Denny's Corporation
Q1 2013 Earnings Call Transcript

Published: 1 May 2013

[Operator:]

Good day, everyone, and welcome to the Denny's First Quarter 2013 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, Ann. Good afternoon, and thank you for joining us for Denny's First Quarter 2013 Investor Conference Call. This call is being broadcast simultaneously over the Internet. With me today from management are John Miller, Denny's President and Chief Executive Officer; and Mark Wolfinger, Denny's Executive Vice President, Chief Administrative Officer and Chief Financial Officer. John will begin today's call with his introductory comments. After that, Mark will provide a financial review of our first quarter 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-Q later in the week. Before we begin, let me remind you that in accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, the company knows that certain matters to be discussed by members of management during this call may constitute forward-looking statements. Management urges caution in considering its current trends and any outlook on earnings provided on this call. Such statements are subject to risks, uncertainties and other factors that may cause the actual performance of Denny's to be materially different from the performance indicated or implied by such statements. Such risks and factors are set forth in the company's most recent annual report on Form 10-K for the year ended December 26, 2012, and in any subsequent quarterly reports on Form 10-Q. With that, I will now turn the call over to John Miller, Denny's President and CEO.

[John C. Miller:]

Thank you, Whit. Good afternoon, everyone. We are pleased to deliver another quarter of solid results, as we continued to successfully execute against our key objectives implemented to strengthen and grow our position as one of the largest franchised American full-service restaurant brands. We grew adjusted net income per share by 48% and generated $12.6 million in free cash flow in the quarter. We achieved these results despite what continues to be a challenging environment for growing sales. We faced significant headwinds in this quarter as we lapped our strongest quarter of last year, and our customers felt the impact of higher payroll taxes, gas prices and delayed income tax refunds. As a result, we ended up with our first quarter of negative systemwide same-store sales in almost 2 years. Challenges aside, our performance is a testament to our franchise-focused business model and the improvements that we've made to date. Our continued success has enabled us to take advantage of the favorable credit markets and once again, refinance our credit facility to the benefit of all stakeholders, which Mark will talk about in greater detail. As we move forward, we will continue to work closely with our franchisees to increase restaurant level performance and new restaurant growth, while also balancing our capital allocation between reinvestments in the brand and returning value to our shareholders. We remain focused on executing against our 3 key objectives

[F. Mark Wolfinger:]

