DENN - NASDAQ

Greetings, and welcome to the Denny's Corporation Fourth Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Curt Nichols, Vice President, Investor Relations and Financial Planning. Thank you, Curt. You may begin.

Good afternoon. Thank you for joining us for Denny's fourth quarter 2022 earnings conference call. With me today from management are Kelli Valade, Denny's Chief Executive Officer and Robert Verostek, Denny's Executive Vice President and Chief Financial Officer. Please refer to our website at investor.dennys.com to find our fourth quarter earnings press release, along with the reconciliation of any non-GAAP financial measures mentioned on the call today. This call is being webcast and an archive of the webcast will be available on our website later today. Kelli will begin today's call with a business update. Then Robert will provide development update and recap of our fourth quarter financial results before commenting on guidance. After that, we will open it up for questions. Before we begin, let me remind you that in accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, the company notes that certain matters to be discussed by members of management during this call may constitute forward-looking statements. Management urges caution in considering its current trends and any outlook on earnings provided during 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 29th, 2021 and in any subsequent Forms 8-K and quarterly reports on Form 10-Q. With that, I will now turn the call over to Kelli Valade, Denny's Chief Executive Officer.

Thank you, Curt, and good afternoon, everyone. 2022 marked a year of many positive changes in our business and I'm excited to reflect on that today before turning to this quarter's results. For starters, our Board of Directors oversaw a very thoughtful and significant leadership transition. We thanked both John Miller and Mark Wolfinger for their many years of service and impact, congratulated them on their retirements, and we now benefit from their experience and wisdom as continuing Board members. I was thrilled to join as CEO and I could not be more energized by the opportunity to build upon the great foundation already in place. We also completed the acquisition of Keke’s Breakfast Café, which transformed our business into a portfolio company operating two complementary concepts now. To ensure each brand maintains its unique identity and differentiated position in the market, we evolved our organizational structure with the appointments of John Dillon to serve as President of Denny's; and David Schmidt to serve as President of Keke’s. Denny's and Keke’s now operate with independent leadership teams, each driving their own strategies, products, marketing, operations, and development initiatives with support from our shared services teams. Importantly, we'll maintain our ongoing collaboration and best practices on all major initiatives with our franchise partners in both brands to ensure we're set up for success. And finally, our seasoned and talented senior leadership team leverage the perspective of our franchise partners, operators, and leaders from both brands, along with insightful data about our guests and teams, to refine and refocus our strategic priorities. I'll now spend a moment on each of these. Our first strategic priority is develop best-in-class people and teams through culture, tools, and systems. I believe a positive enduring culture characterized by shared values leads to winning teams. The restaurant General Manager is clearly the most critical position for any restaurant. We want to ensure we have the best programs in place to attract, retain, and develop these important leaders. In a broad sense, this involves offering transformative experiences and benefits that foster a sense of inclusion, wellness, and belonging and we've been recognized for our efforts here. Most recently, being recognized by Newsweek is one of America's Greatest Workplaces for Diversity in 2023. We also understand our guests and our employees increasingly expect businesses to deliver quality goods and services, while also serving a higher calling. We are a company grounded in strong values at our core and we're a purpose-driven culture as well. We're proud of the $12.5 million we've donated to No Kid Hungry over the last 12 years, the over $1 million donated to St. Jude Children's Research Hospital since 2020, and over $1.3 million awarded in scholarships through our Hungry for Education program, including awards to students attending historically black colleges and universities. Giving is clearly a part of our heritage and fuels us every day. Finally, we continue to evaluate, develop, and offer programs to assist our employees' mental and financial health, so they can be their best selves at work and at home. Our second strategic priority is to drive profitable traffic through relevant and outstanding guest experiences. Our net sentiment scores have been trending up over the last year and most recently, we experienced a dramatic 600 basis point net sentiment increase just this last month with improvements noted across all major metrics. We're thrilled our franchisees continuing to take such great care of our guests, and that the guests are giving us credit. To make further gains, we're learning more about our core guests to ensure we provide that outstanding experience they speak every day. In fact, you may be surprised to learn that Denny's is skewing towards younger generations with millennials and Gen

