Whit Kincaid - Senior Director of Investor Relations John Miller - President and CEO Mark Wolfinger - Executive Vice President, Chief Administrative Officer and CFO.

Michael Gallo - C.L. King Will Slabaugh - Stephens Tony Brenner - ROTH Capital Partners Nick Setyan - Wedbush Securities.

Good day. And welcome to the Denny’s Corporation Third Quarter 2014 Earnings Conference Call. Today's conference is being recorded. At this time, I’d like to turn the conference over to Mr. Whit Kincaid, Senior Director of Investor Relations. Please go ahead, sir..

Thank you, Melissa. Good afternoon. And thank you for joining us for Denny’s third quarter 2014 earnings conference call. With me today from management are John Miller, Denny's President and Chief Executive Officer and Mark Wolfinger, Denny's Executive Vice President, Chief Administrative Officer and Chief Financial Officer.

Please refer to our website at investor.dennys.com to find our third quarter earnings press release along with any reconciliation of non-GAAP financial measures mentioned on the call with their corresponding GAAP measures. This call is being webcast and an archive of the webcast will be available on our website later today.

Our 10-Q will be filed later today as well. John will begin today's call with his introductory comments and Mark will then provide a recap of our third quarter results along with brief commentary on our annual guidance for this year. After that we'll 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 knows that certain matters to be discussed by members of management during this call may constitute forward-looking statements.

Management urges caution in considering its current trends and any outlook on earnings provided on this call. Such statements are subject to risks, uncertainties and other factors that may cause the actual performance of Denny's to be materially different from the performance indicated or implied by such statements.

Such risks and factors are set forth in the company's most recent Annual Report on Form 10-K for the year ended December 25, 2013 and in any subsequent quarterly reports on Form 10-Q. With that, I will now turn the call over to John Miller, Denny's President and Chief Executive Officer..

Thank you, Whit and good afternoon everyone. We are pleased with our quarterly results highlighted by our strongest quarter of system-wide same-store sales in the last two and half years. Our company restaurants achieved the highest quarterly same-store sales increase in the last eight years.

Given the strength of our results and our solid start to the fourth quarter, we are positioned to achieve the highest annual same-store sales growth for the brand in the last eight years. We're also on track to achieve the highest annual same-store sales growth for our company restaurants in the last 10 years.

In addition to the same-store sales growth this quarter, we grew both adjusted EBITDA and adjusted net income per share, while generating strong free cash flow. Due to our performance, we are raising our annual financial guidance again for company same-store sales and adjusted EBITDA.

Achieving these results, despite the ongoing challenging economic environment for many of our customers is a testament to the progress we have made in our brand revitalization thus far. We are pleased with the start of our Heritage remodel program, which was rolled out late last year.

Enhancements and the atmosphere at our restaurant is one of the drivers to our growing sales. [Foundational] to our America's Diner positioning, these enhancements reinforce the improvements we have made to-date in our food and service.

For the first three quarters, we have completed 129 remodels, results have been positive with increases in same-store guest traffic coming at all day parts with dinner seeing the strongest lift.

We have remodeled 38 of our company restaurants through the first three quarters of this year with the goal of completing approximately 45 by the end of the year. This along with the 26 completed late in 2013 means nearly 50% of our company restaurants will be showcasing the Heritage image.

Due to strong performance, we will continue to accelerate remodels at the company restaurants with the target of completing 45 to 50 remodels in 2015. The results we have seen to-date at both remodeled company and franchise locations provided blueprint for franchisees as they continue to remodel their restaurants over the next several years.

We continue to look to our guest to guide us in our ongoing efforts to improve our menus and to meet the needs of an ever-changing marketplace. While we are looking to elevate our product offerings in certain areas, we’re just as focused on finding ways to enhance margins and improve operational execution.

At the start of the third quarter, we rolled out a new core menu which included two premium sandwich entrees with new high quality 7-grain bread in addition to over 20 other menu changes for simplification and for margin improvement.

