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

Michael Gallo - CL King Brittany Whitman - Longbow Research Will Slabaugh - Stephens Tony Brenner - ROTH Capital Partners Colin Radke - Wedbush Securities. Shawn Bitzan - Feltl and Company.

Good day ladies and gentlemen, and welcome to the Denny's Corporation Second Quarter 2015 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, Katherine. Good afternoon. Thank you for joining us for Denny's second quarter 2015 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 second 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-Q today. John will begin today's call with his introductory comments. Mark will then provide a recap of our second quarter 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 31, 2014 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. Good afternoon, everybody. We're pleased to achieve another quarter of strong same-store sales growth for both company and franchise restaurants.

The execution of our brand revitalization strategy focused on improving the food, service and atmosphere at our restaurants has positioned Denny's to benefit from the improving consumer economic environment.

Our efforts to meet our customer's expectations through menu offerings, execution of service standards and an enhanced atmosphere are contributing to the growth of our revenue, cash flow, and earnings per share. The results of our efforts are steady gains and same-store sales and traffic with comparable sales growth in 16 of the last 17 quarters.

I'm pleased to share that our system wide same-store guest traffic has increased each of the last three quarters while traffic at our company restaurants has grown each of the last six quarters.

The growth in guest traffic demonstrates how we are truly benefitting from our strategies to deliver a differentiated experience along with solid execution by our franchised and company operators. We believe the foundation is in place to build on these results and sustain momentum as we move ahead.

Once again, the higher same-store sales resulted in continued growth in revenues, margin expansion at company restaurants and meaningful increases in adjusted EBITDA and adjusted net income per share.

Similar to the first quarter, we benefitted from a rise in guest traffic and favorable product mix shifts from guests trading into higher priced offerings due to our proactive efforts in menu innovation and merchandizing.

We continue to generate favorable product mix shifts which accounted for approximately 300 basis points of the increase in guest check average at our company restaurants. The product mix improvements are coming from guests moving away from Value as evidenced by a decrease in the incidence rate of our $2 $4 $6 $8 Everyday Value Menu.

Most importantly, guests are ordering more of our more premium offerings found in both our core and limited time only menus. We continue to work to optimize our core menu to a combination of editions, deletions and revisions with the goal of enhancing product quality, consistent delivery and check or margin benefit.

In June, we rolled-out an updated core menu incorporating five new menu item additions, nine menu item deletions, and seven new recipe or process improvements. This menu includes a few new sandwiches including a new Cali Club, the Chicken Philly Melt, and the Spicy Sriracha Burger.

We are now showing calories on our menus nationally as we align our consumer's expectations for information and transparency. In addition, we now highlight the gluten-free items in our menu and have added a gluten-free English muffin to our offering for customers seeking gluten-free products.

Our limited time only menu strategy remains focused on showcasing fewer but harder working options in conjunction which highlights around our improving core menu. During the second quarter, we showcased a limited time only menu, Denny's With a Twist which put a spin on a few of our traditional dinner favorites.

The current limited time only menu is an exclusive partnership with the upcoming Fantastic Four movie. The limited time Slamtastic Four Menu features a selection of iconic Denny's dishes inspired by marvel superheroes like the Invisible Woman Slam, the Thing Burger, the Human Torch Skillet, and the Fantastic Four Cheese Omelet.

With the movie hitting theatres later this week, we will replace this menu with the limited time only menu for the month of September. Our Big Burger Bash menu will showcase five premium burgers along with three of our new sandwiches downed in the core menu. Like always guest will always be able to order up to $2 $4 $6 $8 Value Menu.

With each and every quarter we're getting better delivering high-quality products with more consistent service standards supported by our field training and coaching initiatives.

These efforts are supported by the Heritage remodel program, which continues to perform very well, further reinforcing the improvements investments being made in our food and service. With nearly 25% of the system reflecting the enhanced atmosphere, we believe we're still in the early stages of our brand revitalization.

This year we expect 180 to 190 remodels to be completed including approximately 50 remodels at company restaurants. By the end of next year, all of our company restaurants will be remodeled. Approximately 50% of the franchise basis do a remodel in the 2016 to 2018 time frame.

We expect this program to continue to be a sales and traffic growth driver for our brand, allowing our menu, service and media improvements to all work together.