Thank you, Kelli and good afternoon everyone. Not only was 2022 a year of positive change for our organization, it was also another year of resiliency, during which our dedicated franchisees, operators, and support teams remain focused on serving our guests in a persistently challenging environment. We were therefore pleased to close out the year delivering fourth quarter results in line with or better than the guidance we provided on our previous earnings call. Today, I will provide a development update and review of our fourth quarter results, before sharing our guidance for fiscal 2023. Starting with our development highlights, Denny's franchisees continue to grow, opening 12 new restaurants during the quarter, including five international locations. This resulted in 28 Denny's restaurant openings for the full year, consistent with pre-pandemic opening rates. A Keke’s franchisee opened one location during the quarter, resulting in three new Keke’s franchised restaurants for the full year, including one opening prior to the acquisition. However, the persistent inflationary environment has continued to weigh on lower volume restaurants and we experienced a higher than average number of Denny's franchise closures in the back half of the year. As inflationary headwinds continue to moderate, we anticipate returning to our longer term historical trend of consistently opening 2% or more of the system annually, while closing 2% or less of the system through normal attrition. Denny's franchisees completed six Heritage 2.0 remodels and we completed one company remodeled during the quarter. This brought the brand total to 49 remodels for the year, including 38 at franchise restaurants. Our successful Heritage remodel program has consistently delivered a warm and welcoming environment for our guests, and mid-single-digit sales lift for our franchise partners. We want to ensure our remodels deliver the same compelling returns we have come to expect, while also meeting the expectations for a modern diner among a growing base of younger multicultural guests. Therefore, considering the higher cost of remodels due to inflationary pressures, we are taking an opportunity to make certain we have the most appropriate remodel elements. With this consideration in mind, we plan to execute lower scope restaurant upgrades at targeted restaurants in 2023, before returning to a full remodel cycle in 2024. Moving to our fourth quarter results, as Kelli mentioned Denny's domestic system-wide same-restaurant sales grew 2% in the fourth quarter compared to 2021 or 3.3%. compared to 2019. Off-premise sales have remained strong at approximately 21% of total sales compared to the pre-pandemic trends of 12%. This reflects both our speed-to-market as the first family dining brands large online ordering and the strength of our off-premise technology and infrastructure. Additionally, the performance of our virtual brands has remained remarkably consistent and highly incremental, representing about 3% of domestic average weekly sales. Denny's these domestic system-wide same-restaurant sales growth came from an approximately 8.5% increase a guest check average, which was comprised of approximately 7.5% percent pricing and approximately 1% of product mix benefits. As highlighted in our Q4 earnings investor presentation, domestic average weekly sales for Q4 were nearly $37,000 compared to $34,000 in the pre-pandemic fourth quarter of 2019. This represents a 7.1% increase in average weekly sales compared to 2019, whereas same-restaurant sales increased 3.3% relative to 2019. The variance between these two metrics demonstrates that while our system portfolio is smaller than it was three years ago, it is healthier and generating higher average weekly sales as lower volume restaurants exit the system. Franchise and license revenue was $66.5 million compared to $60.2 million in the prior year quarter. This increase was primarily driven by $5.6 million related to the kitchen modernization rollout and $1.5 million of Keke’s Breakfast Café franchise revenue in the current quarter. The revenue related to the sale of kitchen equipment has an equal and offsetting expense recorded in other direct costs. Franchise operating margin was $31.6 million or 47.6% of franchise and licensed revenue compared to $31.1 million or 51.6% in the prior year quarter. I would like to note that while franchise margin dollars were not impacted by the kitchen equipment rollout, the franchise margin rate was impacted by approximately 450 basis points through this accounting requirement. With the kitchen equipment rollout 98% complete, the margin rate impact will lessen, while still having no impact on franchise margin dollars. More information can be found in our recent 10-Q and forthcoming 10-K. Company restaurant sales of $54.4 million were up 14.8%. This increase is primarily due to strong same-restaurant sales growth of 6% and $3.5 million at Keke’s Breakfast Café company restaurant sales in the current quarter. Company restaurant operating margin was $6.8 million or 12.6% compared to $7 million or 14.8% in the prior year quarter. This margin rate change was primarily due to commodity and labor inflation, partially offset by the improvement in sales performance at company restaurants. Commodity inflation moderated sequentially from 18% in Q3 to 13% in Q4 and we anticipate continued moderation. Additionally, labor inflation continues to moderate as we experienced 5% inflation during the fourth quarter. G&A expenses for Q4 totaled $17 million compared to $17.7 million in the prior year quarter. This change was primarily due to decreases in share-based compensation expense and performance-based incentive compensation, partially offset by an increase in corporate administration expenses compared to the prior year quarter. These results collectively contributed to adjusted EBITDA of $23.4 million, which was above the high end of our previous guidance. The provision for income taxes was $3.3 million, reflecting an effective income tax rate of 20.7% for the quarter compared to an annual effective tax rate of 24.9%. Adjusted net income per share was $0.18. We generated adjusted free cash flow of $14.6 million. Our quarter end total debt to adjusted EBITDA leverage ratio was 3.4 times, within our target leverage range of between 2.5 times and 3.5 times of adjusted EBITDA. We had approximately $273 million of total debt outstanding, including $262 million borrowed under our credit facility. As a reminder, we utilize swaps to mitigate interest rate risk associated with our revolving credit facility, essentially pegging our interest at a favorable rate of approximately 5%. During the quarter, we allocated $7.8 million to share repurchases, continuing our commitment of returning capital to our shareholders. For the full year, we allocated $64.9 million to repurchase approximately 6.3 million shares at an average share price of $10.33. As a result, at the end of the quarter, we had approximately 153 million remaining under our existing repurchase authorization, Let me now take a few minutes to expand on the business outlook section of our earnings release, where we are providing the following estimates for our fiscal year 2023. We anticipate Denny's domestic system-wide same-restaurant sales will be between 3% and 6% compared to 2022. As we start 2023, we are rolling over the impact of the Omicron variant, which will magnify our sales comparisons, particularly in the first quarter. Consistent with our existing reporting policy, we will begin sharing same-restaurant sales results for Keke’s in the third quarter once we have a full year of comparable sales activity following the acquisition. We anticipate opening 35 to 45 restaurants on a consolidated basis, inclusive of eight to 12 Keke’s openings, with a consolidated net decline of 15 to 25 restaurants, as the residual impacts of inflationary pressures persist throughout 2023, before achieving a more anticipated steady state in 2024. We are projecting commodity inflation for 2023 to be between 4% and 6%. With roughly 50% of our market basket currently locked. We expect labor inflation of approximately 5% for the year. We took approximately 2% of pricing at the start of 2023 and we will remain thoughtful about our pricing strategies within our customary two to three annual pricing windows. Our expectations for consolidated total general and administrative expenses are between $79 million and $82 million, including approximately $14 million related to share-based compensation expense, which does not impact adjusted EBITDA. This consolidated range contemplates a full year of Keke’s G&A and assumes fully reloaded incentive plans. As a result, we anticipate consolidated adjusted EBITDA of between $86 million and $90 million. In closing, I am very excited about our strategies and where our dedicated franchise partners, restaurant operators, and support teams will take both the Denny's and Keke’s brands in the many years to come. That wraps up our prepared remarks. I will now turn the call over to the operator to begin the Q&A portion of our call.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from Nick Setyan with Wedbush Securities. Please proceed with your question.

