Las Vegas and the acquisition of one franchised restaurant. Our estimate for 2013 is between $17 million and $19 million, which includes remodeling approximately 20 to 25 company restaurants that we have started back into our full-remodel cycle. In addition, we have around $1 million of carryover capital expenditures from 2012 that will be paid this year. Our free cash flow guidance for this year is between $46 million and $49 million. Please refer to the historical reconciliation of free cash flow to net income in today's press release. As Mark mentioned, we will continue to balance our use of cash towards both debt repayment and share repurchases in 2013. That wraps up our guidance commentary. I will now turn the call over to the operator to begin the Q&A portion of our call.

[Operator:]

[Operator Instructions] We'll take our first question from Bill Slabaugh with Stephens.

[Unknown Analyst:]

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

[John C. Miller:]

JR [ph], this is John. Let's talk about fourth quarter momentum first. I think this will help answer the question. One of the things that we had a strong fourth quarter and yet we built momentum during the quarter. If you look back at what happened there, we had a 1.8% increase in check that was driven by both pricing, but also some real strong mix change. But we also, compared to the fourth quarter of the year before, moved our $2/$4/$6/$8 value proposition from 16% incidence up to 19%. So while we're building this broadening effect that's taking place, we have the value seekers coming in higher numbers, but you also had people responding to the diner options in the higher-check building strategy as well. Certainly The Hobbit played a nice role for us there. So we took that momentum into the first quarter obviously, the first quarter being a tougher comparison as Whit pointed out from weather of last year. And then we do have this delayed tax returns in the FICA tax, which affects the middle and lower-middle income consumers as a percentage of their spend a little bit more than others. And our consumer base, a good 50% of those remit $50,000 household income in lower bracket. So it is a headwind for us in the first quarter. We've not been in the habit of commenting about how a quarter unfolds. But I think suffice to say, our guidance of flat to 2% is -- we're confident in that. We do think our initiatives that we have in place from both value and check-building strategies and broadening and frequency strategies are pretty solid. And we feel, all-in-all, good about 2013 at this stage.

[Unknown Analyst:]

Great. Kind of switching gears and -- with respect to the free cash flow of guidance of $45 million to $49 million, it seems to be flat year-over-year or it is kind of flat year-over-year. Just wondering if you could kind of break down the components there.

[Whit Kincaid:]

Yes, JR [ph], this is Whit, speaking. So yes, from a free cash flow guidance, the primary drivers there -- so really you have a slightly higher cash taxes where we ended the year -- last year, it was $2 million. Our estimate for this year is $2.5 million to $3.5 million. Obviously, you pick up some on the interest expense -- the cash interest expense savings we expect which was in our guidance for this year of $9 million to $10 million. And then part of this is obviously the CapEx, our guidance range of $17 million to $19 million. So last year, so this is in 2012, we didn't -- we had very little, if any, remodel capital dollars in that $15.6 million. So we really -- it's been almost 2 years since we've done full remodels at company restaurants. And so that's the biggest difference when you go from 2013 versus 2012. So that range for remodel capital for 2013 is probably for the 20 to 25 restaurants that we called out. It's about $7 million to $9 million. And so that's going to be the biggest driver. And the other piece is obviously the EBITDA guidance. You have headwinds year-over-year due to -- with the FGI program that ended. The front-end fees that we got for those units were about for $40,000 per unit. So we obviously do not expect to refranchise any stores this year. So that was about a $1.4 million year-over-year loss. And then obviously, you lose kind of the EBITDA from selling those company restaurants. Even last year, you get some of the carryover effect into 2013.

[John C. Miller:]

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

[Operator:]

We go next to Michael Gallo with CL King.

[Michael W. Gallo:]

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

[John C. Miller:]

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

[Michael W. Gallo:]

Sounds like still some work to be done, but you're encouraged by what you see.

[John C. Miller:]

Well, it's -- the quarter, [indiscernible] Michael is that -- I just said we're confident with our guidance for the year and I don't want to get into a million [indiscernible] quarter questions. But I would say that this is, if I can tip my hand at all, it's that this would be one of those types of modules that provide check growth versus breakfast, but high-value scores and high-incidence rates.

[Michael W. Gallo:]

And you still have $2/$4/$6/$8 that you're really -- on message with as well. It seems like it's on message. Second question I have is for Mark. Mark, I guess when I look across your peer group, you've seen a number of your competitors recently reprice their credit facilities in January, essentially eliminate all the amortization, get some interest savings. Now all -- both of them similar franchise models, both of them at much higher leverage ratios then you're at and also get extensions of maturity. So I was wondering, as you look at your current credit facility and you look at the marketplace, do you think you can potentially, even maybe eliminate the amortization currently based on where the market is, potentially extend maturities and potentially get some further interest rate reduction?

