Curt Nichols - Senior Director, Investor Relations John Miller - President and Chief Executive Officer Mark Wolfinger - EVP, CAO and Chief Financial Officer.

Michael Gallo - CL King Tony Brenner - ROTH Capital Partners Mark Smith - Feltl and Company Nick Setyan - Wedbush Securities.

Ladies and gentlemen, thank you for standing by. Good day and welcome to the Denny's Corporation Second Quarter 2016 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Curt Nichols, Senior Director, Investor Relations. Please go ahead, sir..

Thank you, Paula. Good afternoon, everyone and thank you for joining us for Denny's second quarter 2016 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 today. This call is being webcast and an archive of the webcast will be available on our website later 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 2016. 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 factor 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 30, 2015 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, Curt. Good afternoon, everybody.

Despite an increasingly choppy consumer economic environment, and rolling over our strongest sales quarter last year, we delivered growth in both company and franchise revenue, while second quarter same store sales declined 0.5% and were impacted by a challenging full-service dining environment, as well as holiday mismatches, two year same store sales remained robust at 6.8% positive.

The Easter-Spring Break shift at the beginning of the quarter, along with the July toward shift at the end of the quarter weighed on same store sales by an estimated 60 basis points. Adjusting for this impact, our system same store sales would have been slightly positive for the quarter.

Our revenue growth coupled with our disciplined focus on cost resulted in margin improvement and led to approximately 7% growth and adjusted EBITDA over – and over 18% growth in adjusted net income per share. Our consistent performance reflects the ongoing momentum generated by the brand revitalization initiatives launched in 2011.

Our vision remains to be become the world's largest, most admired and beloved family of local restaurants, serving classic American comfort food at a good price around the clock. With less than 45% of our system currently reflecting our successful heritage remodeling program, significant opportunity remains with our brand revitalization.

We remain focused on executing against four key strategic areas to drive our future success. The first is to deliver a differentiated and relevant brand, achieving consistent same-store sales growth, supported by profitable gains in guest traffic.

Our consistent strong performance against other full service and family dining benchmarks demonstrate the success of current strategies, delivering system same store sales growth in 12 of the last 13 quarters is also evidenced that our initiatives to enhance our food, service and atmosphere are working.

We will continue to optimize our menus to match our guest needs by responding to their desire for better quality and more favorable products.

Our latest limited time only menu highlights the launch of our new and improved pancake, by featuring four breakfast entrees, including the double berry banana pancake breakfast and the strawberries in cream pancake breakfast.

We completely revamped and improved our pancake recipe by adding fresh butter milk, real eggs, flour and a hint of vanilla, the results is a fluffier, tastier, better butter milk pancake.

The pancake recipe replaces our previous pancake across all breakfast related plates and our menu and our latest example of our ongoing investment in product quality improvements.

We supported the launch of our new pancakes with incremental national media way, including a return to 30 second commercials during July featuring the theme that Denny's new pancake are so good they just might be better than home made.

We are also investing in additional digital and social media to highlight our new pancakes across multiple platforms. Our continued focus on food innovation and product quality and enhancements throughout our core menu will be supported by strong brand engagement initiatives and improving guest experience and enhanced atmosphere.

To that point, our heritage remodel program continues to perform well. We completed an additional 57 remodels in the second quarter, including six company units bringing their heritage image to approximately 44% of the system.

This year over 200 remodels will be completed, including 25 company restaurants and we now expect over 50% of the system will be remodel by year end. As a reminder, remodels will continue to be a significant tailwind for the brand over the next few years as we expect over 70% of the system to have a new image by the end of 2018.

Our second key strategic area is to consistently operate great restaurants with the primary goal of being in the upper quartile of satisfaction scores of all full-service brands. With each quarter we made continued toward delivering higher quality products with more consistent service standards.

Our new field training and coaching initiatives are critical to delivering our mission and to be a model franchisor, which includes assessment and coaching to run great restaurants. We have completed over 4400 product reviews and are observing continued steady improvements in the performance scores.

Additionally our guest satisfaction surveys continue to trend positively and were at the highest point since we began measuring overall guest satisfaction in 2011. Although we continue to be encouraged by our progress, we recognize the need to continue to invest in strategies to further elevate the Denny's experience.