Our Greatest Hits Remixed limited-time only menu leveraged existing entrees like the Super Bird, Moons Over My Hammy and Red, White & Blue Slam and greatly -- which greatly simplified our station prep and line build complexity to enhance operational execution.

In the fourth quarter, our limited time only menu introduces seasonal and holiday flavors into our Build Your Own Grand Slam with check building, premium options like Pumpkin Pancakes and Gingerbread French Toast.

In addition to a new holiday premium Red Velvet Shake, which is available as well as the all new turkey addressing sandwich with Dipper Build turkey gravy.

Additionally, we have updated our 2468 Value Menu with the number of market tested changes designed to keep to traffic driving capabilities of the platform very strong but also balancing the need to improve margins.

New items at $2 and $4 price points are expected to generate favorable trades, improving margins and to reduce these value menu incidence rates. Recently Denny’s was featured in the second episode of TNT’s ‘On the Menu’ cocking show starring Ty Pennington and celebrity chef Emeril Lagasse. The debut season features eight brands and eight episodes.

And we’re pleased to have secured the only family dine position on the show providing Denny's a great opportunity to showcase our revitalized brand.

The winning dish which was an Apple Danish French Toast with chorizo hash demonstrates our growing confidence and our ability to provide our guests with more relevant and more premium products to meet their needs. In summary, we believe that we are still early in our brand revitalization process and pleased with our momentum.

We remain focused on differentiating Denny's in the crowded marketplace by successfully executing on our key objectives to further strengthen our position as America's favorite diner in 2014 and beyond. When it comes to restaurant growth, we continue to make progress in increasing our footprint both in the U.S.

and abroad through traditional and non-traditional formats. Our first restaurant in New York City was opened in lower Manhattan in early September by Rahul Marwah, a second generation franchisee from California. Rahul is taking advantage of our new and emerging markets incentive program to penetrate areas where we do not have top market share.

This location represents the range of adaptability of our brand with an atmosphere scaling to its surroundings, a full bar and a franchisee with a great commitment to Denny's. We believe it provides an opportunity to showcase and revitalize a more relevant family brand appropriate for the times.

Two new international locations were opened during the quarter including our second in Dominican Republic and our first in Downtown Toronto. We now have 65 restaurants in Canada which has grown 33% over the past five years. We also opened our newest non-traditional university restaurant at the University of Alabama at Birmingham.

We have worked hard to evolve the branding for our fast casual on campus format and UAB’s The Den is a much more millennial friendly design.

Although the menu is much smaller than Denny's traditional menu, we do offer breakfast all-day, [hand-smashed] gourmet burgers, burritos, sandwiches and salads along with other favorable items like fried green beans.

We believe that Denny's can compete successfully in the non-traditional market and look forward to opening more university locations utilizing this format starting later this year.

With the franchise-focused business that generate strong free cash flow we will continue to balance our capital allocation between making investments to grow and strengthen the Denny's brand and returning cash to shareholders.

While our investments in our base of company restaurants will continue, we remain committed to returning value to our shareholders through our share repurchase program.

Since our share repurchase program was launched in November 2010, we’ve allocated a $104 million to repurchase total of 20.7 million shares with our focused on growing earnings per share to our franchise focus business which provides financial stability and flexibility.

Our brand revitalization continues to gain momentum with our guests with our franchises and the Denny's team energized and committed to future performance of the brand. With that I’ll turn the call over to Mark Wolfinger, Denny's Chief Financial Officer and Chief Administrative Officer..

Thank you, John and good afternoon everyone. Our third quarter results were highlighted by growing franchise and company same-store sales growing adjusted net income per share by 29.2% and generating $12.8 million of free cash flow after capital expenditures. During the quarter, Denny's opened nine and closed 13 franchised restaurants.

As a result, we ended the quarter with 160 company restaurants and 1,529 franchise restaurants.

Denny’s total operating revenue including company restaurant sales and franchise and license revenue decreased $200,000 to $117 million due to fewer company restaurants and lower occupancy revenue partially offset by higher same-store sales at company and franchised restaurants.

