DENN - NASDAQ

Greetings. Welcome to the Denny's Corporation Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I would now turn the conference over to your host Curt Nichols, VP, Investor Relations and Financial. You may begin.

Good afternoon. Thank you for joining us for Denny's fourth quarter 2023 earnings conference call. With me today from management are Kelli Valade, Denny's President and 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 a 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 risk, uncertainties and other factors that may cause the actual performance of Denny's to be materially different from the performance indicated or implied by such statements. Such risks and factors are set forth in the company's most recent annual report on Form 10-K for the year ended December 28, 2022 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 President and Chief Executive Officer.

Thank you, Curt and good afternoon, everyone. Thank you for joining us. We were pleased to closeout 2023 with solid domestic system-wide same restaurant sales of 1.3% in the fourth quarter reflecting sequential improvement throughout the quarter. And because of that improvement and momentum, we deliver system-wide same restaurant sales growth a positive 3.6% for the full year, which was above the high end of our previously guided range, a satisfying achievement given the operational challenges the industry observed again in 2023. In fact, Denny’s same restaurant sales outperformed the full service industry benchmark for both the fourth quarter and for the full year, an impressive statistic for sure. Looking ahead to 2024, we entered the new year with a clear focus of what we know is resonating with our consumers and a laser-like focus on our three strategic areas of focus. These are a best-in-class breakfast with craveable items, an unbeatable value proposition and convenience in the form of unique off-premise options. We spent last summer cascading these new strategies to our franchisees culminating with a comprehensive unveiling of our new playbook and our annual convention in October. By November, we put these strategies in play with bold moves with a new menu, new food innovation and unbeatable value proposition The playbook is now working and it's providing momentum in this new year. First let's talk about our craveable breakfast items and new menu. According to recent data there were nearly 6,000 new restaurant openings with the breakfast and brunch category in 2023. Clearly, there's an enormous demand for breakfast coupled with consumers wanting breakfast items whenever it suits them. This is obviously our sweet spot. We are American Diner after all and we own breakfast. Our November menu launch showcased our breakfast leadership in a big way as we leaned into our unique ownable equities with our slam platforms, including our new strawberry stuffed French toast slam, now made with our delicious premium Brioche French Toast and guests are clearly loving it given their reaction to this launch as we are selling over 150 total French toast plates per week per restaurant. Additionally, this menu launch was a key activation point in our new playbook and that we revamped the look and the feel of the menu also and leaned into what's most important to our guests while being focused on ease of execution for operators. Specifically, along with new product innovation, we simplified the menu layout while minimizing customizations and the Build Your Own categories on the menu. This not only allowed us to highlight our more popular and most craveable items, but it simplified operations without any impact on the guests or to guests preferences. This new menu also led to margin improvements, given our strategic approach to highlighting our most profitable items and ones we know to be guest favorites. Finally, the recent menu also incorporated a new pricing model that will help protect our value leadership while better enabling franchisees to make smart pricing decisions that are aligned with regional factors and more localized competitive benchmarking. The new pricing structure and approach will help us minimize traffic erosion when we do take price as we now have a heightened focus on the elasticity of certain menu categories and items. At a time when the guest is still extremely sensitive to price increases at the grocery store and in restaurants, this strategy and focus is well timed and will continue to help us with our goal of smart menu smart pricing. Importantly, this improved approach will also be critically important in California as we work to offset the potential impact of AB 12:28 formerly known as the Fast Act. This quarter's results were also aided by our approach to leading with value and leveraging our increasingly successful barbell strategy. Our original grand slam starting at the unbeatable price of $5.99 was feature nationwide starting in late November with positive results. We believe we brought this compelling offer to the guests at the perfect moment helping them balance holiday travel and shopping knowing they could count on Denny's for the best breakfasts out there at an incredibly compelling price. The guest responded well and quickly as we saw traffic in sales trends increased and we immediately noticed share gains against both family dining and casual dining. Mix on our value platform remained consistent and 17% but we grew check with premium offerings merchandize in restaurant, which is proof positive of our successful barbell strategy where some guests indeed are coming in for our rallied equity, but others are ordering more premium options. In addition, we remain focused on providing convenience through our off-premise business and we saw pick up here on a year-over-year basis also. Specifically off-premise sales were approximately 20% of total sales, up from 19% in the third quarter. We feel good about this sales mix considering that many in our industry are actually experiencing sales declines in this channel. For us these channels provide a unique opportunity to leverage operating capacity at dinner and late-night to a distinctly new consumer. For these reasons, this will continue to be a part of our strategies which is why we're leaning into testing our third virtual brand with Banda Burrito and why we're leaning into a test with Franklin Junction, a global leader in branded virtual restaurants. We should be able to speak to both of these tests in more depth at our upcoming calls. But we continue to be hopeful and encouraged by the results we’re