Thank you, John, and good afternoon, everyone. We achieved another solid quarter of results, which is highlighted by growing adjusted net income per share by 48% and generating $12.6 million of free cash flow. In addition, we recently announced that we refinanced our credit facility and that our Board of Directors authorized an additional 10 million shares for our share repurchase program. In the first quarter, systemwide same-store sales decreased 0.7% with a 1.7% 2-year increase as we lapped our strongest quarter of same-store sales last year. Same-store sales of domestic franchise restaurants decreased to 0.5%, with an estimated 2% decrease in same-store guest traffic, offset by an estimated 1.5% increase in same-store guest check average. The increase in same-store guest check average was primarily driven by a 1.6% increase in menu pricing. Same-store sales at company restaurants decreased 1.5% compared with the prior year quarter. The decrease was driven by a 2.1% decrease in same-store guest traffic, which was partially offset by a 0.6% increase in the same-store guest check average. The increase in company same-store guest check average was primarily driven by a 1.2% increase from menu pricing, offset by an unfavorable mix shifts compared to the prior year quarter. In the first quarter, more customers shifted from higher priced entrées, appetizers and desserts, into the skillet bundled meals limited time offering. In addition, the average mix of the $2/$4/$6/$8 Value Menu was 3 percentage points higher during the first quarter of this year. In the first quarter, Denny's opened 7 new franchise restaurants and closed 6 franchise restaurants, bringing the total restaurant count to 1,689. I'll now review the quarterly operating margin table provided in our press release. Denny's total operating revenue, including company restaurant sales, and franchise revenue decreased $12.2 million compared with the prior year quarter, primarily driven by a decrease in company restaurant sales in the quarter. Sales at company restaurants decreased $13.1 million, primarily due to 36 fewer equivalent company restaurants, reflecting the impact of selling company restaurants to franchisees. For the first quarter, adjusted EBITDA margin as a percentage of total operating revenue increased 0.7 percentage points to 16.1%, this increase was primarily driven by the franchise side of our business. Denny's franchise and license revenue increased 2.7% to $33.5 million in the first quarter. The $900,000 increase in franchise revenue was primarily driven by a $500,000 increase in royalties and a $400,000 increase in occupancy revenue, which were favorably impacted by 45 additional equivalent franchise restaurants. Franchise operating margin increased $800,000 to $22.1 million in the first quarter. This increase was primarily driven by the items previously mentioned, but was partially offset by a related $100,000 increase in occupancy costs. Franchise operating margin as a percentage of franchise and license revenue increased 0.6 percentage points to 65.9% compared with the prior year quarter, primarily due to the increases in royalties and occupancy margins. This increase was partially offset by lower initial fee revenue from refranchising 6 restaurants, which benefited the first quarter of last year. The first quarter company restaurant operating margin of 14.7% represents a 0.4 percentage point decrease compared with the prior year quarter and was primarily impacted by higher product and occupancy costs, which were partially offset by lower payroll and benefits costs. The increase in product cost was primarily due to the unfavorable impact of product mix, as well as higher commodity cost. The product mix impact was primarily driven by the unfavorable mix shifts that also impacted our guest check average this quarter, as previously mentioned. The increase in occupancy cost was driven by favorable general liability claims development in the prior year quarter. The decrease in payroll and benefits costs was primarily driven by lower incentive compensation and medical costs, compared to the prior year quarter. In addition, payroll and benefits costs were favorable impacted by $500,000 from favorable workers' compensation claims developments in this quarter. Gross profit from our country restaurant operations decreased by $2.3 million to $11.9 million on a sales decrease of $13.1 million, primarily due to the impact of selling company restaurants to franchisees in the prior year. Total general and administrative of expenses for the first quarter decreased $500,000 from the prior year quarter, as lower expenses across a number of areas were partially offset by higher share-based compensation expense, compared to the prior year quarter. Depreciation and amortization expense declined by $800,000 compared with the prior year quarter, primarily resulting from the sale of company restaurants last year. Interest expense for the first quarter decreased by $1.7 million to $2.8 million as a result of a $26.3 million reduction in total gross debt over the last 12 months and lower interest rates. In the first quarter, our provision for income taxes was $3.6 million, reflecting a 33.5% effective income tax rate. This is lower than our guidance range of 35% to 40% due to a $500,000 income tax benefit recorded due to the retroactive passage of the Work Opportunity Tax Credit back in January 2012 under the American Tax Relief Act signed into law in January of this year. Due to the use of net operating loss and income tax credit carryforwards, we only paid approximately $300,000 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. We generated $12.6 million of free cash flow in the first quarter, which allowed us to repay $4 million in term loan debt. Our total debt-to-adjusted-EBITDA ratio was 2.4x at the end of first quarter. In addition, we repurchased 341,000 shares for $1.9 million during the first quarter. On April 25, we announced the refinancing of our existing credit facility establishing a new 5-year $250 million senior secured bank credit facility, comprised of a $60 million term loan and $190 million revolving line of credit. This bank facility is a testament to the tremendous progress Denny's has made over the past several years with its franchise-focused business model. As a result of our stronger balance sheet, growing profitability and free cash flow, we are once again able to capitalize on the favorable credit markets. The refinanced facility features interest adjustments based on the company's total debt-to-adjusted-EBITDA ratio since our current total debt-to-adjusted-EBITDA ratio is less than 2.5x, the new interest rate will be at LIBOR plus 200 basis points, which is 2.2% based on current rates. The LIBOR spread increase is to 250 basis points of our total debt-to-adjusted-EBITDA ratio is more than 2.5x and decreases to 175 basis points if the ratio is less than 2x. When compared to the previous facility, which had an interest rate of LIBOR plus 275 basis points, the new facility will lower our interest cost by 75 basis points based on current interest rates. The estimated annualized cash interest savings is approximately $1.3 million, which also takes into account the interest rate savings on our outstanding letters of credit and higher fees for the unused portion of the revolving facility. We currently have a LIBOR interest rate cap at 2%, covering $125 million of debt from our previous credit facility, which will apply to the current facility and extends to April 2014. Although there is no interest rate swap or cap requirement for our new credit facility, we have entered into an additional 2% LIBOR interest rate cap covering $150 million of debt from April 2014 to April 2015. In addition, we have entered into a 30-day LIBOR rate swap contract from April 2015 to March 30, 2018, for approximately 1.1% on $150 million of debt through April 2017 and $140 million of debt through March 30, 2018. Based on our current LIBOR spread of 200 basis points, this would translate into a fixed interest rate of 3.1% during this 3-year period. In addition to the interest savings, the new facility offers enhanced flexibility for the use of cash whether it's towards debt repayment, returning cash to shareholders or using our balance sheet for brand investments like direct loans to franchisees and franchisee loan guarantees. The $60 million term loan will be amortized 5% in the first 2 years, that's 5% per year in the first 2 years, 7.5% in the subsequent 2 years and 10% in the fifth year with the balance due at maturity. This translates to minimum payments of $3 million to $6 million per year, which is substantially less than our previous facility, which had a $19 million amortization requirement. Our basket for cash allocation to share repurchases and/or dividends will be capped at $44.6 million each year, which is an increase of $10 million, compared to the previous facility. If our total debt-to-adjusted-EBITDA ratio is below 2x, the $44.6 million cap will be removed except for the requirement to have a minimum revolver capacity of $20 million. We have made great progress deleveraging this business, and erasing the history we once had as an over-leveraged company. Our stronger balance sheet has helped us attract new franchisees, new third-party lenders, facilitate franchisee growth and make brand investments. In 2013, we will continue to use our free cash flow after reinvesting in the brand towards both share repurchases and to a lesser extent, debt repayment. In addition, we will opportunistically use cash to either purchase franchise locations that enhance our company restaurant portfolio or acquire real estate to improve our returns on company or franchise restaurants. As a result of this new credit facility, we will look to repay debt at a much slower rate than we have in the past as debt repayment becomes less of a priority. We are currently focused on keeping our total debt ratio below 2.5x versus getting below 2x, unless there's a need to free up flexibility for returning cash to shareholders or increase in our ability use our balance sheet for the purposes, such as third-party loan guarantees or franchisee loans. In conjunction with the refinancing, the Board of Directors authorized an additional 10 million shares of common stock for our ongoing share repurchase program. Since November 2010, we've invested approximately $53.3 million to repurchase 12.6 million shares through April 24. We now have a total of 12.4 million shares authorized for our ongoing repurchase program, which includes 2.4 million shares remaining on the current authorization and a new authorization of 10 million shares. That wraps up my review of our fourth -- of our first quarter results. I'll now turn the call over to Whit, who will comment on our updated annual 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 first quarter results and management's expectations at this time. We now expect full year systemwide same-store sales to perform between flat and positive 1.5%, as we take into account the challenging first quarter. We anticipate that both franchise and company same-store sales will be between flat and positive 1.5%. We anticipate that we will take approximately 50 basis points of core menu pricing in July when we roll out our new core menu. This is in addition to the 1% price increase implemented in January of this year. Based on our current thinking, we believe that commodity cost pressures will be in the 2% to 3% range this year and are currently locked into approximately 2/3 of our needs for the year. We expect our company margin to range between 14% and 15%, and our franchise margin to be between 65% and 66%. As a result of the lower interest rates with our new credit facility, we expect net interest expense to now be between $9.5 million and $10.5 million with net cash interest expense to be between $8 million and $9 million. We estimate that the closing of this new bank facility will result in a one-time noncash charge to other nonoperating expense of approximately $1.2 million in the second quarter of this year, as a result of the charges for the unamortized portion of deferred financing costs related to the prior facility, and a portion of the fees related to the new facility. As a reminder, there was a one-time noncash charge to other nonoperating expense of approximately $7.9 million in the second quarter of last year when we refinanced our previous credit facility. Our updated estimate for capital expenditure is between $19 million and $21 million, which includes remodeling approximately 20 to 25 company restaurants with most to be completed in the second and third quarters. This estimate now includes the purchase of 2 parcels of real estate in the second quarter of this year for approximately $2.4 million. As a result of the higher capital expenditures, our annual guidance for free cash flow is now between $45 million and $80 million -- $48 million. Please refer to the historical reconciliation of free cash flow to net income in today's press release. That wraps up our guidance commentary. I will now turn the call over to the operator to begin the Q&A portion of our call.