In summary, we’re very pleased with the improvements we have achieved so far, as it is clear to us that our brand revitalization efforts are gaining momentum with franchises and with our guests. Our commitment continues as we execute our brand revitalization strategies enabling us to unlock the full potential of the Denny's brand.

Our continued growth and profitability will be driven by generating consistent gains in sales, improvements in customer return scores, margin growth, and increased unit growth both domestically and abroad. Through our highly franchised business we expect continued growth in our earnings per share and to generate significant free cash flow.

Going forward, we will continue to balance our cash allocation between reinvesting and growing and strengthening the Denny's brand and returning to shareholders.

And I'm pleased to announce as Mark will discuss in further detail, we are increasing our growth expectations for this year as we are now targeted to produce our strongest year of same-store sales growth in a decade. 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 second quarter results were highlighted by growing domestic system-wide same-store sales by 7.3%, growing adjusted net income per share by 21% and generating $9.6 million of free cash flow after capital expenditures.

During the quarter, Denny's opened 13 system restaurants including four international locations and closed 11 system restaurants including one company-operated restaurant.

Denny's total operating revenue including company restaurant sales and franchise and license revenue, increased by $8.7 million or 7.6% to $123.3 million, primarily due to the increase in same-store sales. Domestic system-wide same-store sales increased by 7.3% due to increases in both same-store guest traffic and same-store guest check average.

The improvement in same-store guest check average was driven by both favorable product mix and higher menu pricing. Domestic franchise same-store sales increased by 7.2% leading to a 3.6% increase in franchise and license revenue, primarily due to an increase in royalty revenue.

This increase was offset by an $800,000 decrease in occupancy revenue, which was driven by lease terminations. Franchise operating margin of $23.5 million improved by $600,000, primarily due to the increase in royalty revenue, partially offset by an additional $1.1 million in direct costs.

Franchise operating margin as a percentage of franchise and license revenue was 67.7% compared to 68.2%, in the prior-year quarter. This was primarily due to the increase in direct costs namely higher payroll expenses, advertising fund contributions and incentive compensation.

Same-store sales at company restaurants grew by 7.9%, driving a 9.2% increase in sales at company restaurants to $88.6 million.

Company restaurant operating margin was 18.4% of company restaurant sales, an increase of 4.2 percentage points primarily driven by the leveraging effect from higher same-store sales and the reopening of the Las Vegas Casino Royale Restaurant.

Total general and administrative expenses were $16.8 million compared to $14.1 million in the prior year quarter primarily due to additional incentive and share-based compensation along with higher payroll and benefits cost.

Free cash flow after capital expenditures was $9.6 compared to $11.6 million in the prior year quarter, due to higher capital expenditures and cash taxes paid. We invested $9 million in capital expenditures during the quarter, which included remodeling 17 company restaurants.

In addition we acquired a parcel of real estate for $1.6 million, which is leased to a franchisee. Also during the quarter we repurchased 1.5 million shares for $16.1 million. And through the first two quarters we have allocated $21.2 million to repurchase 1.9 million shares.

We have approximately 10.5 million shares authorized for ongoing repurchase programs based on Friday's closing price. Now I'd like to take a few minutes to expand on the business outlook section of our earnings press release.

Based on second quarter results and Management's current expectations, we're raising 2015 annual guidance expectations for same-store sales and adjusted EBITDA. We are increasing same-store sales expectations to be between 5.5% and 6.5% at company restaurants and to be between 5% and 6% at franchise restaurants.

We now anticipate the company margin rate will be between 16.5% and 17%, primarily supported by leveraging higher same-store sales. We continue to expect the franchise margin rate to be between 67% and 68% including approximately $10 million in franchise occupancy margin.

Total G&A expense is now expected to be between $64 million and $67 million, primarily due to higher incentive and share based compensation levels. Despite this increase we anticipate adjusted EBITDA will be higher than previously estimated ranging between $86 million and $88 million.

Cash, capital expenditures, are expected to be between $26 million and $28 million which is approximately $2 million higher than previous guidance primarily due to a scrape and rebuild of one company restaurant.

Despite the increase in our expectations for adjusted EBITDA, our free cash flow guidance is now between $44 million and $46 million due to higher cash capital expenditures.

Going forward we will continue to allocate our excess cash towards 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] And we will go first to Michael Gallo with CL King..

