Good day. And welcome to the Denny’s Corporation Q2 2021 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Curt Nichols, Vice President of Investor Relations and Financial Planning and Analysis. Please go ahead..

Thank you, and good afternoon, everyone. We appreciate you joining us for Denny's second quarter 2021 earnings conference call. With me today from management are John Miller, Denny’s Chief Executive Officer; Mark Wolfinger, Denny’s President; and Robert Verostek, Denny’s Senior Vice President 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 a business update.

Mark will then provide comments around restaurant capacities, our franchisees and development. Then Robert will provide a recap of our second quarter financial results and prime trends. 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 30, 2020, and in any subsequent Forms 8-K and quarterly reports on Form 10-Q. With that, I will now turn the call over to John Miller, Denny’s Chief Executive Officer..

Thank you, Kurt and good afternoon, everyone. I do hope that each of you have remained safe and healthy since we last shared an update on Denny's.

And we are very encouraged by our second quarter domestic system-wide same-store sales results, which achieved approximately 99% of 2019 levels, despite staffing challenges that have hindered our ability to return to 24/7 operations across our system.

This performance included same-store sales of 1.9%, above 2019 levels at our company restaurants for the second quarter as tourism and travel are gaining momentum. I'm even more encouraged by the stickiness of our Denny's base brand off-premise business, which has grown from its pre-pandemic trend of 12% to over 20% during the second quarter.

Additionally, we are seeing an incremental 3% of average weekly sales through our two new virtual brands The Burger Den and The Meltdown.

We're very pleased the positive sales momentum continued in July with preliminary domestic system-wide same-store sales, 2.7% above 2019 levels including 2.4% at domestic franchise locations and 6% at company locations.

Furthermore, approximately half of the domestic system generated positive sales in the month of July and each of our top four states were positive as well. These results are a testament to the hard work and dedication of our teams, safely welcoming guests back into our dining rooms, while remaining focused on growing our off-premise business.

Our teams have accomplished this while enduring industry-wide staffing challenges that have impacted our ability to execute at our highest potential, especially during our late-night daypart. However, we are excited and encouraged by our recent Americas dining hiring tour.

We deployed our Mobile Relief Diner that typically supports people during hardships, such as natural disasters to bring awareness to our hiring efforts.

This week-long tour with our new career website that includes open positions for all company and franchise restaurants in one centralized location supported our efforts to recruit applicants for over 20,000 open positions in our restaurants.

We remain focused on our four key guest-centric themes, these are reassurance, value, comfort and convenience, and I'll now touch briefly on each of these. As guests return to our restaurant, it is more important than ever that we ensure the health and safety of our teams and guests.

So we are committed to reassuring our guests that Denny's provides a safe dining experience by consistently executing our enhanced cleanliness and sanitation procedures at all consumer touch points. A point of great importance in light of recent surges in COVID cases across the country. And our second area of focus is value.

We understand that value comes in different forms and has a different meaning for each type of guest, we consider our value approach to be a comprehensive balance between price, abundance, convenience and bundled value. And our third focus is comfort. We strive to ensure that Denny's is a place, where our guests feel welcomed and valued.

Whether dining with a large family, or as a party of one, we believe our guests view the Denny's experience as a time to build connections in an environment that is both inviting and comfortable with consistent and reliable service. Our final area of consumer focus is convenience.

We believe guests will continue to expect technology to bring enhanced value to their dining experience whether in our restaurants or through off-premise options like our well-established Denny's on demand platform of our – and that is our two new virtual brands.

Our first virtual brand The Burger Den is live in over 1,100 locations and allows us to focus on one of our strength, great burgers, with new varieties using ingredients that are already in the pantry.

Our second virtual brand called The Meltdown is a Door Dash exclusive brand that features handcrafted sandwich melts with fresh ingredients and unique flavor combinations.

While this brand can utilize approximately 70% of the items currently in our pantry, our innovative culinary teams have crafted new craveable products with the addition of some new premium ingredients.

We started the rollout of The Meltdown in April to approximately half of our domestic system, and expect to be substantially complete during the third quarter, and Robert will give more specifics on the performance of these brands.

However, we believe these transactions are highly incremental, and leverage underutilized labor to maximize kitchen efficiency.

Furthermore, these brands provide opportunities not only at dinner and late-night to leverage underutilized labor and kitchen space, but we're also seeing a meaningful number of transactions during the week versus the weekend. In closing, it's amazing how far we have come since the beginning of the pandemic.

Many things have changed in the restaurant industry, but one thing remains the same, we're still the place where people come in sit down and connect with one another over great food.

And despite near-term labor challenges that will subside in due course, our sales have now surpassed pre-pandemic levels, we have launched two new virtual brands driving incremental traffic during underutilized dayparts, and we still believe there are market share opportunities on the horizon.

We have an extraordinary group of dedicated franchises, and an exceptional Denny's team, which makes me very optimistic about the future of this brand. With that, I'd like to turn the call over now to Mark Wolfinger, Denny's President to discuss more about our franchises and development..

Thank you, John. Our outstanding team and franchise system are driving a lot of exciting momentum for this iconic brand. I'm very pleased to say that, beginning in May, all of our operating domestic restaurants had opened dining rooms and we currently have an effective capacity of approximately 99%.

