Denny’s Corporation Q4 2008 Earnings Call Transcript

Feb.18.09 | About: Denny's Corporation (DENN)

Denny’s Corporation (NASDAQ:DENN)

Q4 2008 Earnings Call

February 18, 2009 5:00 pm ET

Executives

Nelson Marchioli - President and CEO

Mark Wolfinger - Chief Financial Officer

Alex Lewis - Vice President of Investor Relations and Treasurer

Analysts

Michael Gallo - C.L. King & Associates

Reza Vahab-Zadeh - Barclays Capital

Brian Hunt - Wachovia Capital

Mark Smith - Feltl & Company

Den Kashaba - KSS Capital Partners

Operator

Good afternoon. My name is TK, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Denny’s fourth quarter and year end 2008 earnings release conference call. (Operator Instructions). Thank you, Mr. Lewis, you may begin your conference, sir.

Alex Lewis

Thank you, TK. Good afternoon and thank you for joining us for Denny’s fourth quarter and full year 2008 investor conference call. This call is being broadcast simultaneously over the internet and will be available for replay on our investor relation website ir.dennys.com later tonight.

With me today from management are Nelson Marchioli, Denny’s President and Chief Executive Officer, and Mark Wolfinger, Denny’s Executive Vice President, Chief Administrative Officer, and Chief Financial Officer. We’re going to shuffle our lineup this quarter and have Nelson lead off with an overview of our business and an update of the most popular topic these days, our terrific Super Bowl event. Mark will follow Nelson with a financial review of our fourth quarter results. After that, I will walk through our 2009 guidance and some of the underlying assumptions. After our prepared remarks, management will be available to answer questions.

Before we begin, let me remind you that 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 annual report on form 10-K for the year ended December 26, 2007, and in any subsequent quarterly reports on form 10-Q.

With that, I’ll now turn the call over to Nelson Marchioli, Denny’s President and CEO.

Nelson Marchioli

Thank you, Alex, and good afternoon everyone.

Let me start by saying I’m pleased with the adjusted income growth we’ve generated in 2008, despite the considerable economic challenges facing our industry and our country.

The successful execution of our strategic initiatives over the past few years led by our considerable debt reduction, along with the significant shift in our business model, to a franchise focused operation, has increased our operating margins and earnings power, lowered both our business and financial risks and contributed to a renewed restaurant development pipeline.

This transformation is clearly evident in our results. We remain committed to building on the success we have already achieved and optimizing Denny’s business model and will continue to utilize our FGI program to promote growth across the Denny system.

While those efforts continue, we also recognize the critical need to improve our guest traffic trends. Over the past few years, we’ve been able to raise average guest check through proactive menu management and drive intermittent traffic increases through selective discounting; however, we have not been as successful as we had hoped in attracting and retaining light or lapse users that have drifted away from Denny’s over the years.

In 2008, our marketing programs pursued guest traffic growth along two paths – products and value. In terms of products, we began the rollout of our new product pipeline, including a brand new late night menu, our new sizzling skillet line of breakfast and dinner entrees, check builders like our pancake puppies, and of course the handheld version of our grand slam, the grand slamwich.

Our second marketing tactic in 2008 was the promotion of proven Denny’s favorites, particularly those with a strong component. In particular, we let our customers take control of their breakfast with our $5.99 build-your-own grand slam offer. We also responded to the growing economic pressures with our $4.00 weekday express slam.

We launched two other successful initiatives last year, whose benefits we expect to continue going forward. The first was Denny’s all-nighter, which was directed at our primary late night demographic 18 to 24-year-olds. Through aggressive public relations, targeted marketing and a staggered rollout of new late night only products, we moved late night from our most challenged day part before the all-nighter launch to our best performer thereafter.

We also launched our first comprehensive to-go initiative. Without considerable advertising support, we have seen our take-out mix of total sales increase this year from less than 3.5% of sales before the launch to approximately 5% at yearend. We now incorporate to-go into our new product development and operational design to ensure we continue to execute it in a quality manner.

While we have generated incremental benefits from these programs, our real challenge is driving sustained traffic growth. This became even more difficult for full service restaurants as a whole as economic conditions continue to deteriorate. We were as concerned about the economic shock to our customer base and thought a strong value message had a chance to break through for us. Therefore, we made an incremental investment in television advertising over the Thanksgiving holiday and again from Christmas to New Year’s.

The company contributed close to a million dollars to pay for this additional advertising. We were pleased to see a notable pickup in guest traffic during both of these investment periods.

The month of December benefited from calendar timings, but even without those it was our strongest month of the quarter. While we are proud of the new products and programs developed in 2008, we must continue to innovate and market more effectively in order to attract light and lapse Denny’s users and regain lost market share.

We made a decision late in the year to change our advertising agency. Our previous agency had served us well for many years, but we felt a shakeup was needed to foster new ideas.