In advance of the national launch of our new and improved pancake, our field training team has completed nearly 200 training sessions with over 1500 restaurants managers across the Denny system. This focused effort, coupled with improved training tools marked one of our most comprehensive operational training rollout initiatives in recent years.

We believe our investments in training talent and systems to support our strategies will drive future sales growth over the coming years. Our third key strategic area is to grow the global franchise expanding Denny's geographic reach of domestic and international locations.

We opened 13 restaurants during the second quarter bringing the year-to-date total gross openings to 25 locations. Given the moderate number of closings we are very encouraged by net unit growth of 10 restaurants year-to-date.

Over the last 18 months we have grown our international portfolio by a net 11 restaurants or over 10% including 7 openings within the last six months in Trinidad, Mexico, Honduras and Canada. With a pipeline of over 90 new international restaurants, we look forward to gaining further momentum outside of North America.

Our strong performance continues to drive interest in the brand, attracting new franchisees, building the real estate pipeline and adding new development commitments. Our four key strategic areas to drive profitable growth for all stakeholders with the goal to grow margins and profits.

Consistent profit growth will be driven through the continued expansion of our highly franchise business which provides a lower risk profile with upside from operating a meaningful base of high volume company restaurants.

Our second quarter results continue to demonstrate our ability to increase margins and grow key profitability metrics, as we coupled revenue growth with a disciplined focus on cost. During the quarter, we generated $26.1 million of adjusted EBITDA and $18.5% million of free cash flow after interest, taxes and capital expenditures.

Our strong free cash flow generation creates significant flexibility just to support branded investments, including opportunistic acquisitions of high volumes franchise restaurants.

We recently contracted to acquire 6 high volume units from a Southern California franchisee and Mark will provide additional details of this transaction in just a few moment. Including this pending transaction, we still expect to generate over $50 million of free cash flow this year and remained dedicated to returning cash to our shareholders.

Our share repurchase program began in late 2010 and since then we have generated over $259 million in free cash flow of which $223 million or 86% has been invested in share repurchases. With the additional 100 million share repurchase authorization announced in May, we currently have 130 million authorized for share repurchases.

In closing, we remain focused on our brand transformation and building a sustainable foundation to grow around the world. By consistently growing same-store sales and expanding our global reach, we will continue to grow the Denny's brand, while returning cash to shareholders through our ongoing share repurchase program.

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 second quarter highlights include growing adjusted EBITDA by 6.8% to $26.1 million and adjusted net income per share by 18.6% to $0.13 per share while generating $18.5 million of free cash flow.

During the quarter franchisees opened 13 restaurants, including 12 domestic locations and on international location. In addition, we acquired two franchise restaurants and re-franchised two company restaurants. Our system restaurant count increased by 7 to 1720 restaurants as six franchise restaurants will close during the second quarter.

While our domestic system wide same-store sales decreased 0.5% compared to the prior year quarter, we once again outperformed the broader casual dining industries and continue to take market share from our competition.

Denny's total operating revenue which includes company restaurant sales in franchise and licensing revenue increased by 0.8% to $124.3 million due to higher company restaurant sales and franchise royalties.

Franchise and licensing revenue grew 1.2% to $35.1 million due to an increase in a number of franchise restaurants over the past 12 months and a higher average royalty rate, compared to the prior year quarter, partially offset by lower occupancy revenue and 0.5% decrease in same store sales of domestic franchise restaurants.

Franchise operating margin of 69.4% improved by 170 basis points due to higher royalties and improved occupancy margins. Moving to our company restaurants, sales increased by 0.7% to $89.2 million due to an increase in a number of company restaurants over the past 12 months, partially offset by a 0.1% decrease in company restaurant same store sales.

Company restaurant operating margin of 18.4% was flat relative to the prior year quarter. Higher sale, lower incentive compensation and lower workers compensation cost which benefited from operational improvements were offset by higher wages and group insurance expense.

Total general and administrative expenses of $16.2 million declined by $600,000 or 3.7% compared to the prior year quarter. Lower incentive compensation costs were partially offset by higher payroll and benefits expenses.