We are eager to return to our historical position as America's 24-hour diner, and have seen a 5% increase in effective operating hours since the beginning of the year, to our current level of 19 hours per day.

We have worked with our franchise system franchise-by-franchise, unit-by-unit to map out a plan to increase our effective operating hours per day assuming staffing challenges subside after the enhanced federal unemployment benefits end in September. Turning to development.

Franchises opened three restaurants during the quarter, including one international location in Canada. Additionally, franchises closed seven restaurants during the quarter, yielding a net decline of four restaurants during the quarter and five net closures year-to-date.

This does represent the lowest year-to-date closures we've had we've seen in over a decade. I'd now like to take a few moments to update you on the health of our franchise system.

With off-premise sales remaining strong even as our dining rooms have reopened, we are very pleased to see franchise profitability in July, continue to improve as nearly 90% of our franchise restaurants, exceeded the 70% of 2019 sales threshold required to cover both fixed and variable costs.

Additionally, franchises represent approximately 98% all the domestic franchise restaurants have applied for the second round of PPP, and approximately 90% of those restaurants have received funding to date.

Improving sales additional federal stimulus available to franchises, and the net decline of only five restaurants through June gives us confidence in our franchise systems' ability to prevail and emerge on the other side of the pandemic more focused and driven than ever.

We look forward to seeing this historic recovery unfold and returning to net restaurant growth in the future backed by our existing domestic and international development commitments, including approximately 75 remaining commitments from our recently completed refranchising strategy.

Additionally, we believe there will be market share opportunities as the industry recovers. However, with multiple rounds of federal stimulus that have assisted our franchises that remain open, we believe these programs have also allowed other competitors to remain open.

Therefore, the opportunities may not be as robust as once thought at the beginning of the pandemic. Nevertheless, our development team is focused and has a proven record of converting existing spaces, both inside and outside the restaurant industry, into successful Denny's locations.

In fact in the last 10 years, approximately 60% of our openings have been conversions. These less capital-intensive opportunities provide enhanced ROIs for franchises and our experienced development team is already assessing the landscape for future Denny's locations.

I will now turn the call over to Robert Verostek, Denny's Chief Financial Officer to discuss the quarterly performance.

Robert?.

Thank you, Mark, and good afternoon, everyone. I would now like to share a brief review of our second quarter results and current trends as well as our expectations for the third quarter.

As a reminder, I will be comparing our 2021 domestic system-wide same-store sales to 2019 as we believe this comparison will provide a more consistent and informative representation of our recovery. Additionally, we will continue our standard practice of comparing to the 2020 prior year in our press release.

Domestic system-wide same-store sales during the second quarter declined 1.2% compared to 2019. Sales results benefited primarily from reduced dine-in restrictions related to the COVID-19 pandemic. While closed dining rooms and capacity restrictions are no longer the leading factors weighing on our business, industry-wide staffing challenges remain.

As John mentioned, the availability of labor continues to challenge our full return to 24-hour operations with approximately 40% of our domestic restaurants currently open 24/7.

Domestic restaurants, which were opened 24 hours in the second quarter, delivered a same-store sales increase of approximately 12% versus 2019 compared to a decrease of approximately 10% at domestic restaurants operating with limited hours.

We believe this performance differential presents an ongoing opportunity as a growing portion of our system extends its operating hours. With that being said, we are encouraged that preliminary domestic system-wide same-store sales results for July increased 2.7% with approximately 60% of our domestic restaurants still operating with limited hours.

Now I want to spend a few moments providing more detail on our virtual brands. As John mentioned, we believe these transactions are highly incremental and leverage underutilized labor to maximize kitchen efficiency.

In fact, approximately 70% of transactions from The Burger Den and approximately 60% of the transactions from The Meltdown occurred during the dinner and late-night dayparts, compared to approximately 35% of transactions for the Denny's base brand.

Not only are we leveraging underutilized dayparts but both virtual brands over-indexed during the weekdays compared to the Denny's base brand, providing additional opportunities to leverage underutilized labor.

Approximately 75% of transactions from our virtual brands occurred during the weekdays compared to approximately 65% for the Denny's base brand. The Burger Den is live at over 1,100 locations with an average check similar to a Denny's off-premise transaction.

As dining rooms have reopened and initial priority given to new brands on third party platforms has moderated, these locations are generating average weekly sales per restaurant of approximately $600.

Nearly 700 locations are live with The Meltdown and are generating approximately $1,200 in average weekly sales per restaurant with an average check similar to a Denny's off-premise transaction.

These actions being highly incremental and over-indexing at dinner and late-night compared to Denny's base brand off-premise sales, margins range from the mid-20s to the low 30% after considering product cost, delivery fees and labor efficiencies. Turning to our second quarter results.

Franchise and license revenue increased 134.1% to $58.6 million, primarily due to improving sales from reduced dine-in restrictions. Franchise operating margin was $29.9 million or 51.0% of franchise and license revenue compared to $9.8 million or 39.1% in the prior year quarter.

This margin increase was primarily due to the improvement in sales performance at franchise restaurants, partially offset by fewer equivalent units. Company restaurant sales of $47.6 million were up 214.5%, primarily due to the improvement in sales from reduced dine-in restrictions.