Same-store sales of domestic franchised restaurants increased 2.1% primarily due to an increase in same-store guest check average driven by both higher menu pricing and favorable product mix.

Franchise and license revenue of $34.2 million increased $300,000 primarily due to a $900,000 increase in royalty revenue resulting from the increase in same-store sales in 12 additional equivalent franchised restaurants. This increase was partially offset by a $600,000 decrease in occupancy revenue.

Franchise operating margin of $22.9 million increased $600,000 partially due to the increase in royalty revenue that was offset by a decrease in occupancy margin. Franchise operating margin as a percentage of franchise and license revenue increased 1.1 percentage points to 66.9% compared with the prior-year quarter.

This improvement was primarily due to the increase in royalties. Same-store sales at company restaurants grew 4.1% due to both an increase in same-store guest check average and an increase in same-store guest traffic. The improvement in same-store guest check average was driven by both higher menu pricing and favorable product mix.

Sales at company restaurants decreased $500,000 million primarily due to four fewer equivalent company restaurants, which was partially offset by the increase in same-store sales.

As a reminder, sales in this quarter were unfavorably impacted by the temporary closure of our Las Vegas restaurant and permanent closure of one of our Honolulu restaurants in the beginning of this year. In addition, sales were unfavorably impacted by the refranchising of two restaurants in the third quarter of last year.

Company restaurant operating margin of $11 million or 13.3% of company restaurant sales increased by $700,000 or 1 percentage point compared to the prior-year quarter.

As a reminder, the company margin was negatively impacted by the temporary closure our Las Vegas Casino Royale restaurant, which generated $700,000 of pre-tax operating income on $2.1 million of sales in the third quarter of the prior year.

Excluding this impact, the increase in company restaurant percentage margin was primarily driven by a reduction in payroll and benefits and product costs partially offset by higher utilities and legal expenses.

The improvement in payroll and benefits costs was primarily due to a $1.1 million decrease on unfavorable workers’ compensation accrual adjustments compared to the prior year quarter. The improvement in product cost of 25.8% was primarily due to the leveraging effect of higher sales.

Other operating costs increased slightly due to a $300,000 increase on legal settlement costs during the quarter. Total general and administrative expenses improved $300,000 from the prior year quarter primarily due to a reduction in share-based compensation expense.

Interest expense of $2.3 million decreased $200,000 primarily due to the expiration of capital leases. As we approach 2015, we would like to remind everyone that we entered into a 30 day LIBOR swap contract when we refinanced our credit facility in April 2013.

The swap protects us for three years and goes into effect in the beginning of April of next year. The swap picks us the 30 day LIBOR rated 1.1% on $150 million of debt through April 2017 and $140 million of debt through March 30, 2018.

Based on our current LIBOR spread of 200 basis points, this would translate into a fixed interest rate of 3.1% during this three year period. Based on current interest rates, our interest rate would increase around 100 basis points leading to an additional $1.5 million of interest expense on an annualized basis.

With the interest rate swaps starting next April, we anticipate we anticipate that our net interest expense will increase by approximately $1 million. In the third quarter, our provision for income taxes was $4.1 million, reflecting the 33.0% effective income tax rate.

Due to the use of net operating loss and income tax credit carry forwards, we paid $1.1 million in cash taxes during the quarter. At the end of the third quarter, the deferred tax asset on our balance sheet was $43.6 million.

We will continue to utilize additional and net operating loss and income tax credit carry forwards to eliminate the majority of our cash taxes for the next few years. In the third quarter, free cash flow after capital spending increased $1.2 million to $12.8 million.

We spent $4.4 million on capital expenditures in the quarter, which included completing five Heritage remodels at company restaurants. During the third quarter, we allocated $8.0 million to repurchase 1.2 million shares.

Through the first three quarters of this, we’ve allocated $32 million to repurchase 4.9 million shares, which is approximately 30% more than we allocated to our share repurchases during all of 2013. We are pleased with the ability to grow earnings per share as we overcame the temporary closure of our highest volume restaurant.