seeing so far. Now I'd like to provide updates to some of our other priorities captured in our crave framework. Here we will focus on technology and innovation first. We're pleased with our recent progress on our new cloud-based POS platform, as we are now moving forward with installations and all company restaurants expected to be completed by the second quarter of this year with franchise restaurants to follow. This foundation will enable improved kitchen visual systems or KVS, server handheld and QR pay resulting in more consistent operation execution, labor efficiencies and enhanced guest experiences. In addition our culinary and operations teams are continuing to lean in and explore opportunities to further leverage our ovens and other kitchen equipment to drive menu innovation and kitchen efficiencies. In fact, next quarter you will see new exciting products which will leverage our new ovens at the primary cooking platform. Importantly, we've also seen improvement in our food quality scores year-over-year and a high percentage of this improvement can be attributed to our new kitchen equipment. And of course we have to talk about our people and our guests. We're extremely proud of the progress we have made with our people programs including the launch of our game program this last year. We're impacting lives and careers by offering education entertainment for all. As a result, we continue to see improvements in staffing and reduced turnover rates at Denny's. In fact, management turnover for 2023 improved 400 basis points compared to ‘22 and was approximately 400 basis points lower than guest expand family dining index formerly Breakfast Intelligence. As for the guest experience, our overall 2023 net sentiment score was 41% compared to 32% for the family dining segment and 23% for the overall restaurant industry and our Google ratings continue to improve as we recently reached a 4.3 rating. I can't say enough about the progress of both our teams and our guests as we have our company and franchise operators to thank for taking such great care of our guests always. Their continued commitment to delighting every guest is appreciated and apparent. We also continue to remodel restaurants with our Heritage 2.0 program, while testing the next evolution of our prototype which will lean into our unique diner image with a modern updated and fresh look. Early results for the modern diner tests are strong with positive marks for unique, brighter yet warm approach to a modern diner. Sales and traffic results are also promising, while full results from this test to share soon and we'll begin incorporating the modern diner remodel program into the mix in the back of the year. Finally, I want to pivot and talk about the growth and expansion of Keke Breakfast Cafe. We are thrilled to have opened our first Keke location outside the state of Florida a couple weeks ago in Hendersonville, Tennessee, just outside of Nashville. Despite opening during a snowstorm, sales were strong for the first week and continue to be impressive. We also recently held an official grand opening ceremony for the new cafe receiving a warm welcome as we were joined by the Hendersonville Community including the mayor the city Chamber and local businesses. With this new location, we debut a new Cafe design an updated look and feel that was developed through our learnings from last year's brand echos work. It's a beautiful design highlighting the things unique to Keke’s that we know our guests love mornings from scratch as a prominent tagline and our unique positioning which serves to highlight a core differentiatorsm, a fresh from scratch cooking daily made with highest quality ingredients offered in great abundance. We've also now launched a new menu in this location and in all existing Keke’s restaurants. This menu offers a simplified approach with less items and a focus on what we know Keke’s does best. In addition the alcohol program test was a success and a system-wide rollout now is underway. This program will become a brand standard and a requirement for all new cafe openings. For us, this has been a critical year building a strong foundation for the brand and integrating the KeKe's brand into the portfolio at Denny’s. We're incredibly pleased with the progress President Dave Schmidt has made as he has built a strong team cemented a unique position in the A.M. Breakfast segment and a competitive differentiated path that will allow us to win in new markets this year and beyond. As a reminder, we have a franchise disclosure document in place and 14 signed development agreements for over 100 KeKe's cafes across multiple states, 11 of those were Denny's franchisees and three with KeKe's existing franchises. We expect this number to grow and will soon be talking about many more. Our approach to KeKe's and our early results are in line with our expectations. Our strategic intent and purchasing KeKe's was to compete in this highly fractured yet steadily growing day time eatery segment. We have the unique opportunity to leverage our model franchisor approach and our strong network of franchisees in both brands to grow exponentially and capture market share. We are well on our way with the work we have done so far. Finally, we have laser-like in our focused approach to understanding what the guest love about KeKe's and the results here are also phenomenal. The KeKe's brand 2023 overall net sentiment of 54% significantly outperformed the family dining index 31% in addition to significantly outperforming the the segment or service in scores per service on beyond an attempt to return. This tells us we have a winning formula in a brand that gets absolutely loved. The future is bright for a small but mighty KeKe's brand. In closing, 2023 marked another year of resilience for our dedicated franchisees, our operators, and support team and we look to build on our achievements in 2024. This past year, we honored our past celebrating our 70 years in the business at Denny's and we chartered a clear path to winning for the next 70 years. We couldn't do this without the strong partnership and collaborative approach with our incredible franchisees and owners. They are the reason we push to deliver our best every day they deserve it and our guests deserve it. It's clear we have the right approach to win in today's environment with committed leaders and partners and a game plan for our two unique incredible brands prime for growth and continued momentum for 2024 and beyond. With that, I'll turn the call over to Robert.