Company restaurant operating margin was $9.8 million or 20.5% compared to a loss of $4.5 million or a negative 29.6% in the prior year quarter. This margin increase was primarily due to improving sales performance at company restaurants in addition to lower payroll and benefit costs due to staffing challenges.

Additionally, we recorded approximately $600,000 in favorable reserve adjustments and tax credits related to the CARES Act, which benefited the company restaurant operating margin by approximately 1.3 percentage points. Total general and administrative expenses were $17.5 million compared to $13.2 million in the prior year quarter.

This change was primarily due to increases in both performance-based incentive compensation and share-based compensation expense in addition to temporary cost reductions during the prior year quarter as well as approximately $500,000 in tax credits related to the CARES Act.

These increases were partially offset by market valuation changes in our deferred compensation plan liabilities. As a reminder, share-based compensation expense and market valuation changes are non-cash items and do not impact adjusted EBITDA. These results collectively contribute to adjusted EBITDA of $25.3 million.

The benefit from income taxes was $1.2 million with an ultimate effective income tax rate of 59.3%. Adjusted net income per share was $0.18 compared to adjusted net loss per share of $0.25 in the prior year quarter.

During the second quarter, we generated adjusted free cash flow of $17.8 million after cash capital expenditures, which included maintenance capital of $1.5 million compared to $1.7 million in the prior year quarter.

We ended the quarter with approximately $195 million of total debt outstanding including $180 million borrowed under our credit facility. After considering cash on hand, the remaining capacity under our credit facility and current liquidity covenants we had approximately $120 million of total available liquidity at the end of the second quarter.

And we have continued to make progress. Subsequent to the end of the second quarter, we paid down an additional $5 million on our revolving credit facility, bringing our current outstanding balance to $175 million. The pandemic affirmed for us the value of a conservative leverage philosophy.

As such we are currently more comfortable with the range of between two times and three times adjusted EBITDA, whereas, prior to the pandemic we would have targeted longer term leverage somewhere between three times and four times. Our quarter end, total debt to adjusted EBITDA leverage ratio was 2.1 times.

This ratio was calculated using annualized adjusted EBITDA as defined in our prior year debt amendment. Our traditional LTM total debt to adjusted EBITDA ratio is 3.7 times, which is actually in compliance with our unamended credit facility we had in place prior to the pandemic.

As a reminder on December 15, 2020, we entered into the third amendment to our existing credit facility. This reduced the revolver commitment to $375 million and an additional step down to $350 million took place on the first day of the third quarter of 2021.

Financial maintenance covenants were waived through the first quarter of 2021, followed by the introduction of more favorable covenant levels in the second and third quarters of 2021. Under the amendment, capital expenditures are restricted to $12 million from mid May 2020 through the third quarter of 2021.

We have utilized approximately $6 million through the second quarter, leaving an additional $6 million available. Additionally, we are prohibited from paying dividends making stock repurchases and other general investments until we deliver our third quarter results.

However, we look forward to emerging from these constraints and continuing our long-standing practice of returning capital to shareholders while also investing in the business.

Turning to our business outlook, the following expectations for our fiscal third quarter ending September 29, 2021 reflect, management's expectations, that the current economic environment will not materially change. We anticipate domestic system-wide same-store sales will be between 2% and 4%, compared to the equivalent period in 2019.

We are encouraged by the lower number of net unit closings year-to-date.

However, due to labor availability challenges that are impacting the pace of openings as well as the requirement for franchises to remain open for a certain period of time to recognize the full benefit of PPP forgiveness, we believe that it is a touch early to provide guidance on net unit expectations at this time.

Additionally, while our franchise margin is relatively stable due to the efficiency of our highly franchised model, the exact timing and pace of re-staffing, and training new team members at company restaurants yields a less precise view into near-term company margin changes. However, pre-pandemic we guided to 18% to 19% company margins.

And we believe that target is still appropriate in a more stable environment. Our expectations for total general and administrative expenses are between $17 million and $18 million, including approximately $3.5 million related to share-based compensation which does not impact adjusted EBITDA.

Based on the guidance I just described, we are expecting adjusted EBITDA of between $22 million and $24 million. In closing, as we work to overcome staffing challenges and move from our current 19 effective operating hours to our historic 24/7 operations, we remain optimistic, about our ongoing sales trends.

Finally, and most importantly, I want to mention how proud I am of our franchises and the entire Denny's team, who have remained focused on serving our guests, while continuously managing the business needs through this post-pandemic recovery. That wraps up our prepared remarks.

I will now turn the call over to the operator, to begin the Q&A portion of our call. .

Question-and:.

Thank you. [Operator Instructions] Okay. So we will now take our first question from Nick Setyan at Wedbush Securities. Please go ahead..

Thank you. And congrats on some incredible numbers..

Thanks Nick..

I guess first off just given the comparability versus 2019, it's a little difficult due to the refranchising that took place in 2019.

Would you mind just telling us what the 6% comp in July on the company online translates to in terms of average lease re-sales?.

Hey Nick we're happy to get to that. If you look at the volumes, it's probably in the range of $18,000 on the year, sorry $180 million on the year. But let us work on that. And we'll give back to you on that. We don't want to give you the wrong number on that..

Okay sure. Okay. Sure.

And then in terms of the 18% to 19% unit level margin commentary, is that applicable to the second half of this year, or are we talking like longer term 2022?.

