Whit Kincaid - Senior Director, IR John Miller - President & CEO Mark Wolfinger - EVP, Chief Administrative Officer & CFO.

Mark Smith - Feltl and Company Colin Radke - Wedbush Securities Will Slabaugh - Stephens Inc.

Welcome to the Denny's Corporation Fourth Quarter and Full Year 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, Justin. Good afternoon. Thank you for joining us for Denny's fourth quarter and full year 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 fourth 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.

As a reminder, we will be filing our 10-K the week of March 9th. John will begin today's call with his introductory comments. Mark will then provide a recap of our fourth quarter and full year results, along with brief commentary on our annual guidance for this year. 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 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, everybody. We're pleased with our strong finish to what was a very good year for the Denny's brand. Same-store sales continued their steady growth and momentum continues since the 2011 launch of our revitalization strategy.

We're pleased to have established a number of new same-store sales milestones in 2014 including posting positive comparable sales 14 of the last 15 quarters. Our fourth quarter had the strongest quarter of same-store sales growth for the system in over eight years, primarily driven by increases in traffic.

2014 also brought the highest annual system-wide same-store sales growth in eight years and the highest annual company same-store sales growth since 2004. Our same-store sales growth helped to grow both our adjusted EBITDA and our adjusted net income per share while also generating strong free cash flow.

Our brand revitalization efforts continue to gain momentum with our guests. Both our franchisees and Denny's Corporate team remain energized and committed to further enhancing the performance of the brand.

Looking ahead, our focus is to continue our growth in earnings per share through our highly franchised business, while generating significant free cash flow to both reinvest in the brand and return to shareholders.

Our goals for consistent gains in sales, customer return scores and both unit and margin growth are dependent on the execution of key initiatives in four strategic areas which I'll now briefly cover. The first is to deliver a differentiated and relevant brand. Our unique America's diner brand positioning serves as that foundation.

It provides the warm welcome that we all want, that place to be ourselves and that place affectionately known as Denny's. By improving our menu offerings, the taste and quality of our ingredients, our menu merchandising and our dining environment, we're giving more people more reasons to come more often at all times of the day.

Over 50% of the core menu has been improved during the last four years through a combination of new products and enhanced ingredients. Though our strategies have led to significant improvements, we look to our guests to further guide us in our ongoing efforts to enhance our appeal and our product offerings.

Our new core menu, launched in early January, showcases a number of our fresh ingredients with more pictures and opportunities for upselling. Our limited time only menu is more focused with fewer but harder-working options offering both appeal and operational efficiencies.

The promise of everyday value is very important to our diner positioning and delivered primarily through our successful 2-4-6-8 Value Menu. Equally important are the margins of this traffic-driving strategy to our franchisees, who work with us collaboratively to improve the profitability of our menus.

Product mix improvements from this collaboration led to higher average margins per guests, beginning in the second quarter of 2014 with the largest benefit occurring more recently in the fourth quarter. The benefits will continue into 2015, helping us offset commodity inflation.

Our Heritage remodel program which we rolled out at the end of 2013 is foundational to our America's diner positioning and further reinforces the improvements that we've made to date in our food and our service. In 2014, we completed 171 remodels, mostly in the new image including 44 at company restaurants.

With less than 20% of the system reflecting the enhanced atmosphere, we believe we're still in the early stages of our brand revitalization. This year, we will continue to accelerate remodels at company restaurants with the target of completing 45 through 50 remodels by end-of-year.

Our second key strategic area is consistently operating great restaurants with the primary goal of having guests scores at or above other large full-service brands. We continue to invest in the support systems and personnel need to train, coach and equip our operators to deliver reliable guest service every day, every shift and every guest.

At the end of last year we implemented the Pride review program with a team of coaches tasked to evaluate all restaurant operating standards and empower our entire family of operators to share and implement best practices.

This is accomplished by assessing, measuring, coaching and continuously improving the consistency and the execution of our current brand standards, as well as all new initiatives. Our third key strategic area is to grow the global franchise with the primary goal to expand in a geographic reach of domestic and international locations.

2014 brought another solid year of gross openings including the reopening of our Las Vegas Casino Royale location. Our growth initiatives have led it to 321 new restaurant openings in the last five years which represents nearly 20% of the system. The base of 106 international restaurants has grown 29% since the end of 2009.

Our goal is to increase our net restaurant growth through all avenues, domestic, international, traditional and non-traditional. With modest penetration in the northeast, southeast and the mid-west of the United States, we're seeing traction with existing and new franchisees in markets like Charlotte, Atlanta and New York.