Hi, good afternoon. I just want to drill a little bit on the SG&A, a little higher in the quarter. It look like I know you have the stock based comp, but I guess just to take a step back, looks like core SG&A was up about $2 million.

When I look from the start of the year, I think you started at $58 million to $61 million of SG&A on the guidance and now we’re talking about $64 million to $67 million, which I guess back to the envelope that's $0.04 or $0.05 variance from where you original guidance was in February.

So, walk me through the SG&A, how much - kind of embedded in the year or stock based comp, is there any frontloading given just how strong the year has been. And then also what's going on with the core SG&A number, it looks like it was up again fairly meaningfully year-over-year. Thanks..

Hi Mike, it's Mark. How are you? So let's start first with 2014 annual G&A last year, actual 2014, it was right around $59 million and the set of numbers for 2015 is outlined in the guidance comments were in a 64 to 67 range at this point in time. In the second quarter we were up about $2.8 million in G&A.

And I'd say probably about - let’s call it around 70% of that change that increase was a combination of annual incentive accruals, as well as stock based comp and a majority of that was actually the annual incentive accrual.

So, to reference that if you go back and take a look at our proxy statement from last year, the plan is outlined from an annual incentive standpoint is primarily focused around sales - topline sales, as well as profitability.

The plan on the stock based comp is basically, it's a total shareholder return focus primarily but what it really does is takes a look at Denny's share price change on absolute basis and also on a relative basis to peer group. And again, all that's outlined in the proxy statement.

Back on the core G&A piece, I would tell you that excluding stock based comp, and excluding the annual incentive piece, which I mentioned in the second quarter probably was almost three quarters of that differential from prior year.

Within the sort of the core G&A thereafter, which is really payroll and benefits cost, yes, there are some headcount changes, some folks were adding, we're really focused on investing in the right G&A pockets I would say to drive the business forward and I think that's relatively consistent with what we said in the past when we clarified historically about investing in the brand, part of that investment was really on the G&A side and that really - now that's sort of the other piece of that there as well.

But again, when you look at the overall picture, a large portion of the change is a combination of the annual incentive piece, as well as stock-based comp. And as I mentioned in Q2 in our second quarter that was probably, call it, somewhere between two thirds and three quarters of that change on a year-over-year basis for second quarter.

So hopefully that give a lift - go ahead.

Presumably now you've factored in at least ways year-to-date, I would presume that i.e.

contemplate probably hitting the high ends on the annual at this point?.

Well, I would just go back to the range that we quoted, which is the $64 million to $67 million number for the year. And again that compares against $59 million from 2014, actual. So, we did provide a range, and right now obviously we'll update or not update - we'll refresh that accordingly when we get to the end of the third quarter.

But right now the range is $64 million to $67 million. And as I mentioned, when you look at the second quarter and the first half of the year, a large part of that change, that delta is a combination of the annual incentive accrual as well as stock-based comp, the two combined..

Right.

I guess just coming back again $64 million to $67 million range, that assumes just looking at the numbers at least fairly significant leveling off of the year-over-year changes in the back half because I think last year, you did $30.7 million I think in the back half, so that would imply a level-off, is that fair?.

Right. Without answering your question specifically, the guidance would suggest we're going to be up somewhere between $5 million and $8 million on a year-over-year basis, and I think in the first half we're up probably about $5.5 million dollars year-over-year..

Okay. Perfect, thank you..

Thank you. And we'll go now to Alton Stump with Longbow Research..

Hey guys, it's actually Brittany Whitman on for Alton today.

I was wondering if you could give us any color on the nature of the competitive environment, we're just trying to gauge if 2Q was maybe any better worse than 1Q?.

Hi Britney, this is John Miller. Of course our Q2 was slightly stronger than Q1. That's been the trend of the top performers in the industry and sort of the reverse of the average of full service. So, it looks like they're starting to be a little separation between the lead performers and the average.

And other than that, I don't know specially what else to -.

Okay. No, any color is good. And then just a quick follow-up on the Heritage remodel, I know you said that the program is doing pretty well, you're moving along with some of the remodeled stores.

I was wondering if you had an updated comp list figure from the remodeled stores?.

Not updated, I think it's been fairly consistent.

What I could tell you we've had some questions about what happens when they start to comp over, and we're pleased to report they continue to perform very well, and not honeymoon off, so they continually perform in that mid single digit range across all the averages and then they continue to hold it and build..