Interest expense increased by $800,000 to $3 million due to higher revolver balance, and a greater number of capital leases compared to the prior year quarter. As I reminder, we have increased our leverage over the past few quarter, primarily to fund share repurchases.

During the 12 month period ending June 29, 2016, our total share repurchase has exceeded $90 million. This is nearly three times the amount we repurchased during the 12 month period ending July 1, 2015. The provision for income taxes was $3.8 million, an included income benefit of $2.1 million associated with the pension plan liquidation.

Excluding this impact, the effective income tax rate was 36%. The pension plan liquidation did not have any – did not have an impact on cash taxes. Due to the use of net operating loss and tax credit carryforwards, the company paid $600,000 in cash taxes during the quarter.

Adjusted net income per share grew 18.6% to $0.13 per share and excludes the $22.2 million net settlement loss resulting from the pension plan liquidation.

Free cash flow after capital expenditures, cash taxes and cash interest was $18.5 million compared to $9.6 million in the prior year quarter, due to higher adjusted EBITDA, lower cash capital expenditures and lower cash taxes. Cash capital expenditures of $4.1 million included a remodel of six company restaurants and facilities maintenance.

During the quarter we allocated $3.8 million towards share repurchases excluding the previously announced $50 million accelerated share repurchase agreement. The ASR was completed in July following our second quarter close.

As a result, we received an additional 1.5 billion share of our common stock bringing the total number of shares repurchased pursuant to the ASR agreement to approximately 5 million shares at a volume weighted average price of $9.90 per share.

At the end of the second quarter basic shares outstanding totaled 76.6 million shares compared to 83.4 million shares at the end of the prior year quarter to a total reduction of 6.8 million shares.

Since the beginning of our share repurchase program in late 2010 we have returned over $220 million to shareholders by repurchasing over 30 million shares inclusive of the ASR. We ended the quarter with approximately $130 million in remaining share repurchase authorization, which included the new $100 million authorization announced in May.

Our quarter end leverage ratio was 2.4 times. At the end of the quarter we had $221.7 million of total debt outstanding, including $198 million under our revolving credit facility. Let me now take a few minutes to expand on the business outlook section of our earnings release, which excludes any impact on the pension plan liquidation.

Based on our current expectations for the remainder of the year we are raising certain annual guidance parameters as follows. We now expect total operating revenue of $505 to $508 million, including franchise and licensing revenue of $139 million to $140 million.

Due in part to lower commodity costs we anticipate our company margin will range from 17% to 17.5%. Our franchise margin is anticipated to be between 69% and 69.5% due to higher royalty revenue and lower franchise G&A expenses.

We are tightening our guidance range for general and administrative expenses at this time to be between $65 million and $67 million. Adjusted EBITDA is now estimated to be between $96 million and $98 million, while free cash flow is anticipated to be between $51 million to $53 million after cash, capital expenditures of $29 million to $31 million.

The increase in expected cash, capital expenditures is driven by the accretive acquisition of an additional six franchise stores at an aggregate purchase price of $8.4 million. These units averaged $2.3 million in annual sales volume and are expected to generate approximately $400,000 of company operating margin per unit.

Whereas the foregone royalty revenue of approximately $100,000 per units will reduce our franchise operating margin going forward. Transactions such as these are consistent with our strategy of acquiring high volumes franchise units.

In fact these particular units exceed our company portfolio averaging its volumes and are located in the Western United States and fit well with our company operated field infrastructure.

We will continue to allocate capital towards investments in our brand and company restaurants, while also returning capital to our shareholders through our ongoing share repurchase program. That wraps up our guidance commentary. I'll now turn the call over to the operator to begin the Q&A portion of our call..

Thank you. [Operator Instructions] And our first question will come from Michael Gallo with CL King..

Good afternoon and congratulations on continuing the good results.

Just two questions, I was wondering on the pancake change, how long you tested that for and what kind of results you saw from that when you put it in test and was that a meaningful traffic driver or is it something that just enhances overall image? And then also on the calendar shifts mark, how much of that you know, either you had to shift at the beginning of the quarter and the shift at the end of the quarter, I was wondering if you could parse how much of that shift kind of flows into July and actually helps Q3? Thanks..