Thank you, and congrats on a great quarter. Just given the Q1 is still more or less an impacted quarter and the run rate numbers Q2 to Q4 may be very different from Q1, anyway to maybe bracket the comp, the inflation -- commodity inflation in Q1, comp in Q1, and also pricing -- expected pricing in Q1?

Hey, Nick, this is Robert. Good to hear your voice. Let me see if I can parse that apart a little bit for you. So, we're trying to figure out how Q1 will be impacted with regard to the, kind of, top line sales in the inflationary pressures if I think I'm hearing you correctly. So, I think the way to look at it is you are correct. It will be an impacted quarter. And I think we were calling out the in prior year a likely a double-digit impact from Omicron at the heart of it. So, when you look at our 3% to 6% sales range, it's about that midpoint about 4.5%. So, if you factor in rolling over the that decline, I think you can see that we're thinking about Q1 is a pretty, pretty robust quarter frankly in the terms of the cadence of the year. I hazard to put out a specific number, but it is by -- it is the most robust quarter in the year, the way we see it. When you look at the commodity inflation with that 4% to 6%, that clearly is the most impacted in Q1 also. So, the midpoint of that 4% to 6% would be 5 percentage points. I think if you look at the trending of the way we came down from 18% to 13%. If you kind of draw a line to it to get to an average of a 5% on the year, you could still see that Q1 will be highly impacted. Also, kind of, give you a -- kind of, a guide to get there also without giving a specific number. So, you're right to call out the fact that Q1 will look a little different than the balance of the quarters and the year. There was -- just to reiterate what I said in my script, there was 2% pricing in January that we will benefit from that, that will also benefit that Omicron rollover. The next -- the 2 to 3 window is beyond that. The next one, I think is in March, and then about six months later.