Thank you, Kelly and good afternoon, everyone. Today I will provide a development update and a review of our fourth quarter results before discussing our 2020 annual guidance. Starting with development highlights, our brands opened 32 combined restaurants in 2023 marking the highest number of openings since 2017. Within the quarter, Denny's franchisees opened seven new restaurants, including one international location. This resulted in 28 Denny's restaurant openings for the year flat with 2022 and consistent with pre-pandemic opening rates. KeKe's opened two franchise cafes during the quarter resulting in a total of four cafes for the full year. As Kelly noted, we also opened an additional KeKe's company cafe in late January in Hendersonville, Tennessee marking the first cafe outside of Florida. This marks the first of several company cafes as we plan to utilize company capital to develop oversight efficiency in various markets within and outside of Florida. In addition KeKe's currently has four cafes under construction with several others in permitting and site approval phases. Moving to our fourth quarter results, Denny's domestic system-wide same restaurant sales grew 1.3% in the fourth quarter compared to 2022 anchored by a 1.5% percent increase at domestic franchised restaurants. Denny’s domestic system-wide same restaurant sales were 3.6% for the full year 2023 exceeding the performance for eight of the nine years prior to the pandemic. Denny's domestic system-wide same restaurant sales growth was primarily driven by pricing of approximately 7.5%, along with a product mix benefit of approximately 0.3%. Denny's domestic average weekly sales for Q4 were approximately $38,000 including off-premises sales of approximately $8,000 or 20% of total sales. As a result, average unit volumes for 2023 were approximately $1.9 million. Franchise and license revenue was $61.3 million compared to $66.5 million in the prior year quarter. This change was primarily driven by a $5.3 million decrease in initial and other fees associated with the sale of kitchen equipment in the prior year quarter. Franchise operating margin was $31.5 million or 51.4% of franchise and license revenue compared to $31.6 million or 47.6% in the prior year quarter. Approximately 430 basis points of this favorable change in margin rate resulted from the completion of our kitchen modernization roll out during 2023. Company restaurant sales were $54 million compared to $54.4 million in the prior your quarter. Company restaurant operating margin was $5.4 million or 10% compared to $6.8 million for 12.6% in the prior year quarter. This margin change was primarily due to $1.8 million in legal cost in the current quarter partially offset by improvements in product cost compared to the prior year quarter. The $1.8 million in legal cost had an unfavorable 340 basis impact on the company restaurant operating margin rate for the current quarter. Commodity inflation was in line with our internal expectations at approximately 2% in Q4 2023 compared to 1% deflation experienced in Q3 2023. Additionally, labor inflation for Q4 2023 was 3% flat with Q3 2023. G&A expenses for Q4 totaled $19.3 million compared to $17 million in the prior year quarter. These results collectively contributed to adjusted EBITDA of $18.6 million. The provision for income taxes, was $1.7 million reflecting an effective income tax rate of 36.9% for the quarter, compared to 20.7% in the prior year quarter. Adjusted net income per share was $0.14. We generated adjusted free cash flow of $7.4 million. Our quarter end total debt to adjusted EBITDA leverage ratio was 3.26 x. We have approximately $266 million of total debt outstanding including $256 million far out under our credit facility. During the quarter we allocated $16.2 million to share repurchases continuing our commitment of returning capital to our shareholders. At the end of the quarter, we had approximately $100 million remaining under our existing repurchase authorization. Since beginning our share repurchase program in late 2010, we have allocated over 700 million to repurchase approximately 67 million shares at an average share price of $10.39. Let me now take a few minutes to expand on the business outlook section of our earnings release. We anticipate Denny's domestic system-wide same restaurant sales will be between 0% and 3%, compared to 2023. We anticipate opening 40 to 50 restaurants and cafes on a consolidated basis inclusive of 12 to 16 Keke’s openings and a consolidated net decline of 10 to 20 restaurants. We are projecting commodity inflation to be between 0% and 2% for 2024. We expect labor inflation between 4% and 5% for the year. This labor inflation guidance takes into account the anticipated impact from AB12 28 in California. Our expectations for consolidated total general and administrative expenses are between $83 million and $86 million, including $12 million related to share-based compensation expense, which does not impact adjusted EBITDA. This consolidated range contemplate the full year of G&A for Keke's new management team and a fully reloaded incentive plan, which is paid out at approximately 70% over the last four years. Additionally this range would suggest corporate administrative expenses have grown at a compounded annual rate of 2.5% to 3% from pre-pandemic 2019 before considering the investment in Keke’s management team, who will drive that brand’s growth. That compares to a compounded annual growth rate of 4.3% nationally for private Industry salaries and wages between 2019 and 2023. As a result we anticipate consolidated adjusted EBITDA of between $85 million and $89 million. Finally, I would like to thank our engaged franchisees and results-driven brand team who have remained focused on serving our guest while supporting the transformation of the Denny's brand and the growth of Keke’s. 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.