Yes. Mike, this is John, we'll take the last part of your question first and when you talk about the pancakes, so just a little bit.

Obviously because of the Easter flip the first month was toughest in the quarter and then we accelerated through the end and then sort of had a little dim finish with the 4th of July, leading into the weekend flip is still affected the end of Q2.

And so it fell along lines that didn’t really surprise us frankly, but – and we can certainly talk about that a little bit more in a moment. But that I think answers your question.

Regarding pancakes, we had like all of our LTOs, we started these testing processes as many as 13 to 15 months before they launched, some of these things are shelved and resold it through the year depending on the economic conditions, how the consumer is responding. And pancake is no different, I think this is probably the longest test.

We've had different versions of pancakes that we've investigated for several years. And then it finally led to one we felt like we could launch in the market. It did not hurt that commodities for – that eggs are down this year compared to last year and that may have played a role leading to this launch not coming sooner in the brand.

We're very pleased with consumer response. We've had roughly 10,000 calls to the call center relating to pancakes since the launch. That has been overwhelming positive.

They are fluffier and more cake like and our guests seem to be really responding to the incidence rates for this LTO are running on 150 to 200 basis points higher than our normal LTO run and that’s largely pancake incident sort of make shift..

Yes, I know its hard parse data, but is it driving an incremental guest or is it driving a guest that normally gets something else. I guess, what I am alluding to, obviously pancakes have a very high margin, so certainly it’s nice to see the incidence shift. But I was wondering whether if you can tell whether it’s driving incremental guest? Thanks..

Yes, I think it’s a little early for that. It’s a choppy and rough year that traffic is another conversation. But I'd say that compared to – our expectation obviously is sort of continue to be favorably that we eliminate some parts - about the quality of our brand that we're sort of seen as is okay, or average.

And so I believe the right way to answer is that our long-term expectation is you know, when pancakes are in consideration that it might create some favorability for Denny's So the desire here is to have whether frequency of our current guest or the gain share from the home over the current trends, both are part of our long-term goals, they have positive results quarter after quarter after quarter..

Thanks very much..

[Operator Instructions] Moving on, we'll go to Will Slabaugh with Stephens Inc..

Hey, guys. This is Drew on for Will. Just real quick, could you all talk about the performance of your 2, 4, 6, 8, menus as a whole in a quarter and if you noticed any movement of customers toward to that value and your menu as the industry slowed? Thanks..

As on to 2, 4, 6, 8, side, you know, we – I would say there is been a little bit of shifting that’s going on, but basically we continue to average sort of in that mid teens range. So as an example, we ran an incidence rate of about 17% during Q1 of this year, so it’s Q1 of '16.

The most recent 2, 4, 6, 8, range was sort of in that 15% range, so it went down a little bit between the two quarters. If you recall, we talked a lot about the Grand Slam slugger in Q1 that was at $8 price point which really mixed quite well during that timeframe, which was one of the drivers that sort of pulled that mix into.

So I call it from mid teens towards the higher teens, but ultimately we continue to see that run sort of mid teen type of mix at this point in time on 2, 4, 6, 8..

All right. Great. Thanks, guys..

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

Thank you.

Mark, you referred to a higher royalty rate on your franchise revenues, could you explain what's involved with that?.

Yes, Tony, I mean, I know we talked a little bit about just before in some of the – in the calls we've done in the past.

Now this is obviously that the slow transition into this 4.5% royalty rate goes back several years and really is the trade-off between our franchise agreements that we're moving towards the 4% advertising contribution and we basically sat down with our franchise, communicated [ph] with our franchise board and kept that contribution rate at 3% and moved the royalty rate to 4.5%.

And so we're starting to see that climb. I think our average domestic royalty number was probably closer to 4.1% in the current quarter and continued to move upwards throughout the timeframe. So to just sort of set the scene on that, but the end of Q2, the end of this quarter we had 520 franchise restaurants paying 4.1% royalty.

As an example that was up from 465 at the end of Q1, '16. We are anticipating that by the time we get to the fourth quarter of '16 that number will probably move up another 50, call it around 570ish and then beyond that obviously it will cross in that 600 mark. I think as we mentioned these agreements are long-term agreements.