That's very helpful. Thank you. And then in terms of G&A, what portion of G&A is related to the G&A guidance? What portion of that is related to Keke’s?

Yes. So we really haven't parse that out, Nick. It's one of the reconciling items. If you look at where we -- where our G&A came in this year to the guidance range, the $79 million to $82 million, there's a couple of build back there. One is the differential in the stock-based compensation, we gave that as a whole number, you can see what it was in the current year. The other is the build back in short-term incentive compensation. I think in the release that we come across and it's between $5 million to $6 million. And you -- when you get back to a full pool, that's another reconciling item. Keke’s is another piece. We didn't write that out. Keke’s it's an investment year for us. One of the key strategies clearly is to grow that brand much more quickly. You can see already that in the current year with 8% to 12%, that midpoint of 10% is about double any other year prior to us acquiring it. And we know that we have to go well beyond that in the 2024 and out year. So, it does represent an investment into the Keke’s G&A, although we have not called that out specifically.

Thank you. And just last question for me in Q1, are we -- what's the number for the cash portion of the stock comp?

I'm looking at Curt to see if we have that number. We do pay -- we did pay out to the RSU portions of the couple of plans that were in place. I would suggest it's probably in that 3% to 4% range is where I would peg that, Nick.

Thank you very much.

Thanks, Nick.

Thank you. Our next question is from Eric Gonzalez with KeyBanc Capital Markets. Please proceed with your question.

Hey, thanks for taking the question. Maybe the first one just 24/7 locations, can you confirm that there's still that mid-teens comp gap between those 24/7 and non-24/7? And if so, that's still translates into the 5 to 6 point comp opportunity, depending on the timing? And maybe talk about how much you expect to capture this year of that opportunity?

Yes, that's an excellent question, Eric. Thank you for that. So, we can confirm that we are seeing that mid-teens gap between the 24/7 and the non-24/7 units. So, yes, we can absolutely confirm that. With regard to that, that 5 to 6 percentage points, I think as I was speaking to that through about through the back half of last year, I think we've captured some of that. As you can see we've moved from 53% mid-year to 67% at this point with 4 points in the last four weeks here. So, I think we've captured some of that 5 to 6 points already. So, I would bring that down. I would temper that probably to four to five now. And if you look at the cadence, right, we're adding about a point a year, that would translate to probably somewhere in that 3 percentage points range when you look, -- yes, that 4 to 5 percentage points annualized. So, when you look at it, the effect to the current year, it's probably in that 2 to 3 points when you consider that we're adding about a point a week at this stage.

That's helpful. And then just on the off-premise, you said it's 21% of sales. I mean, arguably, it's held up fairly nicely since the stores have reopened and just wondering why you think these channels have held up better at Denny's and the industry? And then looking ahead, do you think this channel -- particularly, delivery is more or less vulnerable to a pullback in spending?

Yes, I think that's a great question. This is Kelli. I think why it's held up for us, I think we -- the guests that are using us in that daypart. So, I think we are uniquely positioned by the way to continue to grow this. I think as others start to think about why it does not make sense or if it hasn't been as sticky, you can see, and you've already mentioned and has been for us. I think we were early in. We were really smart about the acceleration of both of the virtual brands, and our technology has really helped us to not only get there early, but stay there and sustain that. And so given that we uniquely have that capacity at late night, where others may just say, it's not necessarily worth it for the long-term, we're seeing others get out of the market. I think it's still an area of opportunity going forward. So, we know it's incremental. We've said that. We love our two virtual brands. It's younger guests coming in, so we know, again, it's a different guest using it in that late night occasion. So, it just positions us given who we are as a brand to continue to focus on it and continue to watch it grow hopefully.

And then just the last one for me. Directionally speaking, from a franchisee profitability perspective, as you think about your guidance of 3% to 6% comps in the - where you see commodity inflation, labor inflation, do you see this as a year where restaurant margins or franchisee margins expand materially? Do they stay relatively flat? Or do you -- what can you tell us about how much you think that they could either expand or contract this year?