[Operator:]

[Operator Instructions] We will take our first question from Will Slabaugh with Stephens.

[Will Slabaugh:]

I wonder if you could talk just a little bit more about the use of cash given the refinancing. And just really, your willingness to buy back stock here at these levels versus instituting a potential dividend down the road. And then I would assume that this is a fairly good indication that the debt paydown, that you may have alluded to earlier, is sort of falling to the back to the list.

[F. Mark Wolfinger:]

Will, it's Mark. We though we might get this question, so thank you for kicking off. We obviously, are really pleased with the new facility we put in place and for those that know the history of Denny's, the fact that right now the current rates, the average cost of our debt is going to be in that low 2 number, the 2.2% number, I think is a real tribute to obviously, the turnaround in the balance sheet, the cash flow of the business. I mentioned in my comments that, that basket that we have for both, I think, it was either/or but it was a combination of share repurchase and dividends was increased by $10 million up to that, I'll call it around $45 million, I think it was $44.6 million. And right now, as I've talked about the share repurchase program and the fact that we have this new authorization, we've used over $50 million to buy back our stock. We obviously are very focused on that and albeit, we do get questions about dividend payments and at this point in time, we see, again, the cash primarily towards share repurchases, as far as our free cash flow usage, we like the fact that also in this facility, Will, we got an increase in the level of direct lending that we could do to our franchise community. We also got an increase in the ability to backstop franchise walls, both of those went up by about $10 million. So again, it's also about growing and investing in the brand. I also mentioned in my comments, I think, John mentioned this as well, is the repurchase of a couple of pieces of real estate, again, at very attractive rates so. I think the dividend question is always there for us. At this point in time though, I think the focus is going to be on share repurchases, as well as investing in the business at the appropriate return levels.