Last year, franchises open three new locations in the New York market including our first restaurant in Manhattan. Our focus on international development led to six international openings in 2014, primarily in Canada. With nearly 70 restaurants in Canada, Denny's is the largest U.S.

based full-service brand operating there, giving us a source of confidence in the growth to come. We look forward to our franchise partner in the Middle East opening their first location this year in the UAE. Also we believe that Denny's can compete successfully in the non-traditional fast casual market with our updated format called THE DEN.

It has generated fresh interest from both contract food service providers, as well as traditional franchisees. For instance, at the start of this year, we opened our first off-campus non-traditional restaurant adjacent to San Diego State University with a traditional franchisee.

Our fourth key strategic area is to drive profit growth for all stakeholders with the primary goal to grow margins and profits, while maintaining a disciplined focus on operating costs, corporate G&A and capital allocation. Our adjusted net income per share grew 18% in 2014, while we generated $48.5 million of free cash flow after capital spending.

Since 2010, we have generated nearly $190 million of free cash flow, allowing us to establish a history of consistently returning cash to shareholders. Since we started our share repurchase program in late 2010, we have allocated $108 million to repurchase 21.1 million shares.

While investments in our base of company restaurants will continue, we remain committed to returning value to shareholders through our share repurchase program. In closing, we're pleased with our progress to date and energized by the fact that we believe that we're still in the early stages of the revitalization potential of the Denny's brand.

We remain focused and committed to driving long term shareholder value through the execution of our revitalization strategies.

By consistently growing same-store sales and guest satisfaction, we plan to continue to expand the geographic reach of Denny's and consistently grow profitability with our very capable franchisees and are highly franchised business. With that, I'll turn the call over to Mark Wolfinger, Denny's Chief Financial Officer and Chief Administrative Officer.

Mark?.

Thank you, John and good afternoon, everyone. Our fourth quarter results were highlighted by growing domestic system-wide same-store sales by 4.7%, growing adjusted net income per share by 33.6% and generating $17.5 million of free cash flow after capital expenditures.

During the quarter, Denny's opened 22 system restaurants including the reopening of the Las Vegas Casino Royale company restaurant.

Denny's total operating revenue including company restaurant sales and franchise and license revenue, increased $14.5 million to $128.7 million, primarily due to an additional operating week and the increase in same-store sales.

Same-store sales of domestic franchised restaurants increased 4.6%, primarily due to an increase in same-store guest traffic and higher menu pricing.

Franchise and license revenue of $37.3 million increased $4.1 million, primarily due to a $3.2 million increase of royalty revenue, resulting from an additional operating week, the increase in same-store sales and six additional equivalent franchise restaurants.

Franchise operating margin of $25.2 million increased $3.6 million, primarily due to the increase in royalty revenue, partially offset by a $600,000 increase in direct costs. Franchise operating margin as a percentage of franchise and license revenue increased 2.2 percentage points to 67.5%, compared with the prior-year quarter.

This improvement was primarily due to the increase in royalties. Same-store sales at company restaurants grew 5.8%, due to both an increase in same-store guest traffic and same-store guest check average. The improvement of same-store guest check average was driven by both higher menu pricing and favorable product mix.

Sales at company restaurants increased $10.3 million to $91.4 million, primarily due to an additional operating week and the increase in same-store sales. Company restaurant operating margin of $14.2 million or 15.6% of company restaurant sales increased by $3 million or 1.8 percentage points compared to the prior year.

The increase in company restaurant percentage margin was primarily driven by the leveraging effect from the increase in same-store sales and the additional operating week, partially offset by higher commodities and advertising expenses.

Total general and administrative expenses increased $3.4 million due to higher incentive and share-based compensation expenses and an additional operating week. Free cash flow after capital spending increased $8.6 million to $17.5 million. We spent a $4.2 million on capital expenditures in the quarter which included remodeling six company restaurants.

During the quarter, we allocated $4 million to repurchase 500,000 shares. In 2014, we allocated $36 million to repurchase 5.3 million shares which is approximately 46% more than we allocated to our share repurchases during 2013. We ended the fourth quarter with $158.8 million in total debt outstanding.

With a total debt-to-adjusted EBITDA ratio below 2 times, the LIBOR spread on our credit facility will decrease to 175 basis points, saving approximately $350,000 in interest expense on an annualized basis. I would like to take a few minutes to expand upon the business outlook section in today's press release.

Our annual guidance for 2015 anticipates growing same-store sales at company and franchise restaurants in addition to continuing to accelerate remodels in our company restaurants during 2015. We expect to continue to grow our adjusted EBITDA despite having one less operating week.