[Operator Instructions] Thank you. [Operator Instructions] Our first question comes from the line of Michael Tamas with Oppenheimer & Company. Please proceed with your question.

Hi, thanks. Good afternoon. You provided same-store sales guidance of 0% to 3% for the year. So, can you first touch on maybe what level of menu pricing you are anticipating within that for 2024? And then can you talk about the cadence, should we see sales build throughout the year or how you are thinking about that trajectory? Thanks.

Yeah. Hey Michael. How are you? Hope you're well. With regard to pricing for the year we are going to roll into some roll over pricing on the year of approximately 2% and there will be additional pricing. We have two pricing windows. We're getting back to our normal cadence of the year, which is an April menu print and October menu print, which will have two additional menu opportunities for pricing within those menu prints. So we’ve roll over two – we have two additional pricing. The April pricing will allow us to contemplate AB1228 in California. So I would expect that window to probably have a more pricing than the October window. So I would think that the pricing will be in the range of the 5% to 6% with that build that I just described there. With regard to the cadence, I think you probably captured it correctly. I think it does somewhat build over the course of the year. We are rolling over the prior year some pretty strong numbers from the first quarter of the prior year and we have seen some impacts from weather as we started off January here. So I do believe it will build over the course of the year based on some of those items I just mentioned along with our initiatives becoming even further baked as we move throughout the year with regard to menu innovation, value messaging off-prem off-prem with regard to the virtual brand. So I think all of those will continue to mature across the year. So, with regard to pricing, I think that 5% to 6% range and I do think that as you described it does build over the course of the year.

Thank you. And then and then, I think the unit growth guidance suggests you closed about 50 to 70 units this year. Can you talk about maybe what led to that decision? Any help on timing pacing of that throughout the year? And then, can you talk about maybe the financial impact and maybe EBITDA or how we should think about that? Thanks.

Yeah, so it is another really good question. So to your point that that the midpoint there would suggest about 60 closures, right. That 50 to 70 range that you described, the reality of that situation is having come through the inflation environment that we had although it did temper quite a bit in 2023, the profitability of restaurants that where it kind of a breakeven for a unit at Denny's restaurant to remain open has really kind of elevated from about $1 million to about $1.2 million. And so we're continuing that that used to be that level used to be that $1 million I just referenced that used to be the break point of a closure. So we are continuing to work through some additional closures that as a result of those inflationary pressures. Our goal, as I've said previously is to get back to a more normalized rate, but we wanted to be as we started off the year to be somewhat conservative with regard to that. When you think of these restaurants to your point with regard to what the EBITDA impact would be these generally are about million-dollar units, million-dollar restaurants. So $40,000 to $50,000 in EBITDA that’s growing up. So as we build new higher Denny's restaurant openings, so we guided 40 to 50 openings, 12 to 16 of those being Keke's. You would expect us to open somewhere around 30 Deny’s. Those are almost double the volume nowadays of the closures. So the reality is that it's somewhat net neutral on the EBITDA between those two. But the closings about half the number of openings as our closings but the volume of the openings are about double, double - double that of our closings. And we are at that level of openings the guidance actually suggests the highest number of Denny's openings since 2017. So we got we have that machine back open and with the 12 to 16 Keke's, that's three to four times the level of openings that we have seen out of that brand at any point in its history really. So we're really excited about what that starting to produce for us.

Thank you.

Thanks, Michael.

Thank you. Our next question comes from the line of Jake Bartlett with Truist Securities. Please proceed with your question.

Great. Thanks for taking the question. First, I just want to dig into kind of what drove the miss on EBITDA versus your expectations? It looks like, sales was a little bit above. So what was the surprise that drove that miss? I think versus the midpoint of guidance of 5% lower. So, any help there would be.

Yeah. That's a really good question, Jake and hello. Good to hear your voice. Some of it really was there were in some of our prepared remarks really kind of revolving around $2.5 million to $3 million worth of reserve adjustments that we really didn't have a good line of sight into, more than half of that came from some legal reserves that we had to book into late into the year. 2.5 that really sat in the company margin. And if you right size for that on the quarter, it would have been between 14.5% and 15% and that $2.5 million would have added basically another full point to the year and there was a about a $0.5 million of reserve adjustments related to our captive within the G&A section of our P&L also. So, again we really - it bothers us. We put out guidance with the full intention of achieving it and the fact that we didn't because of these kind of one-time events was truly bothersome to us. But when you adjust for those, right size for those, the margin particularly on the company side are much better. The other - some of the other pieces of those one-time charges is 2.5 part was legal. We also had some claims development into workers comp and GL, general liability and some minor medical that impacted that. So it’s just kind of pervasive across the board. Nothing really is going in our favor this fourth quarter.