I think its fair Nick to say, it's probably a little longer term. If you look into the back half of the year, we still have some volatility with regard to that. If you look we're really looking to get staffed up frankly. And that will come both with additional labor expense as training comes back online.

But as we staff up, we'll also have the benefits of more of these units coming online 24/7. So there's some volatility that will likely occur in the back half margins. But again, once we get into a little bit more stable environment, I think the 18% to 19% should hold pretty well..

And just last question. Just to follow-up on the labor line.

I guess, maybe just give us some context in terms of how fast you are on the company on side relative to where you need to be? And then, just inflation expectations for the second half in terms of food cost versus, let's say, Q2?.

Hey. Nick, its John. On the staffing side, just to follow-up on that tour. We did get about 13,000 applications from that hiring tour. We were seeking to hire about 20,000 people. And so, well you won't hire everybody out of all those applicants. It was a very promising tour.

We were able to put a single website out there careers.dennys.com that really helped our franchises. So spirits are lifting up with the staffing challenges that we can close the gap on that.

It did not materially change so far in terms of the number of 24-hour locations, but we are on our way and we expect that, as we work throughout August that continues to improve. And in September, we expect -- in October, we expect to fully close the gap.

As far as to the other parts of your question, Robert, did you got those down?.

Yes, John. So we're talking in the room here. Nick, we're working on that AUV, the 6%, what that looks like. So, hopefully, prior to this call being over, we'll get it to you here shortly. Then with regard to the commodities on the back half of the year. So what we had seen with regards to commodities is, typically, we're in that 1% to 3% range, Nick.

I will tell you that we were slightly above that range in Q2. And frankly, we expect to be in that -- kind of above that range for the back half of the year. But the reality is, we're not overly concerned with that overall. We think it's temporary, frankly, and we do believe that we'll have another pricing opportunity as we head into Q4.

So that's -- it's not our biggest area of concern right now..

Great. Thank you very much..

Thank you. We now take our next question from Michael Tamas at Oppenheimer & Company. Please go ahead..

Hey. Thanks. Hope everyone is doing well. We currently see the business back above 2019 levels and that's obviously continuing to build in July. So the question is really on the sales guidance.

I mean, you're already at 3% above, I think, in July and the guidance is for 2% to 4% for the third quarter, but I think you have some additional catalysts coming through particularly as you continue to rollout, I believe, The Burger Den is going to finish rolling out in this quarter.

So I'm just wondering, how are you thinking about this third quarter, the rest of the quarter here? And you've factored any of the California stimulus payments into that guidance as well? Thanks..

Hey, Michael, this is Robert. So, yes, with regard to that, I think, what you'll see within that 2% to 4% number is somewhat of a continuation of what we know today. Again, one of the things that we've learned over the course of this pandemic is things can change pretty rapidly. But the reality is and we'll kind of point to this, we see the 2.7%.

And frankly, we have seen that remain fairly strong in -- given the current environment and given some of the talk about the volatility. So within that, I think, you would see us include everything that we've talked about frankly. You would see that the 700 -- you -- Meltdown units, the 1100 Burger Den units contained within there.

And then that gradual build back towards the 24/7. If you notice what we've seen when we -- since we spoke to you last from Q1 to Q2 is, we've made some progress with regard to the additional operating hours and we have a very developed plan with our franchises how to continue to move that forward.

But I don't think it's going to be a step function forward. We're going to work through that very deliberately and build those sales and we just don't want to get ahead of ourselves..

That makes sense. Thanks. And then, just on those 24/7 units, can you just help me on first, maybe clarify when you're comparing with the table in the press release against the pre-COVID levels and those units are only down 7%. That's like-for-like, meaning those units had 24/7 service before now they don't. If you could just clarify that.

And if that's the case, that doesn't seem that bad all things considered.

And so what I'm wondering is, is there a chunk of franchises that either don't have to or would you be open to the option of them not going back to 24/7 service, using these virtual brands and having sales volumes that are very similar today to where they were pre-COVID when they were running with those 24/7 units? And then how does that compare from like a cash flow side of things? I'd imagine it's almost better from a cash flow perspective, if they were to just go on the virtual side of things and not be open 24/7 and potentially have a better margin or better process with 24/7 service.

So just any thoughts there?.

Yes, Mike. Let me start there and then I'll turn it over to John. I'll take the more technical piece of that. Yes. With regards to the calculation with regard to those comps those are like-for-like. So you're looking at units that would have been 24/7 previously and now not and that's really the catalyst for them being down.

But correspondingly and the thing that really bolsters us with regard to that daypart is it is a 24/7 to 24/7 comparison to the ones that are up 15% also. So that's the biggest move in late-night upward in the last decade, we were looking into that at least and we can't find a larger catalyst for late-night.

But with regard to the second part, I'll pass that over to John Miller..

Well just simply to say that margins can be calculated in a lot of different ways percent margin you could be right. I'm not sure you are, that is a higher margin. The highest margin would be, if you were just open Saturday from 10 to 1.

But the point of it is these overnight sales we're talking about 8-ish percent 8% to 10% difference in what the brand would be comping if all stores were on 24 hours versus not. There's a fairly significant flow through those dollars being open those hours. And remember we're an all-day menu place America's diner always open.