Yes, Eric, another excellent question. So, a couple of things to try to parse apart that question. First off, in our 3% to 6% guidance range, we would put the franchisees closer to the top end of that range and the company closer to the bottom end of that range. One of the -- clearly, one of the differentials would be 24/7. So, -- but again, that's how we would kind of speak to that range of where the company portfolio and the franchise portfolio sit. I will also tell you that we are keenly focused upon franchise profitability and franchise margins. In fact, kind of the internal talking point around here would be this concept of no stone unturned. In this post-pandemic world, we're really focused upon ensuring that our franchisees are profitable. And we do see that with this, the inflationary pressures is somewhat subsiding. Still from a historic perspective, somewhat elevated. But compared to what we've seen over the last 12 to 24 months, that 4% to 6% commodity and 5%inflation is on the lower side. We do believe that we will make headwind with their profitability and their margins as we move throughout the year.

Great. Thanks.

Thank you.

Thank you. Our next question is from Jake Bartlett with Truist Securities. Please proceed with your question.

Great. thanks for taking the question. My first is just the trajectory of sales, I understand that lapping Omicron is going to be a benefit. But I'm wondering whether you can -- you say that maybe it's comparing versus pre-COVID or whatever way you want to kind of frame it, but are you seeing your sales momentum increase here? We've heard some pretty good things just from industry-wide sales. I know Omicron is driving the year-over-year, but it seems like things are improving versus 2019 as well and I'm just wondering whether you're seeing that same trend?

Yes, Jake, again, good to hear you. I would tell you that with the year started off, pretty strongly, right? We do have that Omicron rollover effect. We still are continuing to build back with the 24/7 units. So, December to January was clearly a build period for us. The quarter will be a very strong quarter for us, as I mentioned, to Nick's question. I would tell you that we are going to lean hard on value. We are on -- back on air with regard to value. When we were on air last year with value, we clearly could see that it was working. So that, again, is a strong point for us. We will leverage that. So, in this terms of what this environment holds, in this recession, not recession, we believe that we are a trade down play. We believe that we are also a value play that we are known for value. So, those two things are really kind of dovetailing nicely together.

Got it. Maybe just digging into that last comment a little bit more. I'm wondering what you can say about just the behavior of the consumer so far? I know you're leading into value, is that really necessary right now because the consumer is kind of demanding it? So one question is just on the lower end consumer, how are they behaving right now? Are they -- is value kind of the only thing that gets them in the door or maybe are they being stronger than that? And then are you experiencing trade down from other higher-end demographics you at this point?

Yes. I think -- hi Jake, this is Kelli. I think there have been -- there's certainly a lot of conversation about the potential for trade down. I think we are, again, well-positioned that if there is a trade down coming from other segments to family dining, we benefit from that. I think to your question, the consumer -- so because we're still seeing the check hold, I think your question about is the consumer only coming in for that? We've got --we're on air. So, given our weight right now and given what we're doing, we're seeing movement. But we -- and we are seeing the incidence where the mix go up a little to a place where we feel really good about. But we're also -- given that the checks holding, we're still seeing people off order and excited about the more premium LTO and core offerings. So, that gives us encouragement about the health of our barbell strategy and the fact that we've got both -- we've got that mix all year long. You'll see us -- we'll have new innovation, we'll have LTOs that usually work very strongly for us, and then we will continue to enhance our All Day Diner deal. So, people do know that need it, do know that they can count on us for the great value.

Great. And then last question. On the new menu that you're rolling out and the dinner menu that's enabled by the new ovens, I believe that you've been testing that. Anything you can share in terms of how it's been testing how much of a sales driver do you think that new menu can be?

Yes. So, what I can tell you is, I mean, in the test markets, in the test restaurants, really well received by operators, craveability, all things that we want to see and look forward. I'll hesitate to kind of talk about what we expect to see from that, just for kind of obvious reasons that you will start seeing it soon. But these are items we can only offer because of kind of launching and finishing the launch of the kitchens. There's ease of execution that comes with it. But yes, just the opportunity to have some exciting and really craveable items that you couldn't have before at Denny's. So, we'll have to probably just kind of leave it at that for now and really excited to -- we do think it will drive trialability and that these are really craveable exciting items for us.

Great. I appreciate it.

Thanks Jake.

Thank you. Our next question is from Michael Tamas with Oppenheimer. Please proceed with your question.

Hi, thanks. Hope you all are doing well. The same-store sales guidance for 3% to 6% comps is pretty strong and just wondering if you can unpack your assumptions, maybe touch on a couple of things, like how much pricing or average check gains have you built into that? Are you also including any assumptions for the future price gains -- future price increases that you're thinking about taking over those next two windows? And then how much of that benefit from late night are you baking in? Are you giving yourself the full credit for that 2% to 3% lift? Just trying to understand the thought process there. Thanks.