Got it. Got it. That all makes sense. My other question was about trafficking. Your expectations in ‘24 given that - given the guidance for same-store sales and the pricing that you talked about, you set pretty negative traffic. So I guess, I'm wondering what is driving that. Are you seeing trade out of the category? I know at some point you're talking about some trade down. And trade out and kind of being maybe a net neutral on that. But what are you seeing with the consumer? Where do you think you're seeing this pressure on traffic? And do you - what can you do about it? Is there is there - I know you're working on some innovation on the lower end of the menu. What's your confidence that you can kind of try to really move the needle here with the traffic?

Yeah, so another really good question, Jake. So when we look at it, and we pay attention to what's happening in the general economy. We're seeing as somebody there's not a lot of confidence into what we're doing into 2024. So we - our guidance to your point on the guest traffic side is really a reflection of that. As you are aware our consumer set is half of our consumer has an income base of less than $50,000. So, again, we're just being conservative there. We are really bullish about everything that we have into the hopper. We have new - we constantly original grand slam that $5.99, $7.99 messaging that we launched into in mid-November really change trends in a very material way. We have concept new value concepts – new value concepts in various levels of testing. We have the multiple virtual brands I various levels of testing. So, in large part, we being conservative because of the rhetoric in the environment is there, but bullish about the other things that we have going.

Yeah. Yeah, Jake I think – hi, it's great to hear your voice, as well. Just to echo what Robert said and just piggyback it really is about just watching the prediction from economist just watching those that we track and those that are putting out those reports that just tell us whether it's inflation in the recent reports that just came out. And just that lot went into thinking about it and being optimistic yet just realistic. I would also call out our value mix have been picking up and we've seen that just in January alone. So we feel like we're probably projecting at the right way and looking at it the right way and yet we are still optimistic. Lastly, I would tell you in both in the fourth quarter of last year and in January, we can tell that we are stealing share both on sales and traffic against our competitive benchmarks, which are both benchmark for family dining and casual dining. So, is there trade down from casual? Perhaps. Is there trade off from us? Perhaps. we also see evidence that people in fact are still anxious enough to maybe visit less often. But again, for us, we can see what we're doing against the competitive set. The last thing I'll say relative to this Jake, is that our value makes while picking up and an indicator perhaps of indeed where people are being cautious. Our GCA is still up and we continue to just be really excited about and encouraged by our barbell strategy in that those that Robert called out less than 50,000 maybe the ones definitely coming in sensing that we do have great value at this unbeatable price and great food are also though - there are also people coming in and then upgrading to our amazing new products like the strawberry French toast, stuffed French toast just continues to just sell incredibly well. So I feel like we're balanced. We thought a lot about it and we're really still pretty optimistic about the things we have in the hopper as you heard from Robert.

Great. I appreciate it all. Thank you so much.

Thanks, Jake.

Thank you.

Thank you. Our next question comes from the line of Nick Setyan with Wedbush. Please proceed with your question.

Thank you. I just want to first clarify the pricing commentary. That I understand correctly that Q1 pricing is 2%.

Yeah, sorry Nick. Now - sorry if I misled you. We have - we're rolling off 2% in pricing in the quarter. The pricing that we will see throughout the year is in that 5% to 6% range and it will be - that will be fairly steady across the year. Maybe a little bit tick higher in April as we take into account pricing related to AB1228. I apologize if I misled with my remarks. But no, no, the pricing in Q1 will be more in line with the 5% to 6% that I referenced today.

Okay. Thank you. And Q4 sounds like it wasn't in that mid 5% range just to kind of get that 7.5%, for the year is that correct?

So we - right that the mass of it is, is that we actually layered in additional pricing with a November print. So, while we're rolling off various pieces of that over the - as we move into Q1 the actual pricing effect in the quarter in Q3, Q4 2023 was more in the 7.5% range. So that that's the number you should think about. And so the 1.3 would suggest about a six-point traffic decline.

About a six point three traffic decline?

Yeah, but about that again, it's not perfectly - perfect math in that when you're dealing with same-store sales. So but yes in that 6% range, Yes. I appreciate you giving me the opportunity to clarify those remarks.

No. It’s very helpful. Thank you. And then just on the G&A guidance it does sounds like you're pretty much, assuming sort of a full pay out across the board. And so when it's all said and done it seems like you know G&A may not be as high as the full year guidance implies. I mean, hopefully it is and everything, across the top-line and margins are great. But if not, it sounds like G&A is actually going to be a little bit lower. Is that a fair understanding of how you are guiding G&A.