So this is gradual transition over the next 8 to 10 years where you eventually see virtually all of our domestic franchise agreements at 4.5% royalty..

What is the international royalty rate?.

It ranges, there are different incentive deals that exist, so that the – the single digit, the low single digit range or we up to plus 4% royalty. As you recall, we also have higher royalty rate on our non-traditional openings which is probably more in the 6.5% range on a non-traditional openings.

But again, basic royalty is 4% moving towards 4.5%, we were about 4.1% domestically at the end of the second quarter..

Okay.

Were your Texas stores unduly impacted by whether the economy and the unrest in some areas?.

It’s hard to fair it out unrest, I'd say Florida or Orlando there may been an impact, its hard to tease out. The story is that Texas economy is been softer which affects the Southeast tourism and then also there was unrest in Orlando on moving one occasion and it may also affected it. But I think those are been hard to tease out whether and or unrest.

What we do know is there is direct correlations to jobs and there has been impact on Texas since the collapse in oil pricing and signs of recovery in Texas, as result as well. We have 190 stores there, Tony, it’s about 11% of our system, second only to California which is just a little under a quarter percent of our total system.

We do have a bigger concentration south, 52 in Houston, 18 and San Antonio which tend to be touch more influence in Dallas and so therefore Dallas does a little better in these tougher economic times and Houston or San Antonio. West Texas has been affected the most.

In Q2 we were down 18 in Texas, it’s about 130 basis point behind the whole brands performance, and so in some way you could see that as you know more negative than in the first quarter in traffic. However, in another way you could look at it is, it closed the gap. So Q1 we were about 200 basis points behind the total system.

So half full or half empty, it’s going to how you're going to look at Texas, we think that it will start to continue its performance with every passing quarter..

Okay. And I know California had been particularly strong market for you, is that changed or does actually mean one of your stronger….

No, California is still performing well, you know, you have the headwind of higher wages there and you have tailwind of a little more money in the pocket of the consumer.

You also have a stronger housing starts and overall one of the stronger performers nationally, certainly in the top 10 every quarter and overall economic performance growth and job growth. So we expect it continue to be a benefit to Denny's with a quarter of restaurants been located there..

Okay.

Last question, could you breakout in the quarter your customer accounts and average ticket in that same store sales number for companies [indiscernible]?.

Yes, check in transactions, so in the quarter we were down 0.5 as you know, that’s up 6.8 on a two year basis, company would be down 0.1 up 7.8 on a two year basis, traffic would have been slightly negative for the quarter for the company stores, let me find that number for you Tony, yes, so, down 2.8 and on a two year basis slightly negative.

So we gave back a little bit, we had some considerable mix shift in check gains which look like it culminated with some transaction consequences in the quarter..

Got it. Thank you very much..

[Operator Instructions] Moving on, we'll go to Mark Smith with Feltl and Company..

Hi, good afternoon, guys.

First off, could you just talk about the improvements in guidance how much of that is due acquiring some restaurants [indiscernible] if you can quantify that at all?.

Yes. Hi, Mark. It’s Mark Wolfinger.

How are you?.

Doing well, thanks..

On the guidance piece, we moved that EPA range up by a couple of million dollars and it’s really a combination of two things. One is obviously the acquisition that John reference, I gave a little bit more detail on that, obviously there is pro rata piece for the year.

And then the second part is the commodity picture, which is continued to - certainly to benefit us. I mean, going to into the year we sort of talking about flat to slightly negative.

I think last quarter we gave a range of deflation or negative number, minus two to minus three, I would tell you that we think that commodity numbers probably like minus three to minus four now, this was for the year, and significantly deflation are in the second half of the year.

And if you recall last year egg prices took off dramatically in the second half of the year. So we're rolling over that in the second half of the current fiscal year. And that’s going to contribute to significant deflation on our commodity basket for the second half.

So back to the original point of question, that movement upwards and EBITDA guidance is a combination of the acquisition, I'll say acquisitions as we also made one in the first quarter, but the large acquisition had – larger acquisition I talked about. And then secondly is the commodity deflation..

Perfect.

And then just talk about non-traditional units how they are doing today, primarily its not, I know its still early, but the Kwik Trip units, can you talk about Den [ph] piece how they are performing?.