After another quarter of growing same-store sales and adjusted net income per share, we are raising the company's financial guidance for full year 2014. The company has increased expectations for company same-store sales and adjusted EBITDA in addition to updating expectations for other selected components.

We look forward to continue to accelerate remodels in our company restaurants as well as reopening our highest volume restaurant on the Las Vegas Strip. That wraps our financial commentary. I'll now turn the call over to the operator to begin the Q&A portion of our call.

Operator?.

Thank you. (Operator Instructions). And our first question will come from Michael Gallo with C.L. King..

Yes. Hi, good afternoon, congratulations on another good quarter..

Thanks Mike..

I just wanted to drill a little bit; I mean third straight quarter company comps now about 3.5% obviously would seem like the spread between company and franchise stores, the main difference would be the remodels.

I was wondering if you’re still seeing the same kind of mid single-digit lift or is it somewhat greater than that given the overall company base seems to be getting close to that area.

And then if you can comment at all about whether there is any kind of accelerated interest from franchisees in the program given we now have a few quarters together and what you’re seeing in accelerated same-store sales? Thanks..

Mike, this is John, great questions. We do believe that that’s playing a pretty important role, the separation between the company and the franchisee performance as a higher percentage of our base has obviously been remodeled. So that’s clearly playing a role.

It could also be that the company restaurants more than a third of our base is in California and though unemployment rate still 7.3 out there, that as a state has represented a significant part of the overall job recovery of the United States.

In fact, our restaurants, we have over 800 restaurants in California, Arizona, New Mexico, Texas, Florida and most of the job creation is right there.

So, our other strong performing state would be Illinois where we have a smaller percent company base, but given that we have 36 in California has also helped with the separation and then we have five big volume stores on the Vegas Strip, one is closed right now.

Vegas is way up with tourism, so that’s helped also with the company through the separation from the franchisee performance. Accelerated interest, we think that there will be some acceleration going into next year, we plan 45 to 50.

Obviously we're not guiding on 2015 just yet that we -- you heard in my comments that we think on this year we expect to do another 8 to 10 this year and then 40 to 45 company stores next year. So, we think the franchisee will also step up with some, call it 140 or so into next year.

And those continue to then bring the performance between the two back together again. But it's nice to see people response to the changes in environment..

Okay, great. Thanks very much..

And next we'll take the question from Will Slabaugh with Stephens..

Hey, thanks guys. Congrats again on the quarter. Just wanted to ask you what you are saying in terms of guest behavior. It seems that we've seen a little bit of pickup in the industry overall; you’re clearly capturing more than your share.

So just wondering what your feeling is in terms of the willingness to spend of your core guest and then what you saw this quarter in particular that allowed you guys to gain more share than the rest of those out in family or casual dining..

Sure. Well, there is a number of things; every brand has its cycle. And obviously because of our changes in environment that plays a role. And as I mentioned earlier, the performance; our wage or distribution of units along with the stronger performing state certainly plays a role.

I also think that as the job markets improve that it’s sort of finally come around where it favors our category to a degree.

You think about a brand with anywhere from $8.90 in some areas to $9.10; check all day, there is something about that that when you reentering the job market that's a little more favorable than maybe brands that are priced higher than that. So I think that entry point may favor our positioning.

And I think we’ve done a really nice job with revitalization both in the environment, but also with food and hospitality and take your time, cleaner restaurants and say better advertising. So, when you get all those together, it creates some momentum that’s favored us for the time being.

I do believe employment play the most -- very important role in sort of all those rising right now. And even though we’ve never really seen a strong correlation, it doesn’t hurt. The gas prices are in favor at the moment as well..

Makes sense. One quick clarification if I could.

I don’t know if you mentioned what the traffic check and pricing was in the quarter?.

We did, but -- so our GCA Company is up 3.1 priced about 1.7 and so the difference is the mix shift changes..