Given the last four years Nick, it would represent 70%. But I liked your more bullish claim that we're going to hit all of our guidance and actually pay out that level and everybody will be excited to do that. But yes, the $83 million to $86 million range does include 100% - 100% short term incentive compensation assumption.

Okay. And then on the franchise margin, can we just talk about sort of the trajectory on the franchise margin in ’24? And then just how many company owned Keke's you guys are thinking of within that guidance in ’24?

Yeah, let me start with the second part first. I'll give Curt a chance to help me out with the margin question on the franchise, but with regard to Keke’s openings, the 12% to 16%, I would tell you that in the current year in 2024 that those will likely be 40% to 50% company openings as we built the pipeline with additional Keke’s franchisee development in some great strength within the Denny's franchise development related to the development agreements that we announced on the last call. Those 14 agreements for 100 additional cafe commitments. So in the current year as we build out our operational efficiency in places like, Tennessee, in Jacksonville, you will see us invest more into the company operated cafe. So the 12 to 16 would likely be 40% to 50% of company cafe openings. With regard to the margin, what I'm being shown is that it will be very, very similar to 2023. So approximately 51% and the changes as you know in the remarks as we have this odd revenue recognition standard that impacted the prior year where we’re having to recognize the kitchen equipment that we were installing for franchisees as revenue with a complete contra offset into the extent which depressed margins by 4 to 5 - franchise margins by four to five percentage points. So what we don't have that same type of impact within the 2023 results. So you shouldn't see - you shouldn't expect or anticipate another four to five percentage point growth. It'll be very similar that low 50s percent range 50, 51 range so.

Got it. Okay. Thank you very much.

Thanks, Nick.

Thank you. Our next question comes from the line of Todd Brooks with Benchmark Company. Please proceed with your question.

Hey, good evening, everyone. Thanks for taking my questions. One follow-up to Jake's question actually. How I think when you were answering value mix has picked up in January I know stable Q4 versus Q3. Can you share with us how much it has ticked up just maybe dimensionalize? Thanks.

Yeah, absolutely, Todd a couple points. We've seen it go up a couple points it’s a recent trend change. But again, we're still seeing that Chuckles reiterate that and we're still seeing, people coming in and ordering some of these great new products around innovation. So the value messaging we know is working to get them in the door. We will refresh that messaging this quarter and but it picked up a couple of points as of late. And again probably evidence to what most are saying about, how people are feeling. But for us again still confident in the strategy on barbell and that that is really working for us.

And if I think back historically, this is running the low to mid 20s beforehand. So we're not back to maybe historical piece for where values mixed out.

I think that's correct. Robert is nodding his head, as well.

Todd, when we - during the height of 2 4 6 8 launch it was in the 23%, 24%, 25% range. And as long as where the barbell strategy is effective, as Kelli is alluding to, we're not afraid of driving that that value incidence rate.

And this is all - these are this not just the original Grand Slam and the one that we're talking about as of late. Although that has been incredibly successful as we talked about. This is the other thing that are messaged in the restaurant that we would classify our everyday value slam or Super Slam. We kind of capture those all in that kind of value incidents bucket for us. The original Grand Slam is the one that has upticked as of late. Yeah.

Yeah, that’s helpful. Thanks. And then I wanted to get a little bit on KeKe’s. So at the end of Q3, you updated us on the 14 agreements, hundred units, and I think today's commentary was 14 agrements, 100 plus units. Are we actively selling agreements now? Or we digesting the explosion that we had an agreements in Q3? I'm just curious I felt there was more momentum able to continue off the franchisee convention and the signings that you saw there. So maybe talk about that.

Yeah. Yeah, I think that's fair, Todd, and, what we're seeing is obviously there's a lot of excitement about it and there's also been a lot of and I think we’ve mentioned this and talked about it quite a bit. There's a tremendous amount of excitement still and there's momentum and there's a lot of conversations about Nashville. It’s that new prototype. It's the new design. It's an all those things were in play and then we still have levers to pull in terms of just continuing to drive that momentum. But a lot of folks really excited a lot of things that are in play with the new menu cocktails, again successful, Tennessee opening we're really encouraged by what we saw there. So there's quite a few that are lined up as of right now is know. The ones that we talked about and then we've literally had people waiting to come to that opening and said, hey, let's get this thing opened. Let's do a great job opening it. We got that ceremony. We did the ceremony and grand opening, ribbon cutting with everyone in the community that we could get, so that we could get this name out there and it's been really successful. But we also have franchisees waiting to go there lining up to go there and be introduced via our development team. And those people are coming in as we speak. So we expect that momentum to continue. There's really no point. Pause other than to say, hey, let's get this thing out of Florida and see how it can perform for us. We do also have four cafes under construction and then, again these openings next year are pretty accelerated rate as Robert already talked about.