[John C. Miller:]

Michael, this is John, again. Before Mark answers that, I just -- I want to take acceptance of the fact that those questions are always directed at the Chief Financial Officer.

[Michael W. Gallo:]

Point is taken. But if you want to take a stab at it first, John, I'll...

[F. Mark Wolfinger:]

So a little bit on the credit facility, and again, this -- and we talked about the credit facility and I think, as I've made in my comments or said in my comments, we called it new credit facility because it's only about 10 months old. It was done obviously April of 2012. So a little bit of a history here. We've -- I think we've mentioned this before. We've refinanced 3x and repriced twice really since 2006 timeframe. So clearly, the company has been very active in the financing markets. But I think when we put that deal together, that was very important to us for a couple of reasons. One is that we had, I think, a very attractive pricing grid. We're currently paying slightly under 3% on our debt. And I go back in time and just of years ago, we were paying certainly above 8% for the total debt cost. But clearly, part of those terms and conditions and the ability to buy back shares was wrapped around the amortization amount, which was the 10% piece. To answer your question from the standpoint of the current marketplace, I've read the literature as well, we see a lot of stuff going to the press. It clearly continues to be a strong marketplace out there. And I think just from our standpoint as a company, as I mentioned upfront, we haven't hesitated to go to the credit markets at whatever point in time makes sense for us from a company perspective and revise whatever deal is out there. As I mentioned in my comments, we have this 2014 timeframe where we think we'll probably come under the 2 to 1 leverage ratio. So sometimes in next fiscal year, that's a key point for us that drops our pricing grid by another 25 basis points and it frees up even more cash from a shareholder perspective. So, again, I think, from our perspective, we like the financing deal we put together 10 months ago. It continues to benefit us on a lot of ways and we'll continue to watch the credit markets appropriately for whatever next action might suit us.

[Operator:]

We'll take our next question from Tony Brenner with Roth Capital Partners.

[Anton Brenner:]

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

[John C. Miller:]

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

[Anton Brenner:]

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

[John C. Miller:]

Yes, we did. We took a small increase. Commodities are actually in our favor now. Long term, Arabica beans are going to cost more than our historical program. So we did do an upgrade but the impact of that upgrade is actually in our favor this year. And so we took about a dime a cup increase and of course, we have a bottomless cup program that -- at Denny's like any other full-service concept would. And it's gone well so far. There was those customers who don't like change. But on the whole -- so you'll hear a little bit of that but on the whole, this has 6,000 customers participating in 2 years research and it was highly endorsed as a nice step forward for the brand. Now as I mentioned earlier in my comments, this is new filters training programs, thermal pots and much better management of overall coffee and coffee culture, as well as upgrade in taste and flavor. And then...

[Anton Brenner:]

Who's your supplier of the coffee?

[John C. Miller:]

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

[Anton Brenner:]

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

[F. Mark Wolfinger:]

Yes. I think -- yes. [Audio Gap]

[Operator:]

Mark Smith with Feltl and Company.

[Mark E. Smith:]

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

[F. Mark Wolfinger:]

Mark, it's Mark Wolfinger. On the company opening side, we have consistently said this really as we've got heavily into the FGI refranchising process that majority of our openings are going to be done by the franchise [indiscernible]. We've got great franchisees that want to develop this brand. And we're going to be relatively selective from a company development perspective. The opening that I mentioned, the store that opened in the fourth quarter from a company operations perspective in Las Vegas, again -- everything along the Strip in Las Vegas is company-operated, this particular location is down off the Fremont Street in the Annapolis area. So it's those kind of a unique locations where we'll be putting our company-operated new store capital. And I think as Whit mentioned in his guidance, the focus this year, 2013, from a CapEx standpoint, on the company side is the remodel activity. And we're targeting I think 20 to 25 remodels this year on the company side. And again, these are strong, high-volume restaurants, heavy traffic restaurants, which is time from a remodel cycle perspective to put the capital there.

[Mark E. Smith:]

Is it -- Did you say that you might get better returns or you'll be opportunistic on acquiring franchise restaurants? It seems like that it's the first time you guys talk about that in quite some time.

[John C. Miller:]

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

[Mark E. Smith:]

And would the same thing apply on refranchising, FGI is done, but you might still be opportunistic there?

[F. Mark Wolfinger:]

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

[Mark E. Smith:]

I want to confirm in the guidance, on the comp guidance of flat to 2% growth. Is there any difference between company-operated and franchised restaurants in that comp guidance? Or do you expect both of them to be between 0% to 2%

[John C. Miller:]

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

[Mark E. Smith:]

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

[John C. Miller:]

Yes. I would say it's just true to form, sort of restaurant 101. We -- you get pricing in this environment, I'd say, there's not a lot of pricing power in general in full-service pricing bundled meals and dealing going on. Nevertheless because commodities continue to move to some degree, we all take some. And I think we've learned the last 2 or 3 years to take a couple of modest increases per year rather than shock the consumer with a lot of new aggressive prices. And so this would be like our last couple of rounds at or under 1%, and not a lot of commentary from our consumers. Whereas going back 3 to 4 years when we had more aggressive pricing, we did hear a little bit of a louder cry at new menu launch. So we've not seen this sort of rejection at this point.