That's been sort of our market positioning for many years. And then finally, if you're going to be open for 5:00 for breakfast and you are wrapping up around midnight, the night before the benefit to closing is not as powerful as you might think. So it's really a staffing challenge.

When we're fully staffed our franchises and our systems' committed to being a 24/7 brand. I would also say that we're getting high trial among Gen Z a little bit more of that late-night dinner and late-night daypart and more reluctant to get trial during the traditional breakfast and lunch daypart, the historical usage of family dining.

So we don't want to miss the opportunity to have a high capture rate of these younger consumers through the late-night daypart. .

Perfect. Thank you..

Thanks, Michael..

Thank you. We take our next question from Jake Bartlett at Truist Securities. Please go ahead..

It's actually Jack on for Jake. Thanks for taking my question. First, I wanted to ask about your trend in off-premise sales. It seems like the absolute level of off-premise sales is coming down here in June and July.

I guess how much of that do you attribute to changing consumer habits as restrictions are easing versus some seasonality as maybe July is usually a lower off-premise month? And I guess where do you see the off-premise sales leveling out long=term, or do you have a goal of where you want it to level out?.

Well, of course, we'd like to continue to build business in all four dayparts breakfast lunch dinner late-night dine-in and take out. We don't have a limit per se. We'd like to grow profitable transactions where the consumer is going and we think that is not as mysterious as it used to be.

There are -- there is a summer softness that's usually expected particularly you might have noted Burger Den, softened up a little bit. We are told by our third-party delivery experts that was to be expected to some degree. They're used to seeing that seasonality where people are out and about more.

They are dining out a little bit more but the third-party delivery burgers softens a little bit so they do expect some recovery of that a little later. And then part of this is, I think just people getting out and more and more restaurants opening and dining in a little bit more. So there's some softening.

But remember we've gone from 12% to over 20% in our takeout business 2019 to 2021 it is very sticky. We expect -- a good portion of that is incremental with different younger audiences coming during the week versus the weekend.

And we expect that a considerable amount of that continues to persist as part of the new normal of how people trade their meals from takeout delivery and dine out away from home. So the summer softness does not -- we expected some of this as people dine-in a little bit more but we do expect it to be really sticky. I mean it's a great question.

I think time will tell, what the more precise answer is. But we're ahead of where we expected and pleased to be retaining this amount of growth in business. .

Okay. Great. That's helpful.

And then I guess is there any sales trends you're seeing differently geographically still? Is California still trailing the rest of your system, or has that come back very strong as that's reopened?.

California sort of trailed in dine-in for a while but remember we were pretty -- during the pandemic it was tough, but remember leading up to the pandemic California we had nine consecutive years 2011 through 2019 of positive comps above the system and I believe 2012 through 2017 positive traffic out there still outperforming the system.

And California is back to being our number one state in performance over these past few weeks. And then other strong states for us have been Nevada, Colorado, Texas, Florida, Hawaii those are some of our stronger performing states right now. But we've had -- I think we reported in the script that over half were positive during the quarter.

So it does vary regionally, but California has certainly been a benefit and not a burden to the overall comp performance of the brand. .

Great. Thank you..

Thank you. We will now take our next question from Jon Tower at Wells Fargo. Please go ahead. .

Well, thanks. Hope, you can hear me? I am curious just to hear your response on, I believe California in particular might be imposing some new rules around animal welfare particularly that may impact pork based products in that market.

And I'm curious to get your perspective on how you think this might impact your business? Do you actually see this proposition as being something that might get passed or sorry enforced in the state, or do you think it's something that the federal government might step in and prevent that from happening anytime soon?.

Sure. I'll give a point of view. Robert you might want to jump in here. I know we've had conversations with our supply chain team about this question. I don't know that I can say with certainty what the outcome will be long-term I'd say the near term-based on how we process and source pork, it's not a challenge for us short-term like you might think.

And that could be explained in some fine points of detail perhaps later. But I'm not sure exactly all of the specifics that set us apart on being less concerned about that impact near-term. So, I don't want to speak out of turn here.

Robert is there any other -- anything else to add to that?.

Hey John just in general not specifically related to the pork. I think you answered that. But I think the reality is we pay very close attention to all of those and we move in concert with what the markets can actually convey for instance with the egg issue and our commitment to get the cage-free eggs by 2026. So Prop 12 is for the raw product.

All of our product is cooked. So, it won't impact us unless they change the law. So that's with regard to going back to the pork specifically but we do pay very close attention to all of that. .

Got it. I appreciate that distinction at the end the raw versus the cooked product. So thank you. Just going into the real estate opportunity Rob, I think you mentioned on the call the idea that you weren't seeing the real estate opportunities you had expected I think even just a few months ago opening up.

And would you say that's more restaurant specific sites, or are you seeing this across retail potential locations that you thought might come up as conversions for franchises down the line? And even that level of closures haven't necessarily shown up the way that you had once anticipated?.

Yes. So, it's Mark. I'll try to address your question and maybe Robert and John may want to jump in here. But -- so in my script when I talked about that I was primarily referring to the restaurant sector. I'm glad you asked this question -- the broader question about retail.

I would tell you and we've talked about this in the past is that from our standpoint if a trade area works the demand point works what we convert doesn't necessarily have to be a pre-existing restaurant. We've done retail conversions that have been very successful for our brand. So, we're primarily focused on the demand point.