Perfect..

And then franchisees are going to be a little lower than that. So, their pricing will be little higher and mix shift is going to be real low, 1.2. So GCA and pricing are going to be about the same. They took obviously higher pricing..

And just last thing for me.

If you could talk about pricing plans going forward things like you maintained sort of that mid-one type range?.

Yes. We do have a headwind of ACA sort of full adoption rate is expected or fuller adoption rate beginning next year. And then you have the carryover of California wage impact plus that among a number of other wage initiatives states. So, we think it’s going to require -- and then the commodity outlook is in that 2 to 3 range at the early look added.

So, we’re going to kick off the year with the sub-one and then leave room in July. And that’s the way we think about it right now. And we’ll some carryover from the pricing that we just took last July..

Thank you..

Next, we'll take a question from Tony Brenner with ROTH Capital Partners..

Thank you.

Could you remind me what the average cost of the remodels is per store?.

Yes. Hi Tony, it's Mark.

How are you?.

I am well. Thank you..

So, on the average cost, what we've said on that is that on the company's side, the average cost is probably up in the high 2s so call it 275 range. On our company remodels, Tony, we are completely redoing the restrooms. So that's an added cost. When we looked at the higher volume company locations we have traffic.

And while we are in the store and closing the store down for a certain number of days, we've gone ahead and done those restrooms even if under a full inspection perhaps that wasn't required, but we thought that was the right thing to do.

On the franchise side, given the scope of the remodels and the fact that again on the company's side we're completely doing restrooms probably the franchise spend is probably around 2 maybe call it high 1s around 2 depending upon again the scopes that they're choosing to do on their remodels..

Is any of that spend occurring in the back of the house in terms of equipment changes or anything of this sort?.

There is a little bit, Tony, but I would say that a very, very high percentage, majority of it’s at the front of the house inside the four walls and then obviously some spend on the exterior between a repaint on the exterior awnings things like. But it's primarily what I would say customer focus at this point..

Okay. Your footprint is sort of a moving target because you’ve legally got a number of closures which tend to sometimes be less than sometimes more than the number of store openings.

At what -- I mean I know it’s an old system and you’ve got a lot of franchisees out there with whole stores, but is there a point at which those closures should [recede] or we’re just going to regularly see maybe half a dozen to a dozen closures per quarter on average?.

Yes. We obviously -- this is a terrific brand, but it’s a brand that obviously has 60 plus years of history. And I think when we’ve gone back, Tony and look at the average closing rate over the last several years, it’s sort of in that mid 30 number, call it 32 to 33, 34 units per year.

And when you look at our tightened guidance range that was in the press release obviously suggests that same type of closing level. And we really don’t anticipate that’s going to change for the next few years..

So, when you talk about an increasing footprint, I mean there really isn’t one, is there except that you’re expanding internationally.

So, your international footprint is expanding, but certainly domestically it’s not?.

Well, so a couple of comments there. Last year I think we can speak the actual, last year we opened 46 locations most of those were domestic locations, but we opened 46 and closed 34, so the net opening number was 12.

And this year obviously the tightened guidance range would suggest a net number sort of in that I’ll call it at the lower-end of the 5 to 10, 5 to 15 type of net number. So, we obviously continue to see that closing number. I don’t want to give a specific net number for the U.S. we really haven’t gone that way.

But I think to your question, again, most of those closings I mentioned and the average number throughout the last few years are only U.S. basically..

Great, got it. Thank you..

You're welcome..

(Operator Instructions). And our next question will come from Nick Setyan with Wedbush Securities..

Thank you, fabulous quarter guys. So, I want to focus on the franchise comp a little bit, because I mean we saw not only a sequential acceleration but also saw a pretty impressive two -- I mean two year stack was pretty impressive acceleration. And so just to kind of even back out obviously, they don't have as much of a remodel benefit.

So, I was just wondering kind of the cadence in the quarter over that, did you see perhaps an acceleration in the comp as gas prices went down? Do you think that maybe the minimal wage actually going up helps in terms of spending power for your demographics, just any commentary would be helpful?.