We are very pleased to have selected our new agency, Goodby, Silverstein & Partners, an award-winning firm known for their world class creative. Their consumer clients include Sprint, Hyundai, Frito-Lay, and Comcast. One advantage we believe they have for Denny’s is that they are a California-based firm.

The Denny’s brand began in California and it has a strong heritage and loyal following there. With 26% of Denny’s restaurants located in California, understanding and attracting those customers is a critical importance.

We took a bold first step with our new agency and placed our first ever advertisement during the Super Bowl. When we decided to participate in the marquis marketing event of the year, we knew we needed a big hit. We knew we had to have something to say. Fortunately, we had a grand slam to offer. This event came together incredibly well and surpassed our expectations.

It began with the good fortunate that Super Bowl XLIII was very competitive and garnered the highest average ratings ever, but most importantly for Denny’s, the ratings points during our third quarter ad placement and even our post game spot were very strong. While the ratings were great, the amount of secondary publicity and media attention this promotion received was truly incredible.

We received almost 50 million hits on our website in the days following the Super Bowl. We received media coverage on almost every major TV and cable network and earned mentions from Katie Couric to Brian Williams, David Letterman to Jay Leno. More than 500 newspapers printed the story with more than 2,300 TV airings and local affiliates.

Denny’s reached number three on the Google hot trend list and was prominent on social networking sites, such as Twitter, UTube, and Facebook. We estimate the value of public relations coverage of this event at approximately $50 million dollars.

I think the most encouraging part of this promotion was the overwhelming goodwill and emotional connection it produced for Denny’s. I keep calling it an event, because it truly turned into just that. We had lines down the block in sometimes freezing cold temperatures in the snow. In many cases, we tried to offer rain checks to customers so that they didn’t have to stand in long lines, but many refused, just wanting to be part of the experience.

With the economic misfortunes affecting so many people in America, we at Denny’s, all our operators, employees, and franchisees, are so proud to have made such a positive impact in our communities and to find our customers so appreciative and grateful.

From a financial perspective, the total cost of the promotion was around $5 million dollars. This includes advertising costs, which were around $3 million for the Super Bowl, and follow-up advertising. Those costs are part of the Denny’s advertising fund to which both company and franchise restaurants contribute. So there was no incremental spend, but a reallocation of the 2009 marketing budget. We, Denny’s corporate, also incurred approximately $2 million in additional costs for the program and lost margin on that day. These costs will have an impact on our first quarter results.

It is our goal to minimize the net cost of this event by achieving improved guest counts and sales, but that will be determined as the quarter and the year unfold. I can tell you that we have seen a very encouraging lift in guest traffic since our super Tuesday event. We do remain cautious regarding our expectations for the year as it has only been two weeks and the economic environment and the sales outlook for our industry as a whole isn’t getting any better. The exit polling we did during the event suggested approximately 60% of the participants were in our target group of light and lapse users, meaning they had not visited a Denny’s in the last three months. Well, over 90% of the respondents said they were either extremely or very satisfied with their experience and said they would either definitely or probably come back within the next three months.

Much of the post even success will depend on our execution in the restaurant when those guests do return. To that end, we remain cautious in our outlook in light of the broader economic environment; however, our company and our franchise operators have never been stronger and better prepared to demonstrate their operational excellence and hopefully turn a visitor into a customer.

We still have a ways to go to cover the cost of the Super Bowl program and farther still to return our business to where we think it should be. We hope the success of this event, the strategic changes we have implemented, and the strength of the Denny’s ongoing value proposition will propel further operational performance improvements as we move forward.

We have never been more excited about the opportunity here and we believe we are well positioned to achieve further success in the years to come. As always, thank you for your interest in Denny’s.

I will now turn the call over to Mark Wolfinger, Denny’s Chief Admin Officer and Chief Financial Officer.

Mark Wolfinger

Thank you, Nelson, and good afternoon everyone.

I will start my comments with a quick review of our fourth quarter sales performance. System-wise same store sales decreased 6.1% in the fourth quarter, comprised of a 3.2% decrease at company restaurants and a 7.2% decrease at franchise restaurants.

There are many factors that contribute to the difference in same store sales results between company and franchise restaurants including the timing of pricing actions, geographical variances, and the exclusion of same-store sales from restaurants sold during the year.

Looking at the details for company sales performance, an 7.5% decline in guest counts was partially offset by 4.6% increase in average guest check. Most of the growth in company guest check was attributable to pricing actions taken during the year to help offset minimum wage hikes, food cost pressures, and rising utility rates. Guest check also continued to receive a benefit in the fourth quarter from a modest reduction in discounting compared with the prior year.

The decline in total company restaurant sales in the fourth quarter reflects the continuing impact of our Franchise Growth Initiative or FGI, as sales decreased $38.9 million or 20% due to 131 fewer equivalent company restaurants compared with the same period last year.