And again, to answer your question, I was primarily talking about the restaurant closures per piece, but clearly retail has also been heavily impacted as a result of the pandemic. So that does continue to create an opportunity for our brand. .

Great. And just two more for me. On the 24-hour stores, 24/7 in the 2Q, I believe they were in plus 12% versus 2019. And stores that didn't have it were down pretty nicely.

Aside from these stores being open 24/7, is there anything else that call out about these stores in terms of their ability to staff, maybe there's geographies that are better than others perhaps these stores have both of the virtual brands? And anything you can comment about those stores just outperforming, or is it solely just the fact that they're 24/7?.

I think -- those are some great questions.

With anything circumstances and the timing of those play a role in where people are today and the trajectory of staffing hiring, where -- on the averages, it's always through 100 years ago, 100 years from now those stores that have really top-quality their managers do a really good job taking care of their crew and where they were newer or in transition, then those stores had a tougher time.

They weren't as deeply established with a crew, where there was continuity of leadership there for a long period of time. So the stores have had stable management and stronger -- more tenure tended to have outperformed. I'd say there's some correlation there.

There's some correlation to the franchises that read into the pandemic a little bit more trouble weren't certain of PPP loans early on and we're more aggressive in furloughs or laying off than that cultural signal in their ranks.

And so they struggled a little bit more than those that took the bet that all would be fine and protected management and keep positions in their restaurants and on their rosters. And so, there is some correlation there not just with our brand Denny's, but across the industry, depending on some of the staffing challenges.

I think the strongest correlation though is just the neighborhood the store happens to be in, where some areas are richer with staffing opportunities and others are tougher and that would be I think the strongest correlator. We do again believe these are temporary and they're all solved through time..

Got it. And then just last one for me.

Can you remind us, how you're marketing, the two virtual brands? And if there are any plans on the horizon to alter it if say today you're only doing it in digital channels if perhaps you start tagging it on to Denny's specific commercials?.

All those things are in discussion all the time. We're testing and weighing the pros and the cons. We do believe there's benefit in having some of the product lines that have been especially popular on the core base brands in due time. We did update some of the melt sandwiches on our core menu last quarter.

As a result they've performed really well for us. And so, we're studying those things all the time more to come on that. The advertising channels are really mostly through social media and/or the social pages associated with third-party delivery..

Thank you, very much..

Thank you. We will now take our next question from James Rutherford at Stephens. Please go ahead..

Thanks very much and congrats on the improvement here. I just wanted to narrow down in on those units opened 24/7 that are comping up 15% versus 2019 levels.

Can you give some detail about the components of that 15% growth, perhaps even directionally if you can speak to traffic versus check or new customers versus existing or dayparts or days of the week? Just trying to get as much detail as possible on the components of that growth.

And the goal is to try to understand maybe how sustainable that mid-teens lift might be over time? Thank you..

Sure, James. That's a great question. As to sustainability, it's a bit early to comment on that. We're highly confident these are brands that will endure a while and they're not just a flash to sell some burgers and melts for the short period of time.

They're quite popular and we get high marks from our third-party delivery vendors saying, this is the kind of product line they're looking for and we've even heard discussion about how they're dialing back the number of automatic takers that they just put on their platforms without evidence that the product will stand up over time.

So we're pleased with how they've been launched and confident of their enduring value. In terms of the rest of the answers, I wish I could give you some specifics. I think basically the 24/7 stores with both Burger Den and Meltdown outperform everybody.

So there's a strong correlation to the number of hours open and being fully staffed and having quality management on staff and having the capacity to take on these new efforts. So they're going to do a little bit better on check. Obviously, discounting is out of favor and full-service right now until brands are fully staffed.

Said another way, we can't handle all the transactions. We aren't -- we don't have the dinings fully open. We're not 24/7. So, there's no particular reason to move transaction building to know that we don't have the servers to cover more shifts at the moment.

But the -- all the way around, weekday breakfast, lunch, dinner, and late-night, I'd say the good news is especially strong mid-week and for The Meltdown and The Burger Den in terms of just outperforming the normal dine-in business in being both younger and a different time of the week.

And then late-night has been very, very strong as a result of one being open with fewer options open out there in the marketplace and then also having these virtual brands. So, but -- on just about every metric across the board, it's sort of run of the board that the 24-hour stores are just categorically better.

Not located better necessarily, but just performing better..

Okay, perfect.

One more and it's a question that we're starting to get, probably hard to answer but just as the cases have started to rise in certain parts of the country, have you seen much impact yet, or do you think it's a situation where consumers have learned to live with it and are working around in some of the isolated restrictions and mask mandates and that type of thing?.

Well, I think true to form, we carp and harp and you hear the people talking about the way that -- which the world was or the way the world ought to be, but it isn't right now. It's a challenging time for people. I think people are trying to sort out what will come next. It introduces a certain level of uncertainty.

And so it's the conversation of pretty much every business every day to mask or not the mask. I think what you're seeing so far because we are talking about it a lot and watching it very closely is we're not really seeing any change whatsoever or if any, certainly immaterial, in any consumer behavior at this point.

That's not to say they aren't concerned or thinking about it, but rather I think they're optimistic that they may go through some social distancing, some flexiglass put up between cash registers and consumers, some more tape on the floor to keep people far enough away and mask mandates and the like.