[Will Slabaugh:]

Okay, got you. And then also I wanted ask you about trends throughout the quarter. Wondering if you saw -- you did mention a 3% higher incidence of the $2/$4/$6/$8 Menu. I wonder if that was more throughout the quarter? You'd see it quite a bit higher in February. Things were difficult in the industry. And then just really, your overall thinking about how you guys performed, given how difficult the market was for these past 3 months?

[John C. Miller:]

Yes, Will, this is John. The quarter was certainly more volatile than normal due to a combination of factors that we're all aware of by now. Certainly, the weather was much more favorable during January and February of last year. There was higher gas prices, certainly the income tax refunds were delayed and then what we don't know how to read now throughout the whole year is the impact of the increased FICA tax. Our consumers at about 50% -- a little more than 50% below $50,000 household income, we think might have been impacted just a little bit more. So how the quarter might have affected us? Perhaps a little bit different than the industry at large so -- but our systemwide same-store sales were positive in March. We benefited from the early timing of Easter. We were down .7 in the quarter as I mentioned. We were up 1.7 on a 2-year basis and we had our best leverage in the quarter get over so. We also had some good momentum going into January, Will, with our Hobbit promotion. That carried into January a little bit. And we also benefited from the timing of the New Year's Flipped into January. So sort of a good start, a good finish and in the middle, it was a challenging quarter, to say at least.

[Operator:]

We'll take our next question from Michael Gallo with CL King.

[Michael W. Gallo:]

My question is for John. The promotion you ran in the quarter, obviously you saw some pressure on the company restaurant margins, I think you mentioned some things you were tweaking with that. Can you talk a little bit more about that kind of what happened why the margin expectations were different than what you saw? And what kind of adjustments you make to that so that, obviously, you don't see the same kind of margin impact, and whether we should expect on the Q1, will be the high point for food costs for the year?

[John C. Miller:]

Right. Well, Q1 product margins, we were about 26.1%. It's about 1.1%, primarily due to the impact of unfavorable product mix versus prior year first quarter, about 6 points there. In addition, 2% increase in commodities. So there is basically the story of Q1. The unfavorable mix is primarily driven by customer shifting from higher-priced entrées. And then also, it affected appetizers and dessert sales into these bundled meals. The bundled meal is a value proposition designed to drive traffic, and we have a lot of confidence in our Skillet programs. It's been a top seller for us. There's been a lot of affection that our customers have for that program. It helps build lunch and dinner incidence. But because of the headwinds in the quarter, we didn't get the transactions that we expected with this promotion. So we do believe value platforms -- the bundled value platforms and programs like this have a place in our program, and so we just continue to test ways in which they can be more effective in driving transactions. But that's the story of the margin hit during the quarter.

[Michael W. Gallo:]

But in terms of just some tweaks you're going to make to those, I think you alluded to that.

[John C. Miller:]

Well, I think the way we look at it is the annual marketing calendar has its own rhythm. Q1 is a value season for us. So we had a value transaction driving strategy and other headwinds got in the way of that being fully realized. So as we go into the year, other strategies now take place with maybe check building or lunch or dinner incident builders. If you look at current trends, we're in our Baconalia! program, and Baconalia! is a higher check but lower percent margin promotion compared to last year when we offered our Build Your Own Pancake promotion. So this will have percentage implications, but beyond that, it's too early to talk about the balance of the quarters for the year. Obviously, you've seen our recent guidance update, and we do believe we have the right strategies in place overall.

[Michael W. Gallo:]

All right, okay, great. And then a follow-up question for Mark. With the new credit facility, obviously, you did repurchase a lot of stock in the first quarter. Correct me if I'm wrong, the $45 million will be use it or lose it, so if you don't use it this year, it's kind of gone. You're going to the -- you start on the new basket next year. Can you use the entire $45 million this year? And if so, should we assume kind of a 2.5 million share kind of rate that you'll step up and complete that to the end of the year? Obviously, it may not be even, but should we expect given where you're at right now, that you'll look to buy as much as you can under that program this year?