Hey Mike, yes, thank you. Let's try to unpack that. I hope you're doing well also. So, I think the 2% pricing in January was fundamentally across the board. So, that will live through in that 3% to 6% guidance. Then you were trying to reconcile -- I think it was for Eric a little bit trying to reconcile the impact to 24/7, particularly into the franchise base, again, building upon that, adding about 1% of the units a week at this point. I believe that would probably add in that two to three percentage points range to the franchise side, particularly. And then we have additional pricing windows, right? So, in March and September and to give you kind of the way that works, right? It doesn't -- if we took another 2% in that, it would add roughly 1% to the impact for the year. So, again, we're pretty -- we're really kind of -- and that will all be based upon inflation, right? It's not a foregone conclusion. We'll read and understand that better because we don't want to outprice this market. Clearly, there's been some consequential pricing over the last 18 months, and we're looking to mirror that against what we're seeing there. So, that's really kind of the build that we're seeing. We also have some rollover effect. And I think what you have come to expect from us is that we put out guidance ranges that we are comfortable in achieving. So, it's kind of a build back and kind of a philosophical add point there at the end.

Okay. Thanks for that. And then if I use sort of the presentation and the disclosure about your average weekly sales, it looks like in the fourth quarter, the average weekly sales were down maybe 4% or so relative to 2019 levels for the on-premise business. Is that purely just the late-night component? Or are there other parts of the business that you think you still have a big opportunity to recapture in addition to the late night?

Yes, I think that's clearly still an opportunity to recapture with regard to that late-night daypart there, Mike. So, again, we're really pleased that 2019 in totality -- 2019 versus 2022 in totality was up to 7% on a 3 comp, and we still believe that there's room to capture more of that as 24/7 comes back online.

Thanks so much.

Thank you.

Thank you. Our next question is from Todd Brooks with The Benchmark Company. Please proceed with your question.

Hey good evening everyone.

Hey Todd, how are you today?

I'm well. How are you doing Robert? First question, if I could. So, the incremental 2% pricing that you took at the start of the quarter here, can you walk through the waterfall of what rolls off in March and September that you'd be deciding about taking further pricing against or what would be a headwind?

Yes, I'm looking over at Curt to pull that out. So, we were seven points coming through this quarter. I would -- trying to figure out exactly how to frame that for you. If they -- do you want to grab your second question and as we give them a chance to look, and I'll come back and answer that one for you?

Absolutely. Switching to Keke’s, you talked about the FTD hitting hopefully this spring and starting to really ramp up some of that franchising growth with new partners. But a bridge here maybe with some corporate stores, especially seeding new markets. If you look at the guidance for the eight to 12 new Keke’s, what do we see, if anything, in there for corporate units? What's the mix of corporate franchise?

Yes, I would say, Todd, that a few -- typically, that would be in the two to four range to get that done. And we do want from a corporate perspective to get to utilize our capital to get it outside of the State of Florida. We're really still bullish upon the Keke’s franchisees within Florida. And we will begin to utilize the Denny's franchisees within Florida. That's really not the rush to file all of the FTDs in the other states because we didn't want to open it up to the balance of the Denny's franchisees until we proved out the concept outside of Florida. Kelli spoke within her comments about the ethos work that we're completing, we're really excited about that. I would suggest that we're halfway or so through that and getting bits and pieces fed to us along the way. So, we're really excited about what that will tell us and what optimizations that we will include in Keke’s as we move outside of Florida. But we're really excited to grow that. The 8% to 12%, as I mentioned to us, if you midpoint that at 10, that's double what Keke’s have been able to do on their own. And we won't stop there, right? We know that, that pace even has to go well beyond that level. So, Curt's drafting some notes up for me. So, in Q1 of 2022, we took 4% -- or 0.4% pricing. And in Q1 of 2023, equals basically the 2% that we just took. So, that if I'm looking at them and interpreting that correctly, I think that's what they're telling me to say here.

Okay, perfect. And then a final one if I can slide it in. It sounds like Kelli, when you were talking about Heritage, sounds like a bit of a pause year and maybe as you're tracking a little bit different customer base, you want to re-evaluate what's in Heritage 2.0 before getting back to maybe a greater cadence of remodels in 2024. Just how big of a review is this? And is part of the review maybe getting the ticket cost of Heritage down for franchisees to speed the role going forward? Thanks.