But I think people are generally not expecting there to be shutdowns per se. And so we're going about our business. I think people have more and more confidence that wherever these rises and spikes came from.

They came from large events and 100,000 people gathering or beach parties and the like and not likely coming from responsible socially distance restaurants with servers in masks.

So, I think my sense of it is while there will be discussion and concern and people will be watching carefully what happens over the next several weeks that the consumer behavior so far in particular in areas like California and other areas that maybe have a higher vaccination rate, the consumer confidence remains high to go out the eat in our -- and the support for Denny's continues to be strong in spite of the Delta version and mask mandates..

Thank you. Always appreciate your perspective..

Thank you..

We will take our next question from Eric Gonzalez at KeyBanc Capital Markets. Please go ahead..

Hey thanks and congrats on the return to pre-pandemic trends. Just regarding the 24/7 units and the sustainability of those comps that was just discussed. I would imagine a lot of those businesses, particularly the independents that are in the same area might have more difficulty staffing than large ones like Denny's.

So, is it possible that these units are perhaps overearning a bit by virtue of fact that you're the only game in town at those hours? I'm just trying to understand how those 24-hour units might perform as additional competition opens up in those trade areas..

Yes. We're certainly not the only game in town. We are one of the very few full-service games in town. But there are quite a number of options available including third-party delivery these days that did not exist before. So, we think instead what's happening is there's been a considerable reintroduction of the brand.

People in trade areas where they ordered through third-party delivery and gave us a good old try for a burger and omelet or what have you that are less likely to be a dine-out customer at the breakfast daypart. At lunch, they might be working at home on Teams or on Zoom. And -- but at dinner and late-night, they're going hey let's order out.

And so I think we've been had the market opened up to us in a number of areas. And because we are open late to your point, but also not just because we're the only one open late, but because we've been a little bit rediscovered.

People have -- remember, QSR went through the roof throughout the pandemic and full-service is fairly compromised, because it's diner shutdowns and the number of transactions.

And so, with that comes a little bit more of a -- I don't know a cabin fever or an interest to try some full-service meals that are maybe different than a handheld drive through type of meal. And so with that, I think we have some stickiness that remains post-pandemic that's driving this transaction..

Sure. That's fair. On the -- if I can squeeze another one in.

On the third quarter guidance, you touched on this earlier, but just wondering what are you assuming in terms of 24/7 units versus what you have today for that third quarter guidance? And then, as you think about the fourth quarter, do you expect to see a big uptick in 24/7 units with the supplemental unflown rolling off?.

We believe it will progressively improve. We're not guiding precisely on the number of units that will convert just yet..

Okay. All right. That's fair. And then, lastly for me.

How much price did you have or did your franchises have in the second quarter? And how are you advising into price going forward in the second half of the year? I think you mentioned in the fourth quarter, you were going to revisit it, but maybe if you can quantify that?.

So with regard to that -- hey, this is Robert again. We had -- within the comps the traffic is still breaking out the pieces the traffic is below 2019 levels. We haven't quoted a pricing number yet, but the pricing we do have slight pricing within that number.

But one of the material components is the mix change that we benefited from throughout this year, with additional lunches and such. So really minimal pricing, a lot of mix traffic below 2019. And with regard to the second part of the question, I am maybe miss....

Just the pricing and how you think that….

Yes. We got another opportunity for menu pricing here coming up as we head into the -- to Q4 and we're always balanced. We do take into account the commodity inflation to ensure that we're covering that. But we do believe now is the appropriate time to leverage all various aspects of our value to ensure that we are capturing traffic.

That is the opportunity now. So, we won't underprice ourselves but we know that the opportunity is to capture the traffic..

And just so, on the same page when you say traffic on an off-premise order, do you count entrees or do you count one order versus an on-premise transaction that might have multiple guests or one guest per entree per guest?.

Yes, that's a really good question. To be very specific, we count entrees as we -- for a measurement of our guest traffic..

Got it. Thank you..

Thank you..

Thank you. So we will now take our next question from Brett Levy at MKM Partners. Please go ahead..

Great. Thanks for taking my call. You talked about -- you spent a good amount of time talking about 24/7, especially as it related to labor and your shortfall, and you talked about the success you had on your tour.

What are you doing going forward? How often do you think you need to go out and make these pushes for grand gesture tours or really push the agenda to make sure you get -- you're getting more than your fair share of labor, because you're not the only ones who have gone out and tried to beat the bushes to scare off the snakes on labor? And what are you doing from an incentive standpoint, whether it's upfront incentives ongoing some kind of incentive for existing people?.

That's a great question. The questions are asked often about wage incentive environment culture, a good place to work stay bonus hiring bonuses, upward mobility, education support, so just about everything you can imagine. Scaled organizations, like Denny's would have many of those kinds of programs in place.

I should remind you that we've been awarded as one of the best places to work in South Carolina on multiple occasions. And so, we guard all those mirror check type items all the time.

Is this a place I'd like to work as a starting place as a restart, as a career builder, as a jumping off place, and all the kinds that are important to attract the quality workforce. All of those things are very challenging right now in this environment, which is a curious place to be.

Again, we think they're overall temporary, but it's important that we continue. Any good company and the good companies we compete with are going to continue to be vigilant about holding and building and developing their staff and the career opportunities within their organization.