[F. Mark Wolfinger:]

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

[Operator:]

We'll go next to Michael Halen with Sidoti.

[Michael Halen:]

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

[John C. Miller:]

Well, the company base is scattered about pretty well. So as much as we'd love to be able to pull off a total market scenario, that's not how it will unfold. They'll be based on when they're due.

[Michael Halen:]

Okay. And what kind of step up have the remodels -- the franchisee remodels seen?

[John C. Miller:]

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

[Michael Halen:]

Okay. And how many of the franchise units don’t needs to be remodeled?

[John C. Miller:]

So about 70% of the systems on the current scheme. That's about 290 neons [ph] open since 2008 and there's 270 that were refreshed at some level, a good portion of which were on that lighter scheme. So now, we're back into the full remodel cycle. The little bit, not the cheaper version but the full remodel program. These run for about 7 years. And so, I want to say 30% then -- so 70% are in the cycle are current and 30% are not.

[Michael Halen:]

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

[John C. Miller:]

Yes, so it's fairly steady. We have a little -- we have a few spikes but -- so you can't divide the whole system by 7 exactly. But it's basically a pretty smooth consistent portion per year.

[Michael Halen:]

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

[John C. Miller:]

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

[Michael Halen:]

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

[F. Mark Wolfinger:]

Yes, Mike, it's Mark. I think some of the comments we made during the discussion here today is obviously, we've been able to blend really the 2. Our term loan has a 10% am rate to it, so it requires a $19 million a year amortization. So clearly that's going to the debt pay down. We obviously have sort of exceeded that kind of am rate, historically. And as I mentioned, that brings us in the -- when we get on the 2 to 1 lever that brings us into a more attractive pricing grid by the debt by another 25 basis points. But at the same time, we've repurchased a lot of shares. And just as a reminder, the share repurchase program has only been in place since November 2010, so call a little bit longer than 24 months. And as I mentioned in my comments, we've repurchased slightly under $50 million of stock in that timeframe about 11.5 million shares and there's about 3.5 million shares left in the authorization from our board. So it's really been a blend of the 2. And I think the last piece that John mentioned in his comments upfront is we're also focused on reinvesting appropriately in the business. And we're certainly the 20 to 25 company remodels is I think a real strong example of that.

[Operator:]

We go next to Nick Setyan with Wedbush Securities.

[Nick Setyan:]

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

[John C. Miller:]

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

[Nick Setyan:]

Got it. So even including starting in Q1, when you see about an even member of remodels starting in Q1?

[John C. Miller:]

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

[Nick Setyan:]

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

[John C. Miller:]

Well, we had call it a 1.4 or so improvement in transactions from third quarter to fourth on the company base, and franchisees also had a very strong fourth quarter in transactions. So it did benefit us. But bear in mind, when you have call it, a couple of years ago, 55-ish percent of your transaction is going to breakfast all-day, and today 5 or 6 point lift from 2 years ago in the number of instances when people are buying lunch or dinner items versus breakfast items. So that raises check. So you're able to -- this broadening strategy beyond breakfast initiatives allows us to satisfy a value seeker, at the same time, offer incentives for guest to try us if those incentives are toward items that are not the lower average check breakfast. The $6.50 Grand Slam for instance, then it's still in our favor from a check standpoint. Whereas, competitively, you wouldn't see people add breakfast, it would lower their check, right? So it's...

[Nick Setyan:]

Got it, got it. That's helpful. And just lastly, I have grown up with the Denny's brand here in L.A. and I still live here in L.A. I go in from time to time and I actually really believe that you guys have improved the menu quite a bit in recent years. Now you guys are really thinking about maybe changing the messaging around media to communicate that to your customer base more effectively? I mean, how are you thinking about perhaps communicating that message a little bit better than you have in the past?

[John C. Miller:]

Yes. So one of the things that is always interesting about the full-service business is how compared to very, very large top 4 or 5 QSR brands, is the difference in shout power. So if you have a new coffee initiative or cinnamon roll in brand x, y or z, the top 2 or 3 deepest-global penetrated brands, everybody in the world knows about it with multiple contact points. There might be 6, 7, 8, 10 merchandising pieces just in restaurant, billboard campaigns, radio, television, broadcast support and so forth. In our business, there's not 28 or 30 different pieces of creative a year, there's 5 modules. So we invest in the general value messaging. We first drew menu merchandising table tents and the likes, socialized new items. We use -- we leveraged our servers quite a bit with the power of suggestion and then as these things hook and catch on and become a little bit of heavier mix, then we're willing to do a little investment spend in telling the world, if you get that out of order, you don't get the benefit. People don't think about your brand that way. So you can investment spend and then it can go. So it is a longer, slower process to evolve how people think about a brand. But we are getting traction from these initiatives, and I appreciate you noticing that in your store visits.