Well, you've got it. So, great question. Thank you for the question. It is absolutely not. So, as we look at, these are really strong returns that we were able to show with the Heritage 2.0 remodel of the gate that has changed, right? So, that has changed given the inflationary environment and the cost of supplies, labor, all that, right? So, as we look at that and just try to be really good stewards of our business and great partners to our franchisees, it gave us a chance to just step back a bit, look at our research. We see an opportunity to lean even more of those strong research, strong results and returns initially. It's a chance to look at the approach to rethink diner a tad more lean into our unique positioning. We continue to say we uniquely own that as America's diner. So, we see an opportunity to kind of tweak from there. We will still do. We've got partners still investing in their business in light touches and making sure we continue to update our assets. So I don't think it's a long process, but we are going to just pull back our hair to be smarter about the investment and getting as strong as returns as we were getting before the prices escalated to the pace that they did.

Okay, great. Thanks everybody.

Thanks Todd.

Thank you. Our next question is from Jon Tower with Citi. Please proceed with your question.

Great. Thanks. I guess maybe starting following up that last question and bring it back to CapEx and your thinking for fiscal 2023. I don't think that was part of the guidance. Maybe I missed it if it was there. But obviously, remodels, which are not really on the corporate side slowing, but you're also potentially going to be investing a little bit more in Keke’s. Can you help us think about the CapEx spend for fiscal 2023?

Yes, kind of a good reconciling question there, Jon. Good to hear you. So I think in the current year, we were between $12 million and $13 million in our CapEx spend. So that -- kind of using that as a jumping off point. There wasn't a ton of remodel capital in those numbers either. So if you -- these Keke’s builds were -- we anticipate being in that $1.1 million area. So, if you think about where we are with regard to the number I just quoted there, kind of that few being in that $2 million to $4 million range. You would expect that to be in the kind of the $3 million range. Without specific number guidance, I would suggest that's a mid-teens kind of number that we would be at with regard to CapEx?

Got it. Thank you. And then just taking a step back on the net closures for the year. First, can you parse out whether or not that's all domestic or a mix of international and domestic? And then more importantly, can you help frame the health of the franchise base? I know the guidance obviously calls 15 to 25 net closures, but maybe you can provide some guardrails about how many more stores in the system or franchisees out there, maybe near that -- getting close to that break of closure, should say the economy soften or inflationary pressures back up again? I'm just -- I want to understand how are we coming back to this in six to nine months and saying 15 to 25 should have been more like 25 to 50, or maybe it's the other way, maybe you're being conservative?

Yes, that's a really good question. So, let's piece that apart a little bit. So, the guidance range for the openings was 35 to 45. So, midpoints for each, that would suggest 30 Denny's and 10 Keke’s, if you put that at the midpoint of each of those, which puts the Denny's growth back to pre-pandemic levels. It's basically at that 2% level. So, what's different is this kind of this 4% closure rate that we experienced in 2022. And really, for 15 to 25 closures, you would need somewhat of a similar closure rate in 2023. I think a couple of things to note. The reality is, given the inflationary environment over the -- particularly the last year, but the last two years in aggregate. The volume at which a Denny's is really kind of profitable has risen. It used to be we would quote some in the air that you need about $1 million to be a profitable Denny. Now, again, that was all a function of your geography and your lease there. There are a lot of other components in that. So, that's kind of a broad average. That's really kind of grown to about $1.1 million to $1.2 million. So in our -- that guidance range of 15 to 25, we've kind of taken that all into account. So if the -- if we get back to24/7, like we know we will, if the inflationary environment stays in that, labor of 5% and commodities in the4% to 6% range, I think we're very comfortable with that range that we provided. And in fact, if those -- if that settles more quickly than we may have an opportunity with that. We believe -- and we fully expect that longer term, right, the 2024 and beyond period that we will get back to that kind of that normal kind of attrition rate. We will always have some level of closures within the brand, which is historically, if you look back over a long period of time, about 2%. We do believe that that's where we will get to, although we may be experiencing about one more year in that 4% range, given everything we see. I can tell you that these are primarily at this point, domestic closures.