Right now, our company historically and like many franchisors worry about joint employer challenges. And so we've had really hard lines between, our HR policy and what a franchise might do.

There might be shared services, or we point people toward an outside council or guide, but we usually don't directly tell them, what their employee support program should look like, just what their outcome should be and how they run a store according to Denny's policies. Today, we blur those lines a little more.

We are more collaborative in our ability to say here's a website. Here's a Denny's website to help. Let's all recruit.

Where we can share third-party services through a link, as we sure try to work really hard to make things easier and better from a technological standpoint to support our franchises in the system, to share best practices, or give them sources to find, or mine those best practices.

So our Franchise Association Board recently met starting in – starting late last year, but all the way throughout this year.

Many of the meeting topics have been focused around, market-wide hiring bonuses ways in which we can recruit share practices, share resumes if we aren't going to use this particular cook we'll share with another franchise down the block.

So a lot of those things are changing and becoming more institutionalized and formal inside our system, compared to a little bit more casual in the past. It was a great question.

And I think we're doing a pretty good job of assisting our franchises to make sure they've evaluated their programs from starting wage to the rest of the programs and benefits they're offering. And I think our franchises are doing a nice job at retention.

Just so you know in 2019, and I'd say most years prior to that, when you looked at our roster we had average tenure and turnover rates lower than most full service competitors. And so we would have been one of the better performers in the industry, and we'd like to be able to maintain that status coming out of the pandemic..

And when you think about those areas that had been early in removing the enhanced unemployment benefits, have you seen any change in their ability to hire, or is it just more the expectation that as they roll off and as we get past September that they'll improve?.

Well, I think it's a lot of things. Some of this is – the challenges aren't just because there's incentives out there. There's also maybe a concern about being confident about the environment or having an elderly parent at – in home, and they're really nervous about being out.

So there's really a number of things that abate through time, but not all at once. And so we're confident things do continue to improve. There's quite a number of people displaced and out of work, and working provides a better outcome than staying at home based on their historical personal household experience.

So I would expect that those things will return in due time. But as it is today, a number of people came through the pandemic cut their expenses, and found different ways to make it through that environment. And so they're maybe not quite as ready to go back to work just yet. So, again, I think all these things abate in time.

I don't think this is too different than what you're hearing across restaurants and retail. The answer is, time will tell. We're confident it normalizes but not – it doesn't happen like snapping your fingers. It's not yet. It's still a challenging hiring environment..

And then one – just one last question, when you think about the talk of different markets out there introducing a mandatory vaccination – proof of mandatory vaccination to enter the restaurant.

What do you think you'll need to do structurally? Is there going to be a dedicated position? How are you thinking about that from an operational standpoint?.

Yeah. I think, we have in place the kind of supervisory controls and headcount. Remember from – the restaurant industry is already full of multiple layers of compliance. So when it comes to health and sanitation ServSafe compliance food safety handling. These aren't the kind of things you do on the ride to work per se.

These of course, work that takes a while. It takes a considerable head space to pass, with a lot of really smart people that fail those classes. So we're good at institutionalizing those kinds of areas.

So it's certainly not, that big a challenge for us to say show me evidence that you've been to a doctor or show me evidence that your hepatitis has gone or in this case, show me evidence that you've been vaccinated. I think we have to treat these things with a great deal of respect and honor, whatever the local jurisdictions are requiring.

They do vary considerably across the country. And we have both customers and employee bases that will look to different authorities than us as the expert. So we have – we're managing that with great sensitivity. And I think that our system's doing a pretty good job of it..

Thank you..

Go ahead, please..

[Operator Instructions].

Yes. And as we're waiting to queue additional questions, I just want to follow-up with that question from Nick Setyan, earlier in the call, with regard to how the 6% same-store sales increased for company units in the month of July, translated into average unit volumes in the comparison to 2019 to 2021.

In 2019, those set of company units were running approximately $2.9 million annual unit volumes or roughly $57,000 per week. That would translate into an annual run-rate of $3.1 million or approximately $60,000 a week. So that is the – how to convert that 6% comp into an AUV from a refranchised year to a non-refranchised year.

So I just wanted to follow-up with that. Thank you..

Thank you. It looks like that is all the questions we have for today's call. So I would now like to turn the call up over to John Miller, for any additional or closing remarks..

Thank you, all for joining the call today. We are very pleased with the progress we've made through the pandemic and we have started navigating the recovery, as you can tell. The demand for Denny's is strong, with same-store sales currently trending above pre-pandemic 2019 levels, even with only 40% of our domestic system operating 24/7.

And we safely welcome guests back into our dine-in rooms. Our off-premise business has remained sticky and supported by the launch of two new virtual brands.

So we are actively working to address the temporary staffing challenges, which we believe will abate, as I've mentioned before, as we move through the balance of the year and we see additional potential for our brand based on the performance of those restaurants already operating 24-hours a day, seven days a week.

We were encouraged by the level of adjusted EBITDA and adjusted free cash flow generated by our highly franchised business model during the second quarter and we look forward to the opportunity to begin returning capital to shareholders later this year, while advancing our long-term brand revitalization strategy.

So we look forward to our next earnings conference call in early November to discuss our third quarter 2021 results. Thank you again for your time today and all have a great evening..

That concludes today's call. Thank you for your participation. You may now disconnect..