And are the four – are the 40% of growth that’s here that’s anticipated to be company stores. Are you seeing ceding other states for proof of concept or are you looking to get that kind of operational efficiency in the Tennessee Market as a corporate market and then go ahead, Robert. Sorry.

Yeah, so just so, Toddy, we're really excited by what we're seeing in Tennessee. We already have another corporate Cafe under construction in Tennessee, right now. We have another corporate cafe in Jacksonville under construction right now. And you will see us move into Texas heating Texas as the next corporate area for development. So, we'll be in places other than Florida and Tennessee this year.

Okay great. And then just a couple to wrap up on Keke’s and I’ll get back in queue. Can you speak to since the program was successful can you speak to maybe alcohol incidents or lift and check that you saw in the test that we should think about for your views for the concept? And then the second one just with the new prototype opening in Tennessee, which looks great from the pictures I’ve seen online. Thoughts on is there, is there a point in order to the franchisees existing in Florida want to go back and rework their units in the new prototype? Or is this really a go forward type prototype for Keke's? Thanks.

A lot in there Todd and really great question. So first to take the maybe the last thing that you mentioned in terms of going back in and Florida, there are a lot of franchisees really excited about, it’s a beautiful buildings, it’s a beautiful design, really leaned in to what Keke’s is known for and what's special about it with an updated really bright fresh look. So I'm glad to get the feedback. Pictures don't fully do a justice. It really is a stunning building. That franchisees will go back. There is conversations with a lot of them in Florida to go back and look at paint colors. Look at some of the things that they could pull forward. There's really not been a comprehensive remodel program for the Keke’s brand up until now. So they're excited about the things that we can pull forward and having those conversations for sure. In terms of the alcohol programs really encouraged by what we're seeing. It's a really simplified approach with Mimosa, Sangria's and 5% to 7% mix is really what we're seeing their higher on the weekends. This is obviously expected, but really in line with what we thought that that would do for us. So it's not been rolled out system-wide. In fact that Tennessee location did not yet open with it. It's one of those things where we're excited about the potential this has. This is a brand where it doesn't have a honeymoon curve that like other brands, I'm used to it does have a honeymoon curve where it decreases it actually grows over time and we're actually not talking about just yet because we know it's got the potential and we've already seen it starting to grow. And again, we didn't open with the cocktails or the alcohol program. We didn't open some of the other things that we know we can pull and that will help it to continue to grow for us. So we are excited about what that can do for the Keke’s system in terms of rolling that alcohol program, as well as even the remodels and what that could do for the Florida market.

Okay. Thanks Kelli.

You're welcome.

Thank you. Our next question comes from the line of John Tower with Citi. Please proceed with your question.

Great. Thanks for taking my questions. Maybe if we could start off on the unit closures and specifically I am just trying to maybe you can help us ring-fence. How many of the stores are potentially at risk, of closure? I think, Robert, you mentioned earlier that the profitability breakevens are close to $1.2 million now at Denny's. I'm just curious, you know, if you could maybe give us some an idea of what percentage of the system might be at or near those levels? And maybe that's what stopped to the moment.

Yeah, John. I'm happy to try to provide some additional color to that. With regard to we assess our kind of our the Denny’s system with regard to the kind of quintiles and our low - I can tell you that our lowest quintile in aggregate is actually above the $1.2 million. So it's only a subset of that lowest quintile that we are really dealing with. The other the other piece that makes this a little bit harder to predict is that, it's made up of - there's many franchisees that have restaurants within there and they all have different motivations, right? So they - if it's covering the least cost, but not necessarily profitable. It may be a restaurant that remains open in that scenario. So it's hard to say of that subset of units of that subset of quintile how many are likely to close near it. Overtime, right an elongated time frame you may be looking at have that quintile. But right now what we're comfortable doing is to guide one year at a time with what we know. And really, really watch closely particularly as we move across this year and with the initiatives that we have in place to hopefully to grow out of it. I can tell you that of these quintiles, the three of the four of them actually grew volume over the course of the pandemic that the only one that did not was that lowest quintile. So if we can if we can get that moving also, it may put less of those at risk. Again another reason why we're just trying to give that one year look right now is as opposed to looking out much further than that a lot of nuances that go into predicting how many of those will actually close in the in the near term.

Thank you. And I guess on the flipside of that, it sounds encouraging with the new store openings on the Denny’s side, the first number is reaching 2017 levels. So I'm just curious maybe you can give us a little color on where these stores are? Are they more infill? Are they new markets? Are they new franchisees existing franchisees? Are they effectively relocations of existing stores? Just curious if you could provide some color.