[F. Mark Wolfinger:]

Mike, we haven't always been given real specific metrics as far as anticipated dollars or shares for the balance of the year. Really, on any annual basis. I probably would just go back and take a look at what we've averaged annually the last couple of years, that number has come in about, call it, $22 million a year, at least for the last couple of years. Again, with different or lower limitations on that. But I think the big difference here, obviously, is the fact that we had an annual amortization on the debt, the previous facility of $19 million a year. Obviously, the early years of amortization is in the low-single digits as far as millions of dollars. So again, we continue to be consistently in the market as far as repurchasing shares, but I don't feel comfortable giving specific guidance on dollar amount or share count amount for the balance of the year.

[Michael W. Gallo:]

All right, okay. Is it fair for me to assume that given the increase and the new authorization, which is obviously well in excess of what you could even buy under the current facility, that it will be -- you should see an accelerated rate of share repurchase for the remainder of the year assuming the stock price stays where it is?

[F. Mark Wolfinger:]

I would say it's fair to say that we continue to view our share repurchase program as a consistent and strong way to invest our cash. And clearly, in this new credit facility, we were very focused on the size of those baskets and the use of those baskets. It's not just for the share repurchase and/or dividend fees, but as I mentioned earlier, also reinvesting in the brand. So the nice thing about this new credit facility is a combination of, obviously, the structure of the facility, the costs from an interest rate standpoint, and that's that 2.2% number, but also the flexibility that we received and the support that we received from the banking community when we put this deal together. So that gives us tremendous options and flexibility, which we're excited about both, to your point, repurchasing shares but also investing in our business.

[Operator:]

We'll go next to Tony Brenner with Roth Capital Partners.

[Anton Brenner:]

Two things. You touched on this several times already, but regarding your same-store sales guidance, calling for an increase of up to 1.5%, both company and franchise implies a pretty nice swing from the first quarter. And there is still plenty of headwinds on a macro basis out there. Other than a price increase at midyear in the third quarter, I guess, what are you assuming specifically that's going to turn that number around?

[John C. Miller:]

Tony, this is John. Well, we're just getting through the noise of Q1. I think it's too early to get into all the specifics, but what we do see is improved housing starts. It's a volatile, choppy recovery. We'd all like it to be stronger, but it is a recovery, nevertheless. And we see continued improvements in key states for us like California, Texas, Arizona. There are softness in a couple of places, but those continue to show good signs. We have an overweight of percentage of our units there, so not to say we don't care about a national recovery, we do. But we have some positive signs in those states that matter.

[Anton Brenner:]

So it's essentially a macro-driven change to the balance of the year?

[John C. Miller:]

That, and bare in mind, 33 remodels were completed in the first quarter. We have 20 to 25 companies expected to be completed in the second and third. And so again, we expect the normal mid-single digit response from those, and that plays a role.

[Anton Brenner:]

Are any completed yet of company stores?

[John C. Miller:]

We completed one in Q1, company.

[Anton Brenner:]

Can we stretch a black string from the sales lift of that one store?

[John C. Miller:]

Yes, we don't get into single unit performance, Tony. But yes, as we've shared a number of times, this is -- it's just part of the ongoing evolution of the brand to refresh units as they're due. And we get sort of the normal, above from that.

[Anton Brenner:]

Okay. And what's the timeframe in remodeling the entire company store base, 164 stores?

[John C. Miller:]

Yes, the overall brand has a 7-year rhythm on the whole. But it was interrupted a little bit, as you will remember from the 2-year hiatus that we provided. And so it creates this little metric -- or matrix of 7-year remodel cycles and 5-year remodel cycles from a number that straggled 2010, and '11 and a little bit into '12, what we call our New Day or a lighter Refresh program. And so about -- I think we guided a little bit on the number of units that is over the next 5 years, but it's...

[Anton Brenner:]

About 25 or 30 a year, basically?

[John C. Miller:]

Yes, on the company side, yes, you can sort of divide it by 7. 1/7 is a pretty good guide.

[Operator:]

We'll take our next question from Mark Smith from Feltl and Company.

[Mark E. Smith:]

I just wanted to clarify one thing, and sorry if I missed this, but did you discuss the real estate acquisition to the quarter and what those are for?

[John C. Miller:]

I'm sorry, Mark, can you repeat that just one more time, please?

[Mark E. Smith:]

The real estate acquisition here in the...

[F. Mark Wolfinger:]

Right, yes, we had -- sorry, if I understand your question, we talked about 2 properties during the quarter, 1 company location and 1 franchise location. And obviously, we are on the head lease on a few hundred properties out there with -- and some of those have an option to purchase. And obviously, in running those numbers and looking at the kind of metrics that we need, we purchased 2 of those parcels during the quarter. And in our view, this is the end of the best that we can make with our cash with our free cash flow metrics. And I think you might recall that in the fourth quarter of 2012, we repurchased an operating franchise restaurant out in California, and that fit well into our company-operated structure there out in Southern California.