In 2015, we expect same-store sales to be between 2.5% and 4% at company restaurants and between 1.5% and 3% at franchise restaurants. We currently anticipate that same-store sales will be strongest in the first quarter of the year, primarily due to a favorable year-over-year benefit from product mix.

During 2015, we will continue to face inflationary headwinds including minimum wage increases and commodity inflation. We anticipate the commodity cost inflation in 2015, i.e., this year will be less than 2%. We're currently locked into approximately 60% of our needs for the year.

As a result of inflationary pressures impacting our industry, we took a 1% price increase with our new January core menu and expect some restaurants to take an additional price increase this summer.

The same-store sales growth at our company restaurants and reopening of the Las Vegas Casino Royale location should enable our company margin rate to be between 14.5% and 15%.

The growth of our franchise business will be driven by same-store sales growth, a higher percentage of restaurants contributing at a 4.5% royalty rate and new restaurant growth. These benefits will be offset by unfavorable impacts from not having the additional operating week and around a $1 million decrease in occupancy margin.

The net effect of these impacts means that we expect our franchise margin rate to be between 67% and 68%. We have a 30 day LIBOR rate swap contract on $120 million of debt which goes into effect in the beginning of April.

The swap fixes the 30-day LIBOR rate at 1.1% and based on the LIBOR spread of 175 basis points, this would translate into a fixed interest rate of 2.9%. We currently expect our annual effective income tax rate to be between 36% and 38% with cash tax payments between $5 million and $7 million in 2015.

Cash capital expenditures annual guidance of $23 million to $25 million includes remodeling 45 to 50 company restaurants during the year and acquiring a parcel of real estate under a franchise restaurant.

Our free cash flow is expected to be between $45 million and $47 million, as the increase in adjusted EBITDA is offset by higher cash capital spending and higher cash tax payments. We will continue to allocate our excess cash toward supporting reinvestment in the brand and our company restaurants, as well as returning value to our shareholders.

That wraps up our guidance commentary. I will now turn the call over to the operator to begin the Q&A portion of our call..

[Operator Instructions]. First question will come from Mark Smith with Feltl and Company..

Just real quickly, can you walk us through the economics that you've seen on remodels, any changes here in the quarter, I guess really the lift?.

Sure. Mark, this is John. Great question. There's a lot of brands remodeling out there. We're no different. It is key to our revitalization strategy. If you heard us speak about just a few minutes ago, we have completed the year with 171 total. The range is, I would say at the lower end of the range, 150,000 and 250,000 is probably the upper end.

The company runs a little higher than that because we replace all the booth furniture, putting in hard surface floors and doing bathroom remodels. The reason for that is we think it's a good use of our cash and it just lowers the cost of the next remodel down the road for these things that last longer than one cycle.

Most franchisees curb that cash outlay a little bit more than that but not all. So that gives you an idea of the averages.

And then, a mid single-digit lift with a pretty high flow-through on that last dollar that comes in the door creates a return well inside of the time before the next one is due, so that's the -- at least, big picture of the numbers..

And then you guys quantify or talk more about what the impact on comp was from the ticket during the fourth quarter and then maybe your expectations going forward with the 1% increase that you've got here, it sounds like in January and expectations for the summer?.

Yes. Fourth quarter check it grew considerably, company was 3.2, guest check average was of about 2.7, for franchise system to 2.8 and pricing was a little bit different between company and franchise, nearly a point difference, company being a little lower, franchise being a little higher.

And so the second part of the question is do we -- what do we anticipate this year? Q1, we do have favorable -- we expect this guest check average to continue.

We have the pricing we took in January plus pricing from last July, so call it around 2 points on company so it's -- we have a favorable comparison, positive mix checks, positive weather about 60 basis points of weather in Q1 2014 that we -- so Q1 will be the easiest of all quarters by comparison..

[Operator Instructions]. The next question comes from Nick Setyan with Wedbush Securities..

This is Colin Radke on for Nick. I was just wondering if you could comment on the comp trends and maybe if you have seen any divergence by geography or perhaps any changes as you move through the quarter on a month-to-month basis and also to January? Thanks..

Sure. Fourth quarter, we saw basically momentum growing from beginning to the end of the quarter and we saw geographies that trailed earlier in the year catching up. But the strongest performance still favoring the geography of where we're were heaviest with penetration, so Florida, Texas, Illinois, California, Arizona and Vegas, or Nevada.

Those states had the most job growth; they also had the best comps..