Okay. Great, thanks guys..

Thank you. Our next question comes from Will Slabaugh with Stephens..

Yes, thanks guys. You mentioned last quarter, and then again this quarter that the guests are ordering more of the high priced premium items.

So I'm wondering if you're seeing this across the board, across your system, or if it's notably stronger or weaker in certain parts of the country where employment growth or some other factor may be stronger or weaker?.

That's a great question, Will. It's been fairly consistent and we see a little bit of difference in comp based on housing and sort of employment, but we don't see much difference in total check, GCA. So the stronger - there is a little bit of a difference between company and franchise.

Franchisees have a little bit more price they're carrying and so we have a little bit smaller $2 $4 $6 $8 incidents and more trade into the premium items as a result of slightly lower pricing. So there is a little bit of benefit there.

In other words with less pricing we actually have higher guest check shift to report but other than that it's fairly consistent, Will..

Got it. That's helpful.

And then on the $2 $4 $6 $8, I may have missed this, I know you mentioned last quarter that that was down 300 bips year-over-year and probably in conjunction with what you just mentioned a minute ago, was that number similar into 2Q?.

That's right, real similar to Q1. However, the Company continues to slide a little bit. So the company incident rate is about 15% now, system is about 17% in Q2, Q1 was about 18%. So it's real similar, so 17% versus 21%, about 300 to 400 basis points difference..

Got it, okay.

And the last thing from me, update on any sort of pricing changes that you may have had during the quarter or looking forward just given any sort of movements you've seen with eggs or anything else in your commodity basket?.

Sure, as you may or may not be aware, our commodities are pretty well spread, that's the benefit of our larger menu. Pork and beef are the two highest of comp - make up about little more than 30% of our total market basket, with beef being slightly higher and pork being slightly lower, that 30% eggs only makes up about 10%.

So in the first half of the year, it was fairly nominal what the avian flu impact was in the back half of the year to be more significant. So full year guidance is about 2% to 2.5% total market basket change including the impact of the avian flu..

Perfect, thanks, Jon..

Thank you..

Thank you. And we'll go to Tony Brenner with ROTH Capital Partners..

Thank you, good afternoon. I wanted to ask a little more about the shift in the Value Menu, it makes sense, I think that your customers and your existing customers are coming more often given what economic improvement there is.

But one of the motivations are putting the Value Menu on the first place was to attract new guest, new customers, who were not currently patrons of Denny's and the fact that the Value Menu is running down 300 or 400 basis points as a percentage of the mix.

I wonder if that implies anything with respect to whether the increased sales or how much of the increased sales are coming from new customers, who are not previously going to Denny's, whether the Value Menu really makes a difference in that respect at all..

I think those are great questions.

Tony, obviously we pride ourselves on taking care and consumer insight work and market intelligence on where our traffic is coming from, breakfast, lunch, late night value menu, premium options, LTOs, and then the great work our marketing team does on segmentation and demographic information, and how they are responding to different initiatives.

Obviously way too much to put into a short answer but they all seem to be moving in a positive direction and so we look at $2 $4 $6 $8 and say this is primarily a traffic driver, not just for new customers but for any of those categories.

And we were very comfortable with its impact on check up to a certain level and above the 21% level or so or maybe for easy talking points above 20, we start to view that as migration in two successful. So, somewhere in that 15% to 18% range, we're very comfortable.

It's doing what it's designed to do and maintaining frequency for guest that might not have been there without a value program, that's a great lever that we have and a tool in our toolkit to pull we need to accelerate it or pull off the gas a little but we're pleased to see the work in raising the quality and other drivers for that other 80% of the guest and their business is taking root as well.

So, all-in-all I'd say we're fairly comfortable to where we are, as well as our franchisees, the two was not expected to go away but we made the election not to re-price it, but to keep it with the equity in the name $2 $4 $6 $8, so it did require some engineering and it was a bit too successful by some measures, and it's very appropriate where it is right now..

Are you seeing, John any particular strength in - at day part for example was, is the big growth reflecting more families coming at dinner or is it spread out?.

Yes, that's a great question. The dinner day part is the biggest beneficiary of the remodeled program, which is called 25% of the system at the moment. For the whole system including stores of remodeled the averages are a little different than the remodeled isolated.