I'll talk about the Kwik Trip piece, if you recall we had four of those conversions we did three of them last fiscal year, and one early in the new fiscal year, up in the Midwest three of those are in Wisconsin, one is in Ireland. Those units – we've talked about this a little bit before, but I'll just articulate that a little bit further.

Similar type of investment, size is to the Flying J, in fact, they are facility themselves, and our travel center facilities and the conversion of existing restaurants. But those Flying J investments if you recall were in that $5 to $600, 000 all in a range per unit. So obviously it’s a lower end of our - I'll say a new Denny's investment.

And those stores from a volumes standpoint I think are doing reasonably well, it’s pretty much into our pro forma and what we expected and obviously the lower end investment speaks to a very reasonable ROI.

On the Den piece?.

Yes, let me talk about, its actually a little bit of mix result, we have the early in the later going in this, you might have noted we had a couple of closings in non-traditional, I'll talk about those first, Nellis Airport base closed and Auburn University closed.

So we have four openings we expect this year, Clarion University opened, we have Indiana University, Old Dominion that will bring us to 16 of these locations by the end of the year. We do have developers like Compass, Sodexo, Aramark involved with us and we've been sort of refining the model.

I'd say we're pretty pleased with what we are opening these days. We revised the format to a product called the Den. We tend to locate them a little bit more strategically in the early going they go into some traditional food courts and other places where QSR might have been the higher expectation.

And we tend to be located more where the campus housing is these days and with the certain amount of density requirements and are getting a reasonably stronger responses result to that. So I'd say it is mixed, is the big picture answer, but through these refinements it’s actually been pretty healthy results in the last few opening.

We don’t have street side expectations at this point, these tend to be captured crowd, development opportunities. But with four openings this year, we've been running two to three. So its, momentum though modest..

Okay. Perfect.

And then lastly can you just talk about late night trends, there seems like late last year maybe it was trending down little bit, any update?.

Yes, the dinner day part, the breakfast, lunch, dinner and late night four day parts of Denny's seem to kind of have their annual story. You will remember we talked a little bit last year about being most challenged at the late night day part.

That continues to be the case dinner and late night, strongest performing for the brand right now is breakfast as you can imagine for the pancake promotion and or promotion sooner the round breakfast and then also breakfast all day efforts by McDonalds and other QSRs.

So the news out there is sort of overweight along the story line of breakfast and so it’s created favorability on our breakfast day part. So it is a strongest performing day part for us right now. If you could call there a challenge, the late night would still be the softer performing day part for us.

All day, they - breakfast is call it, just under a quarter of our overall mix of the four day parts about 35% comes to lunch 22%, dinner 19% late night. So while it is softer those numbers haven’t materially moved, but it has been little softer with the late night day part..

Okay, great. Thank you..

[Operator Instructions] And next we will go to Nick Setyan [Wedbush Securities]..

Thank you. Hi, gentlemen. So you guys reiterated your comp guidance, obviously that implies that the sales softness in Q2 is going to be short live, that we are going to see reacceleration in the second half.

So any comments on where the confidence is coming from, is that being driven by the national advertising and the pancake rollout or is that going to be more towards Q4 as the comparison deeds?.

It is a great question, I think it is the industry question right now, the softness versus prior year, how do the quarter shake out and which brands will be winner and losers. And so brands that are guiding to be in our case the sixth consecutive positive year, that I'd say that is very question.

We focus on in our management team here, we knew this quarter this quarter will be challenging Nick, we were rolling over a very strong, one of the strongest quarters in 20 years. Our second quarter of 2015 were up 7.3 and as we've been sharing with folks, we also had the holiday mismatches in the quarter.

We had tremendous growth in GCA from some engineering of 2,4,6,8 value menus and we just knew this quarter is going to be challenging.

There is also in terms of recent performance you got the Texas softness and then some Southeastern softness as a result of Texas softness and we don’t view those as longer term challenges, already starting to see some reversal of the trends. We - as I mentioned that 200 basis point gap in Texas Q1 is narrowed to 130 basis points already in Q2.