And then I was also wondering if you could give us an update on what you're seeing from the Las Vegas location, post reopening maybe sales trends or margin trends or anything like that?.

Sure. Vegas unit number 141, as we affectionately call it, or Casino Royale, because it's immediately adjacent to the Casino Royale there, the store did reopen, call it around Thanksgiving and we're seeing it more or less pick up where it left off which is a very good sign.

It's on the second floor so we were -- I wouldn't say concerned, but everybody had that question in their minds, so it's good to have it back in the fold and we'll obviously have it for the full year of 2015..

[Operator Instructions]. Next question comes from Will Slabaugh with Stephens Inc..

Could you talk a little bit more about the product mix improvements that you mentioned? Is that a combination of the trade up on the 2-4-6-8 menu along with the uptake from LTOs or would you point to one or the other in terms of what's driving that mix?.

The 2-4-6-8 mix change -- Will, this is John -- it was fairly dramatic in the fourth quarter. It started early in the year. We started to reengineer it. It had gotten up to about -- it's range from the beginning, 18%, middle teens to as high as 22%.

But it's been a real good traffic performer for us and I'd say very helpful during the tougher economic time. But then, through time it requires some reengineering as the cost can get out of whack because obviously there's no price change. So we did start the reengineering process earlier in the year.

We took off a $2 biscuit [Technical Difficulty] we changed into a $4 enhanced it, that a little bit changed to a $4. We took the free beverages out of the $8 category with the exception of one product that's on the $8 menu that it was dependent on the beverage.

So we started to see the incidence rate to drop down in the 20% and then that continued to go down so far in 2015 that's down around the 19% range. So that helps check and then also it helps margin. We had about 100 basis points improvement in the 2-4-6-8 menu and obviously franchisees were delighted to see that.

But it still mixes well so we didn't alienate the consumer, we just made adjustments, so that's played a role. The other role is just going into the holidays with a better economy and more consumer confidence, we saw steaks and salmon and the other parts of our menu perform well. So that's played a role, a positive role also in the check..

And then, as far as the capital plans go for 2015, is it safe to assume that you're going to continue to use your excess free cash flow to repurchase stock here or are there any other plans to think about?.

Will, it's Mark. I would say that you pretty much answered the question. We have consistently said that obviously we're focused on reinvesting in the brand, as well as returning value to our stakeholders, to our shareholders.

We obviously talked about a CapEx number that includes 45 to 50 company remodels and we believe that will not complete our remodel activity but obviously we will be towards the higher end as a percentage of our company-based remodel.

The earlier question that John answered about the success of the remodels, absolutely, that is working for the brand and obviously for both company and franchise. But then it to the other part of your question, absolutely, I mentioned the fact that we increased the dollar amount of our share repurchases during 2014.

It was up almost 50%, 46% is the exact number. We continue to see share repurchase as a very strong focus for us and continue to be consistent in the market doing those share repurchases, so really a combination of reinvesting in the brand but also repurchasing shares with that excess cash..

And one quick follow up on the balance sheet if I could. You dropped about that EBITDA ratio below two and I realize, while asking questions, this has been a long process and so congratulations on that.

Now that you are reaping the benefits of lower interest rates, I'm asking the question of internally are conversations taking place on the potential to take that number back up? Now that you've grown your EBITDA, grown your free cash flow, could support more debt if you wanted to, to return even more cash to shareholders.

Is that a possibility or you feel comfortable where you are in this slightly below two times range?.

Yes. We were just slightly above 1.9, so slightly below 2, but just slightly above 1.9 -- it was a 1.92 it or something like when you do the calculation, but it's a situation for us and you know the history well. Obviously, it's been a long deleveraging process and we've said all along that we didn't aspirational see us aggressively deleveraging.

That's certainly how the math worked at this time, but I would say to answer the broader question, when we look at the amount of free cash flow we generate just coming out of the business model, we like where we're leveraged. I'm not saying that below two is the right spot, but we've been in that low two range from last several quarters.

I don't see us moving that leverage dramatically upward to the other part of your question, but we will continue to generate, call it $45 million plus in free cash flow, as we mentioned for our guidance for 2015 and we see a lot of that obviously going into the share repurchase program.

So we're pretty comfortable as a management team, that's where we're headed at this point..

And that does conclude the question and answer session. I'll now turn the conference back over to you for any additional or closing remarks..

Thank you, Justin. I would like to thank everyone for joining us on today's call. We look forward to our next earnings conference call in early May to discuss our first quarter 2015 results. Thank you and have a great evening..

Thank you. That does conclude today's conference. We do thank you for your participation today..