Got it. Thank you for all the color. And last from me. I know it's a little early in the year and perhaps you don't have this level of data, but I'm curious if there's any way you've been able to see whether or not some of the, I guess, older demographic have made their way back to stores, given some of the shifts in social security payments? And whether or not you've actually seen it early in 2023 in the form of greater frequency or perhaps higher check within that kind of older cohort of customers?

Yes, it's a great question. It is early in the year. We actually can tell that we have had a steady increase in some of the promotional offerings like AARP that we uniquely offer to, obviously, that demographic. And -- so we do see that getting better since the depths of the pandemic. And then the flip side of that, we also do -- we continue to skew younger all the time, not just in our virtual brands as we talked about earlier, off-premise, but continue to skew younger. That's about the late-night daypart continuing to be more open all the time as well. That's a good thing. But the -- yes, we can see the baby boomer population is starting to rebound a bit.

Got it. Thanks for taking the question.

Thank you.

Thank you. Our next question is from Andrew Wolf with C.L. King. Please proceed with your question.

Great. Thank you. Regarding the franchisees getting to their stores open 24/7, is labor availability or sort of just their hiring practices and their ability to get people in and hire them, is that kind of still the key reason that you're hearing from them that they're not yet open operating 24/7?

Yes, it's a great question. So, we continue to just -- this is a collaboration. This is a -- these are conversations daily. These are -- I mentioned -- we've mentioned in the past, we have literally segmented every single restaurant and have our operators talking to every single franchisee. It's an ongoing conversation. So, while there's more optimism as of late that you see everywhere around labor and the availability of labor, you also do see and have to -- we have to be aware of and mindful of and consider the inflationary environment that still exists for so many of them. So, it is as much now about profitability as it is staffing. So, as that is eased, you've had other things that have contributed, not just lower volume, but things like 80/20 and things like just differences in wage inflation or the wage treatment that really do impact profitability. So, it's conversations about all of that. It's why we've also got a task force. We've talked about no stone unturned. It's why we're looking at every opportunity to help them with margins as well as focus on how to profitably get them back to 24/7. And so we've said that before that we continue to look at every restaurant and assess their situation and that we may have less -- and we definitely will have less than we did before the pandemic. And that remains to be the case. So, it's a collaboration for sure and ongoing conversations.

Okay. And just a follow-up to that is, I think -- in the third quarter, you guys reported that the company restaurants were now fully staffed at that time. So, I guess they're still fully staffed. Can you tell us a little about the sort of trade-off between training of new employees and them getting up the productivity curve that I assume is something that the franchisees want to know about because obviously, new hires are more expensive than seasoned folks are productive.

Yes, that's exactly what's happening. So, you're right. So, we've been staffed now and have mentioned it, yes, last quarter, and we can now see the stability of what that does for guest sentiment scores. We can see what that does for training dollars. We can see all of that in our company restaurants, obviously. So, yes, there's a natural learning curve that's going to happen for every franchise location that gets back up. We're helping them with that in any way possible, helping to kind of lessen that learning curve, but that's certainly a play for all them. We see the traffic and the sales come back when they do that, but we're also trying to just help them to strengthen all aspects of the P&L, which does, yes, absolutely include the training costs that go with that. It levels off, and it can level off fairly quickly once you get back into that rhythm, but that's absolutely a good question and that's part of what is happening as well.

And the other kind of related question here is, as I understand the incentives to the franchisees, there's a setup to do it sooner than later. So, there's still a double-digit gap to get to 90% of the franchisees operating 24/7. Am I understanding that right, are they -- are they still being incentivated right now at the same rate they were when things accelerated later in the fourth quarter? Or does that fade? I'm trying to understand, is it sort of going to get hard [Indiscernible]?

Yes, it's a great question. You broke up a little bit at the end. I think the nature of your question we do understand, it's really is the window is definitely closing on the incentives. So, it was a staggered incentive. We've had a lot of people participate in the incentive. We've had a lot of virtual hiring events. We've worked hand-in-hand with them to do that. So, we see progress, and we also have line of sight to a lot more restaurants. And again, at the same time, it's really about having those conversations and helping them get there at the right time and helping them to be profitable when they do so. But yes, you are correct that we're nearing the end of the incentive.

Great. Thank you.

Thank you.

Thank you.

Thank you. There are no further questions at this time. I'd like to turn the floor back over to Curt Nichols for any closing comments.

Thank you. I'd like to thank everyone for joining us on today's call. We look forward to our next earnings conference call in early May during which we will discuss our first quarter 2023 results. Thank you and have a great evening.