[Mark E. Smith:]

And how many real estate properties do you guys own today?

[F. Mark Wolfinger:]

We own around 90 pieces of real estate, and probably around 1/3 of those are under company-operated stores, and the other 2/3 are in the franchise. That's a rough split. And I think you heard us say this before, we also own the headquarters that we are in, in Spartanburg, South Carolina. But the majority of those properties, obviously, are restaurant properties. And again, you probably also recall in the history that we sold a lot of real estate back in 2006 time frame, which is really the beginning of our deleveraging process. And we did sell certain pieces of real estate as we went through the refranchising process as well. But, again, as we look at the use of our cash, if these type of transactions makes sense, then we will step forward and do these transactions, of which there were 2, I think, we mentioned for the -- and actually in the second quarter.

[Mark E. Smith:]

And then second, can you guys just talk about your commodity outlook and what you're looking for in your basket and any particular items that maybe you were seeing a bigger shift in?

[Whit Kincaid:]

Mark, it's Whit. Yes, our update for commodities, initially when we gave guidance for this year was 3% to 5%. Now it's 2% to 3% range. We're locked into 2/3. The biggest driver is kind of the inflation that's coming from pork and eggs and dairy, and the remaining areas of variability for this year are going to be things like really ground beef and pre-cooked bacon. And so what we've seen, kind of the recent favorability has been more focused on kind of chicken, eggs and cooking oil. And that's really a function of kind of the some of the changes in the grain market putting less pressure on commodities. Just a reminder, we do all the purchasing, the contracting for the system, and so yes, we'll look to continue to try to bring scale, with guidance that we can bring scale to.

[Mark E. Smith:]

And one last one, just on the outlook here as we look out maybe even beyond 2013. Your appetite for opening new restaurants, company-operated restaurants?

[John C. Miller:]

This is John. And between Mark and I, we'll do our best to answer your question. We are -- we have a lot more flexibility under 2.5 levered with this new credit agreement and lower amortization schedule. So much like this real estate acquisitions, I would say that where it complements our portfolio, where we have supervisory efficiency, we would be of the mind to be opportunistic to acquire and/or grow 1 to 2 units a year. And this year, we've not guided to a company unit opening, but last year, we did open 1 and I would say that back in that range of 1 to 2 year, if it's the right arrangement, it would be part of our overall strategy.

[F. Mark Wolfinger:]

Yes, and this is Mark. And I agree totally with John's comments. And again, our current guidance for the current fiscal year 2013, all of the opening -- store openings or franchise openings, and to John's point last year, we opened, obviously, our flagship store in Las Vegas, Neonopolis opening off the Fremont Street area. So again, a focus of our capital, if it's the right investment, last year was Neonopolis, this year, we have no company openings as part of our current guidance.

[Operator:]

And we'll take our next question from Nick Setyan from Wedbush Securities.

[Nick Setyan:]

I was very pleasantly surprised with the franchise margin, particularly since we were expecting the lack of additional franchisees to maybe be a much bigger headwind. So I just wanted kind of think about it going forward. Can we see the continued leverage going forward for the rest of the year? Or are there some moving parts in Q1 that particularly benefited this quarter and we shouldn't think of it that way going forward?

[Whit Kincaid:]

Nick, this is Whit. Yes, I think kind of we gave our annual -- gave kind of an annual guidance for franchise margins between 65% and 66%. So I think yes, I think you could expect to see a bit more leverage certainly than what you saw last year. And part of it is performance-based compensation. And then another piece would be based on kind of just the occupancy kind of cost going through there. And then there was also some investments, kind of brand investments we made last year that hit the franchise cost side as well that we do not anticipate having this year.

[Nick Setyan:]

Got it. And then just kind of a more bigger picture kind of question. Could you guys maybe talk about what the margin structure for your top 20% of stores versus your bottom 20% stores, your current company-owned store basis?

[Whit Kincaid:]

Yes, Nick, this is Whit. So yes, it's really a wide range. So obviously, the midpoint is right there, around what we've guided. Last year was kind of a little bit south of 15%. So it's certainly the higher-volume units. And then this is -- part of it, if you look back in history, our high-volume units. So we have really units that do well over the $2 million average. We also have units more kind of towards the -- would be the system average, kind of which is $1.5 million, some of our Flying J units. Those units average $1.4 million. And so yes, so it tends to our margins, tend to correlate well, I think probably much similar to another franchise -- restaurant concepts to sales volumes. And so yes, you certainly would expect to see our upper quintile restaurants performing kind of well above kind of the average and then kind of the lower quintile kind of below the average that we reported. So this is one of the areas we continue to put focus on. And so yes, so in terms of the new kind of bringing on the operations team, we've really made investments there on the company side, as well as the franchise side. And certainly, we think this is one of the areas of opportunity for us, is really continue to improve the operations of our restaurants.