Yeah happy to do that also. Generally not offsets not close. This Danny's open this Getting so they're not the not generally off. That's 90% of the restaurant that closed are what we were just talking about these very, very low volume units. So it's not that we're not offsetting because of a property control issue. So not offsets. Every year we have new franchisees somewhere in the neighborhood of - let's say four to six new franchisees. So there that will always be some new franchisees development, but generally the vast majority of these openings would be infill restaurants from existing franchisees. So that I think that's probably the best way to look at it with. And now 1342 franchise domestic restaurants another 65 company. We're fairly penetrated into most markets. You can go find some particularly if you look east of the Mississippi, that that we could potentially build out. But in general these are infill into existing markets where we know that Denny's has a lot of strength.

Got it. And then just kind of thinking about California a little bit more detail, you know, do you have any specific plans to address value in that market given obviously the changes in pricing structure across the industry coming in April. I mean other any explicit plans that you might have to attack the value messaging whether it's on building brand awareness with incremental marketing. Obviously, you've got a lot of innovation in the pipeline when it comes to product, but I am just curious how you plan on handling that market specifically in April forward?

It’s a great question and lots of conversations that we have. We're working very closely with the California franchisees. In fact, we call it our situation room where we come to them and we partner with them both in them sharing kind of ideas that they might have many of them. All other brands many of them have QSR brands actually. So while we're not in that same situation, of course being a full-service brand, we're being very mindful of that. So what I can tell you is, you know, the value messaging there. So we've got a you know price point at $5.99 in many markets but in California $7.99 that's competitive for their. That's been working there fairly. Well with that we've been working really well they're also so we'll continue with that messaging the other thing that we have done. We are re-implementing a reinstituting the co-op program and so we will to spend at the local level will spend more at the local level working in partnership with them. So we'll do things we need to the market wherever possible we're doing our match again for that co-op program for bringing that back after several years of not doing that. And we know that will help strengthen the market. And then finally really, really looking to strengthen that top line for them and as many ways as possible looking at I've mentioned this before, but looking at the virtual brands that things we’re testing in off-premise. So not only helping them with analytics and metrics to understand the effectiveness of their off-premise channels today, but also potentially bringing those virtual brands to them first. Bringing those to enable as much revenue that we could possibly help them drive. So that's really the focus for us is, it's almost a triage approach with them and at the same time, making sure just were available to have the conversation. So we're staying really close to it.

Got it. Thanks for taking the questions.

Of Course.

Thanks Johnny.

Thank you. And our next question comes from the line of [Indiscernible] with Piper Sandler. Please proceed with your question.

Hi, good afternoon. It's great to hear about all the momentum with Keke's development. But just on the franchise comp result for the quarter. Could you speak to what is behind the softness there? Is it specific to like the Florida consumer or is there a primary driver as you point at that?

Yeah, so that's a really good question. Florida remains, it was - you must have been looking at some of the my teachings that we prepared. Florida is by far the weakest state that we’ve had. There's actually some good strength throughout the Midwest when you look at New York, Pennsylvania, Ohio, Indiana, Illinois, strength there, but the Florida still trails quite significantly with regard to that. And the reality is if you look at the pace of our same-store sales across the quarter October was weaker than November and November was weaker than December and December actually showed some mix significant strength as we got deep into our value messaging the $5.99, $7.99 original Grand Slam messaging. So, again, we were with regard to that we were pretty pleased on the way we finished out the year.

Great. Thanks for that. My second question is on 24/7. Now we are in 2024. I'm just hoping you could give us an update on what percent of the store base is back to 24/7? And what your expectations are for the return to 24/7 this year?

Yeah, again, really good question. That's really stabilized when we’ve looked at it, it grew through about just the July, August time frame. We had a pretty concerted effort to get back the as many that as we could to 24/7. And it kind of leveled off at about the 75% level and the other piece that to note though is even if you're not at 24/7 the vaster are already over 20 hours. So I think we've stabilized. I don't think I don't think you'll see material growth from here nor do I think you'll see a material slide from here. I think this is somewhat of the new norm.

I think the other reality acts - I'm sorry. Go ahead.

No, that's okay. I was only going to add to what Robert mentioned in terms of just, we just came off the last question on the fact that AB1228 and the impact there in California. So, we're just always mindful you know of the profitability of our franchisees, the health of those franchisees that we talked about. It's about driving top line. It's about just showing them every opportunity, but also just being the best partner possible. We still know given the percentage not only of Oak, those that are 24/7 at 75% and holding but also the amount of hours that we are open that as a full-service brand that you, we are we are back strong and as strong as many other players that used to be 24/7 and haven’t gotten even close to 75% back. So we feel good about it and yet, given the pressures in some of the states like California, we're just mindful of that.

Thanks.

You're welcome.

Thank you. And we have reached the end of the question and answer session. I’ll turn the call back over to Curt Nichols for closing remarks.

I’d like to thank everyone for joining us on today's call. We look forward to our next earnings conference call in the spring when we will discuss our first quarter 2024 results. Thank you all and have a great evening.