Yes, this is John. I think that there is so much noise; it's hard to fair at all that out. We've asked all the same questions as you can imagine and we have a pretty good robust sort of machine here for post add analysis, post initiative analysis.

So, whether it's discounts, digital media, broadcast, local store or co-op initiatives, we take a very hard look at all those. We can't point to any one thing associated with wage or gas prices particularly; and usually they don't co-relate certainly in the near term.

Disposal income obviously does correlate over the long-term and number of meals away from home and employment are the strongest correlators. That said, July was the toughest month in the quarter and then things picked up from there..

Perfect. Then on the labor front, I mean even if you back out the benefit from the work comp, you pretty much stay flat on the labor line even with the minimum wage headwind in July.

I mean I know obviously your company owned comp was very strong, but I mean is there anything else going on or is there some cost focus or anything else you’re doing kind of at the restaurants to be able to control some of those labor headwinds?.

We do have like anybody in the restaurant business, so it’s a constant battle around wage and cost containment. And our progress along those lines is never as strong as we like, we like to have the margins of days going by or decades going to by.

That said, we saw an improvement in the labor line, I believe it’s about 30 basis points; part of that, we had a favorable workers comp. So we are about [1.5] last year to 400,000 this year, I believe about one, one pick up there.

And then some overall better controls -- I’m sorry, cost of sales was 30 basis points improvement; and that’s really just pricing over commodity. So we saw tail end of the year come under control a little bit better, we had some -- we recovered on all the big commodities and so we saw some pick up there.

So between food and labor, you’re right, labor about flat and then a little bit of leverage over cost of sales..

Are we pretty much covered for the full cost for Q4 now?.

For this year, yes..

Okay.

And then just last question, any updates on the royalty transition?.

Yes. The transition is going well. I think as you can imagine, this is as we’ve said before, this takes place over the long haul, take a good decade for to fully mature.

I think we’ve shared that by the end of this year we’re around -- right now and through the end of the year about 150 restaurants are affected by that, so they would be at the higher rate. And then that grows every year, I think to about 40% of the system over the next four years and then trickles in over 10..

Thank you very much..

And our next question will come from Mark Smith with Feltl and Company..

Yes. This is (inaudible) for Mark Smith. Just one quick question here.

What was traffic versus ticket in the comp?.

So let me just give company. So company GCA was up three one, about one seventh of that price; and so traffic would be about one on the company stores, positive in the quarter. Guidance for the year would be zero to one, so updated guidance..

Perfect. Thank you..

(Operator Instructions). And we do have a follow-up from Michael Gallo with C.L. King..

Hi, good afternoon, just a follow-up.

I was wondering if you saw any GCA benefit from some of the changes you made on the $8 items, may be getting a higher incidence within 2468 or you saw the mix within 2468 stay relatively skewed to the lower priced items?.

Yes. The two crucial state changes have been good changes for the brand. We addressed our $2 and $4 items that might have been just a little bit too good deal and we did a nice task to make sure there weren't negative consequences. So it's consistent with what I said in my opening remarks.

We've seen a nice balance working with our franchisees to protect margin or grow margin in that category but at the same time, still have some traffic driving consequences. This has been mixing in that 19% to 21% and sometimes 22% range. We'd like to curve that back a little bit with these changes.

So, we're starting to see some nice adjustments accordingly; we think we’ll get the biggest benefit in the fourth quarter, third and fourth quarter; and about a 1% cost of sales impact on that part of our menu..

Thanks very much..

And that does conclude our question-and-answer session at this time. And I’d like to turn the conference back over to Mr. Kincaid for any closing or additional remarks..

Thank you, Melissa. I'd like to thank everyone for joining us on today's call. We look forward to our next earnings conference call to discuss our fourth quarter 2014 results and detailed annual guidance for 2015. Thank you and have a great evening..

That does conclude our conference for today. Thank you for your participation..