[Nick Setyan:]

Got it. The reason why I asked that is because I'm trying to -- I want to really understand why you guys feel like the current sort of company-owned store mix is the right mix versus the franchise mix. And I mean, if you -- is it just kind of like an arbitrary 10% is the right number? Or could we possibly see kind of as you guys go through the next couple of years, maybe you guys could call a little bit more and then perhaps we can keep some of the better performing stores and sell off some of the more underperforming stores.

[John C. Miller:]

Nick, this is John. I wasn't here during the entire FGI program, so coming in to it fresh, I had a lot of similar questions, and those are very good questions. There's nothing magical about 10%. I'd say that we like it being somewhat significant of a portfolio that it matters that we maintain our ability to be strong restaurateurs, strong restaurant operators. We think that makes for a better franchise or franchisee relationship. We have skin in the game, every strategic decision that's being made. We also like its ability to sort of move EBITDA in a more powerful way as comps move in the straight 100% franchise model. We think there's an advantage to that. And then the base has been really picked over and analyzed and looked at a number of different ways from supervisor efficiency to short plights, location of supervisory, strong supervision and where they reside and can travel from, any number of ways you can look at it. And at the end of the day, the portfolio that remains, the company portfolio, because it's beneficial in earnings, for it to be beneficial to our shareholders to sell them, they get to be a risk-adjusted price to the franchise community. They prefer to go do something cheaper. So we'd have to charge a price that sort of gets in the way of their risk, and they'd rather go and put that same money in a location somewhere else and take the risk of opening up a sales that gives them a better return than having to pay a higher multiple something we would reluctantly sell. We certainly wouldn't turn it over for less than an accretive sale price. So that balance was sort of self-adjusting, looking at shareholders' point of view and then our ability to operate it over the course of the FGI program.

[Operator:]

We'll take our next question from Conrad Lyon with the B. Riley and Company.

[Conrad Lyon:]

Question about the credit facility. I think an intriguing aspect. I mean, Mark you talked about this, the ability to land and backstop some of your franchisees. Maybe you can just kind of remind us, how significant can that be? I mean, is that something that potentially could accelerate growth? Or is it just a matter of simply giving them better rates perhaps? Any color would be appreciated.

[F. Mark Wolfinger:]

Yes, Conrad. I would say it could be pretty significant. We had, I believe, in the old facility, under the current leverage ratio, we had up to $10 million that we could direct lend. That number is up to $20 million now. So it increased by about $10 million under the current leverage ratio that we have. But if you look at it, and I know we talked about this in the past, one was the coffee program. So we have the national rollout and the change in coffee equipment brand-wide, total reintroduction of coffee, including adding -- upgrading, in my view, the coffee product that we had in our restaurants and to facilitate that rollout with our balance sheet flexibility. And this was on the old credit facility. We were able to direct lend to the franchise community over a 12-month timeframe and charge no interest. And you probably heard us talk about this. We had obviously a very strong credit card program, credit card relationship, which allows us to obviously collect that loan back through our financial resources. But if I look at that, we've also done a similar program with our point-of-sale equipment. We don't have 1 point-of-sale product throughout the system. So again, we encourage franchisees to convert their platform. We also have direct lend money as it relates to point-of-sale conversion. So again, using the strength of our balance sheet, the credit card program we have in place, and obviously, our continuing lower cost of debt or cost of capital. But I think probably the other part of your question, would we consider doing something like that for remodel programs or equipment package changes, I think that's always a possibility. Again, if it makes sense, that's the kind of investment we should make in the brand. The great news is we have that kind of flexibility with our balance sheet and with our cash flow metrics. As I mentioned, this facility that we put in place, just tremendous backing from the bank group on this facility. A lot of positive feedback from the bank group and a lot of demand out there in the marketplace for the Denny's brand.

[Conrad Lyon:]

Yes, I like that. Flexibility is fantastic. Question about marketing. How is the calendar looking in general for the year? And what I mean is, is there going to be anything drastically different? Might you go after different demos, maybe focus more on Hispanic younger groups, anything of that nature?

[John C. Miller:]

I would say -- this is John. Thanks for the question. Nothing we want to talk about, tip our hand to. We feel like we have a good calendar. We do focus on boomers, as you know, Millennials. We had good social media programs that we think are gaining momentum. We're becoming more powerful every year, and we have quite an extensive outreach to the Hispanic community, and we think we're getting better and better at that. And beyond that, I think we'll let things unfold.