And that's the breakfast and lunch have been stronger performers year-to-date in non remodeled stores. So it's an interesting comparison between the two. But yes, we're seeing a stronger lift right now in breakfast and lunch from all non-remodeled related initiatives..

Thank you.

Thank you. And our next question comes from Nick Setyan with Wedbush Securities..

Hi guys, this is actually Colin Radke, in for Nick.

I may have missed it, but was the impact of pricing and traffic on the comp in Q2?.

Pricing is roughly 2.5 year-to-date, and also in Q2, slightly about – call it 50, 60 basis points difference between company and franchise. Back half of the year is predicted to be in the 2 to 2.5 range, slightly lower than first half..

Okay, got it.

And then how should we think about kind of lapping the changes to that $2 $4 $6 $8 menu in the second half along with the rollout of the core menu update in June and some of the - this shift in the instance you've been saying, how should we think about that as we start to lap some of the changes going into the second half?.

Yes. Guest check impact will start to mitigate late Q3 and most - the toughest comparison will be Q4 where we have the full benefit of the re-engineering. So, we have the toughest comparison late in the year..

Okay. Got it. Then just one more kind of in the context of the egg cost.

Might you take any more pricing to kind of offset in the second half, or how does that impact may be how you think about the LTO pipeline or the marketing calendar or is there anything you can do to offset some of that inflation?.

We did as you can imagine take a careful look at our LTO strategy and where pricing options could be addressed inside between the announcement in the end of the year. So in this menu just rolled out, we took a little pricing related to omelets and then we did the same thing in our LTO menu that we have in place right now.

And then you'll see that we have a burger bash following the Fantastic Four promotion, the movie promotion, which is markedly counter to an egg promotion. So there are some things we've done to mitigate it.

And again, we think without the eggs, we would had a fairly flattish commodity year, but we're guiding 2% to 2.5% .So it is having an impact but the news is getting a little bit better every week..

Got it, okay. Thanks a lot..

[Operator Instructions] We'll go to Mark Smith with Feltl and Company..

Hi guys, this is Shawn Bitzan, sitting in for Mark.

Can you touch on results that you're seeing from non-traditional restaurants, mainly college campuses?.

Sure, this is John and I'll address. The DEN we have 14 of these non-traditional locations open, they're primarily with partners like, Compass, Sodexo, Aramark, we have an [APs] [ph] relationship as well.

And then we have a couple of college campuses that operate their own food service and have elected to put the Denny's fast-casual program on their campus. The DEN concept is our latest version, it's at the University of Alabama Birmingham, University Charlotte and then San Diego State.

It has a slightly higher average or weekly sales than the average of all 14. So it represents progress, but I'd say the way we look at this division is as more opportunistic driven, it's not in a position for scale at this point, but it’s been great learning for the brand.

It’s tremendous opportunity for us to appeal to millennial crowd that has firsthand captive audience opportunities to share with us what they like about the image of it, the product development. And so it certainly has its benefits for our system.

And we’ll continue to open a few a year at this point and the guidance for this year I think is three total..

Okay.

How about some of the forms raised in the airports and international results from those non traditional?.

Flying J is what we call our travel center is quite scaled on the other hand and since we did the transaction with pilot when they acquired Flying J, we’ve added new travel centers every year since that transaction concluded there.

We’re not adding them at the same pace obviously, but every year franchisees from mom-and-pops with truck stops two new build travel centers and our franchisees are non-branded or not pilot of Flying J that are adding travel centers that include Denny's.

So there’s a few of those been added every year there add or around the average of the brand franchise average and generally have some favorable economics. The crowd is little different depending on how much is four wheel and how much is 18 wheel traffic.

The most notable difference is the 18 wheel traffic since ever stronger Tuesday, Wednesday, Thursday mid-week evening day part instead of a Saturday morning strong day part. So you tend to sell few more T-bone steaks and sirloins and chicken fried steaks than omelets, and pancakes, but it’s a very good complement to our brand..

Thank you very much..

Thank you. And with no additional questions from the queue, I'd like to turn the floor back over to our speakers..

Thank you, Katherine. I’d like to thank everyone for joining us on today's call. We look forward to our next earnings conference call in early November to discuss our third quarter 2015 results. Thank you and have a great evening..

Thank you. And ladies and gentlemen, again that does conclude today's conference. Thank you all again for your participation..