[Operator:]

And we'll go next to Conrad Lyon with B. Riley Caris.

[Conrad Lyon:]

I've got a really more of a big picture, long-term macro question probably geared for John. First, you've done an excellent job in effectuating your game plan here

[John C. Miller:]

I think for the first part is easy to answer, the near-term, which is sort of leads to the longer term. We, obviously, are making more investments as both Mark and -- where both Mark's and my comments and then also in Whit's guidance, we've made some investments in the support for our franchise system -- and excuse me, support for growing our franchise base. So we think there's more to be done with our current licensees in nontraditional. We think there's more to be done in military and airports. We think that there's opportunity for global -- for continued traction in global growth. We've had some very good results, but they're not material, fast-growing achievements at this stage. That we think that the globe is a big place and there's lots more opportunity there. So obviously, we'd like to step up or achieve a higher net unit opening with slower closings and more, domestic, international, traditional, nontraditional efforts playing out through time. So that's one, obviously, goal for the organization. We also think sustainable. We have 7 consecutive quarters so we expect to continue to grow comps through check. We're broadening strategies and obviously expect to ultimately turn traffic positive and remain that way. So the core brand strength and performance in the mid-scale category and then the overall full-service category that revitalization is our primary effort near term and then where that leads us longer term. We also believe that there's tremendous opportunity to continue with our share repurchase program. And so again, without getting into longer-term guidance, I think that you can safely see from the near term, as Mark commented, just not -- just since late 2010 with the first authorization, we've repurchased considerable number of shares, a near $50 million commitment towards that end. We have 3.5 million shares remaining and we have free cash flow to continue to execute against that value creation strategy. So I think at least near term, I know we've not given longer-term guidance, but at least near term, I think you could see where we're headed with the brand.

[Conrad Lyon:]

Yes. And maybe, I can sort of frame it this way, it's probably going to be tough for you to answer this given you don't like give to too much about where you want to go which share repurchases. But I -- envisage the company in a few years, almost probably no debt, significantly lower share count to the extent where you might be in a position where you have the luxury of saying, "Hey, do we continue to buy back shares or is it time to put the cash into a whole another strategic alternative?" Is -- I don't know if it's fair to ask that question at this point but I will. So...

[F. Mark Wolfinger:]

Conrad, it's Mark. And I think you're really driving home some key points here because yes, there's been a dramatic conversion of this model into this $50 million approximate free cash flow type of model. And we've been fortunate to move accordingly in that fashion. But I look at that use of cash and you talked about the debt reduction, which is very important and we've talked about that new pricing, the grid, as for as getting the 2 to 1 in leverage. Now that still in front of us for 2014. The share buyback fees, we've received, very strong positive feedback from our stakeholders as far as that program. And again, that's only a couple years old at this point. And then I look at the quarter and say, look at some of the other uses of cash that John mentioned in his comments upfront. One of those obviously was the buyback or the purchase of this franchise unit and we've talked about some of the metrics there. The use of cash as far as franchisee loan pools, again, drive growth, An example we gave was the Flying J, growth opportunity and signed up the loan pool for that. And then the other piece was the coffee program, which I think is a great expansion of the existing brand inside our existing stores. And we've committed loans to our franchisees for that, interest-free loans that again we're able to leverage our credit card program and collect against those loans with virtually no losses at all. And so I look at that and say there's a number of ways that we sort of been utilizing cash now that if you just step back a couple of years, that was in sort of the radar screen for Denny's. So I know that we haven't answered your question specifically long- term, but it's just sort of describes the flexibility we have today in our balance sheet, in our cash use to, obviously, reward our stakeholders accordingly, but also reinvest in the business both on the franchisor and the franchisee side.

[Conrad Lyon:]

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

[John C. Miller:]

No, I think those were great questions. We have essentially grills and fryers and we have anything you can do on that, we do a pretty good job of. And it does create some limitations to where the menu could go. So we're experimenting all the time with ways in which we can continue to broaden the menu and where there is a payback on different types of line efficiency opportunities, consolidation to prep opportunities, higher producing menu item opportunities and then baked goods is certainly one of those. In our downtown, Fremont St. Vegas unit, we put in a series of new pieces of equipment there including Turbochef just to test that range. We have a number of new items in test there from steaks, lasagna, baked goods, baked items. They're selling really, really well. So those are interesting questions and how they might play out over time, it just way too early to tell. But obviously, you'd expect us to be involved in testing those ideas.

[Operator:]

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

[Whit Kincaid:]

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

[Operator:]

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