[Conrad Lyon:]

Got you. And then it's kind of a follow-on kind of from the marketing spend perspective. Any -- is this going to be consistent perhaps as a percent of sales or from what you collect or any major fluctuations there, do you think?

[John C. Miller:]

No major fluctuations.

[Operator:]

And we'll take a follow-up question from Michael Gallo with CL King.

[Michael W. Gallo:]

This is Mike. Just a follow-up question. I'm wondering if you've seen any impact from the -- on any of the Flying J locations from some of the stuff that's been in the news there?

[John C. Miller:]

Yes, Mike, it's John. No impact, really, at this point. We can't tell that anything is any different other than that's unfolding in the news every day. Jimmy Haslam, the Pilot CEO, in the entire time that I've known him or that our company has been associated, has been very forward about his view that the trucker is everything to them. And so our sense of it is that he will do everything in his power to earn the trust of that community. And he did go out and make a statement recently about a 5-point plan to address the issues that have been uncovered in the organization. Beyond that, I'll leave it to them to speak for themselves. But so far, we've seen no pattern that's been broken in our sales, whatsoever, in the Flying J operations. 130 of those, of the 600 Pilot locations, about 130 are Flying J's with Denny's.

[Operator:]

We'll take our next question from Michael Halen with Sidoti.

[Michael Halen:]

I just was wondering what the guest traffic looked like in the quarter and where the guest check came out at?

[John C. Miller:]

Yes, you're talking about company?

[Michael Halen:]

Yes, for the company-owned stores.

[Whit Kincaid:]

Yes, Mike, this is Whit. The company guest traffic was negative 0.1% -- negative 2.1%, that's guest traffic. And then the guest check average was positive 0.6%. So that gets you to same-store sales at company restaurants at negative 1.5%.

[Michael Halen:]

Okay, great. And I know some other chains sometimes when they go through the remodel program, that, that's a time they make decisions whether they're going to keep some stores open versus -- and remodel them versus closing them. Are there any company-owned stores maybe that you're looking to close this year?

[John C. Miller:]

Well, the first part of your question, clearly, that's an ongoing process of 60-year-old brand. So not necessarily, but sometimes associated with when the remodel is due, but mostly when leases come due. A portion of our brand will continue to purge. We have 1% to 2% store closings a year. It has been fairly much the prediction or sort of the track record over the recent years, and we'd expect that, we've guided that would likely to continue throughout this year. Company locations, I don't believe we have a company location on the list.

[F. Mark Wolfinger:]

Yes, I think, Mike, if you look to John's point, historically, and I'll just go back, let's say, over the last 5 to 7 years, we've closed around 2% on average, sort of low 30s type of number. And that's unit count. Last year, 2012, we closed 37 locations. 29, I believe those were franchise and 8 was company. Our view, I think, is that, that closing rate, I think what we've said sort of it's going to continue in that manner. When I say closing, right, I mean specifically company, but overall, sort of in and around that 2% range that both John and Whit have mentioned. Part of the answer to your question as well is there were significant number of company-operated closings back, I want to say, in 2006 timeframe, and that was the year before FGI or the refranchising strategy started. So we went through a different portfolio at that time. And at that time, we had over 500 company locations. Today, we only -- we have 164, but we went through that entire company portfolio and there were a number of closings, substantial number of closings, higher than normal rate closings in the company portfolio in 2006. And I don't think we've given specific guidance on company closings and....

[Whit Kincaid:]

And we have not, other than to say, last year, it was certainly anticipated being less than it was last year. So you might see a few company closures, kind of depending on how the leases come up and they get renegotiated, things like that.

[F. Mark Wolfinger:]

Yes, the interesting part is when you look at our portfolio and take out that 2006 era for us that I mentioned as we sort of geared up for the refranchising strategy is despite the recession, which was extremely difficult, and still there's pockets of that obviously in the U.S., but despite the recession in certain states that, that recession environment hit, and so you look at the difficulties in 2007, 2008, 2009, you look where our geography penetration is, our closing rate really has not changed that dramatically in the last 5 to 7 years. So I think that again speaks to the longevity and the viability of this brand despite incredibly tough economic times, especially in certain states like California, Arizona, Florida, places like that, which clearly went through some very difficult economic times. And we talked about the fact, I know Whit has mentioned and John has mentioned in his comments, that we've begun to see some recovery in places like California and Arizona, and we find that to be encouraging. But again, closure rate has been relatively consistent over the last many years.

[Operator:]

And with no further questions in the phone queue, I'd like to turn the call back to Whit Kincaid for any additional or closing remarks.

[Whit Kincaid:]

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

[Operator:]

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