So with the broader shift to consumer, but the only thing that we didn’t account for I'd say and how we were viewing Q2 compared to the full year is this allocation nation theory that Malcolm Knapp has been sharing, retail has actually shown consumers actually stronger than you might imagine at 4.5% annual rate, its one of according to JPMorgan were the biggest quarters in over a decade, Q2 4.5% and retail spending, bigger ticket items.

And so the theory is that with politics and unrest and the things going on in Texas and Florida and then some house remodels and big ticket item sales there may have been a little bit of a pullback and some ease out.

I do think full service takes it on the chin first, but I think we're well positioned with our value proposition, our product line up, the way we plan the year. We feel pretty good about how - where things go from here. So its confidence in the quality, the service initiatives, the overall brand remodel efforts and so forth.

So we see Q2 is little more of a speed bump in the long-term of things. There are a number of other things that are really positive going on in the brand, our net user growth is improving, we will have one of our best years on a long-term on a net basis which means it, the few less closings.

We have made these acquisitions of some higher volume restaurants that complement the company portfolio. And our business model continues to offer some pretty high free cash. So we - as I started the comment, I think we were confident in our six consecutive positive year and well it's little choppy this year, we expect the momentum to continue..

Got it.

And in terms of kind of the pricing going forward and mix, was in the [indiscernible] was mix about 80 Bps or so?.

Nick, its Mark. I think probably that mix number was call it 60 to 80 Bps something like that, pricing was a couple hundred basis points, sort of in the - I will say in those ranges..

Okay.

Then going forward just given kind of the product cadence that you guys made internally, do you expect the mix to continue to grow with the pancake et cetera?.

Yes, I think it's hard to - the pancakes 55% of our all day product mix is already breakfast oriented now, a large portion of that’s pancake. So one might automatically deduct to margin firmly with lower cost, this depends on what's been traded. And you might actually think that it could, I mean, I you see in our guidance margins are guided up..

Yes.

Okay, and then just a couple of clarifications, on the acquisitions is that whether the incremental forward, that’s the Q3 timing?.

As far as the actual acquisition you're right, I'm sorry yes, about the incremental Nick, yes, there was a total of – there were total of six restaurants, two fell under the previous quarter, four fell under the third quarter. So I'll say two fell in the Q2, four fell onto Q3, early Q3..

Okay.

And just lastly on labor, obviously with the staff comps, 20 Bps that you have leveraged actually quite excellent, so what I guess reacceleration we're calling for in the second half, can we go back to maybe flat year-over-year or even leverage in the second half?.

So, you are asking about company operating margins, Nick?.

I'm talking about the labor right on the company side, in Q2 we de-levered only 20 Bps with the soft comps.

So with the reacceleration in the comp, you guys expect in the second half, I'm start thinking about flat or maybe even leverage again?.

Well, I mean just some I guess, I'll tap to answer your question just for a couple of data points. So we obviously guided up on company margins, sort of tighten the upper end of the range on company margins. We came in at 18.4% for company margins in Q2 or about 18.2 year-to-date, last year we are about 17.5 year-to-date, fiscal '15.

In the current quarter, we had a number of things that went through there to benefit us overall. And part of that went through the labor one and part of them went to other sections of the P&L. But certainly pricing helped us, mixed shifts helped us to some bit – to some extent and I mentioned the commodities side.

On the labor side we certainly saw benefits both in some lower incentive or lower bonus compensation and also benefit of workers comp which I mentioned is well. So those were items that went through on the positive side. To your point Nick, we obviously had - traffic was negative in the quarter, so there was the reverse leverage there.

And then also we've identified that from a minimum wage standpoint in California that probably is causing us sort of in that 70 to 80 basis point range as well the long way. So as we looked at and we looked at our guidance number, our new guidance again for the entire year for company margins is 17% to 17.5% the older guidance was 16.5% to 17.5%.

So we brought up the lower end and tighten it in the 17% to 17.5% range and in reference to last fiscal year, that means fiscal 2015 we ran 16.6% for the entire fiscal year. So obviously that was just going to be up, call it 50 basis points or so in company margins right now..

Perfect, thank you..

And that concludes our question-and-answer session. I would like to turn it back to Mr. Nichols for any closing comments..

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

And that does conclude today's conference. We'd like to thank everyone for their participation. You may now disconnect..