Through yearend 2008, we have sold 209 company restaurants or 40% of the company’s store base. As a result, we have increased the mix of franchise restaurants in the Denny’s system from 66% to 80%. We expect the mix to continue moving towards a more heavily franchised system.

Turning now to the quarterly operating margin table in our press release, our company restaurant operating margin in the fourth quarter was 11.8% of sales, a decrease of two tenths of a percentage point compared with the prior year period. The slight decline in operating margin in the fourth quarter is due to additional marketing expense as Nelson mentioned in his remarks, along with higher general liability expense, which offset several positive margin contributors.

The first factor which contributed positively to company operating margins in the further quarter is the additional week of operations. The 14th week of the quarter and 53rd week of the year is not just an additional week, but it also is the strongest week of the year, because it includes Christmas Day, our highest volume day of the year and continues through New Year’s Eve, another strong operating day.

The second factor positively impacting our margins in the fourth quarter is the price increases taking during the year to help offset inflationary pressures. In addition to those factors, our continued success with menu management helped to further reduce product cost, which decreased nine tenths of a percentage point in the fourth quarter.

Starting in the second quarter of 2008, our promotional activities focused on menu items with a lower food cost, but still provide a compelling value to our customers.

Our customer showed their approval by driving up the purchase mix of our grand slam breakfast, but also with a strong reception to new menu items like sizzling skillets, all all-nighter menu, and our new pancake puppies.

The combination of all these factors has resulted in Denny’s lowest product cost as a percentage of sales since 2002. This is a terrific accomplishment, given the considerable commodity inflation experienced in 2008.

Payroll and benefit costs also improved in the fourth quarter, decreasing by a substantial 1.5 percentage points to 41.1% sales due to a more efficient crew and management labor. Our operations team did a commendable job on improving labor efficiency in the quarter despite the considerable pressure from declining sales volumes.

Occupancy expense increased seven tenths of a percentage point, due primarily to unfavorable developments and certain general liability claims.

Utility expense in the fourth quarter increased two tenths of a percentage point due to higher energy costs which peaked in the third quarter and have since begun to subside. We have locked in our natural gas cost for most of 2009, which should result in somewhat favorable utility cost comparisons beginning in the second quarter of 2009.

In summary, the gross profit from our company operations decreased $5 million dollars and a sales decline of $38.9 million dollars. While the profit contribution from our company restaurant operations is trending down due to the sale of company units, the offsetting effect is driving strong growth in the franchise side of our business. In the fourth quarter, franchise revenue increased $3.3 million dollars or 13% comprised of a $2.3 million dollar increase in royalty revenue and a $3.2 million increase in franchise and occupancy revenue, partially offset by $2.1 million decrease in upfront franchise fees.

Royalties and rents were higher due to 127 unit increase in equivalent franchise restaurants. The franchise fees were lower due to 57 fewer FGI transactions in the fourth quarter of 2008 compared with the fourth quarter of 2007.

Franchise operating margin increased by $1.6 million to $20.4 million. This higher franchise revenue offset a $1.7 million increase in franchise costs, primarily related to rental expense on properties subleased to franchisees.

For the full year 2008, franchise revenue increased more than 18% and franchise operating margin increased more than 15%.

In summary, the gross profit from our franchise operations increased $1.6 million on a revenue increase of $3.3 million. From a gross profit standpoint, the franchise side of our business is for the first time contributing more than our company restaurants. This income shift allows us to lessen the risk and increase the predictability of our earnings.

General and administrative expenses decreased $3.4 million in the fourth quarter due primarily to lower salary and other compensation costs attributable to the new organizational structure we implemented in the second quarter of 2008.

Contributing the lower G&A was a $1.5 million dollar decrease in incentive compensation and a $1 million dollar benefit related to the accounting for our deferred compensation plan.

Next, depreciation and amortization decreased $2.2 million from the prior year quarter due primarily to the sale of restaurant operations and real estate assets over the past year.

Operating gains, losses, and other charges decreased $19.8 million from the prior year period due primarily to a $2.1 million decrease in restructuring impairment charges and $17.7 million decrease in asset sale gains from with the prior year period.

The significant decrease in asset sale gains was attributable to 57 fewer FGI transactions in the fourth quarter compared with the prior year period.

Including these items, operating income for the fourth quarter decreased $17.6 million to $10.4 million. If you exclude the gains, losses, and other charges from both periods, operating incomes increased $2.2 million in the quarter despite a decrease in total revenue of $35.5 million. To post a $2.2 million in adjusted operating income despite a significant revenue decline is testimony to the efficiency of our transitioning business model.

Below operating income interest expense in the fourth quarter decreased by $1.6 million or 15% to $8.6 million as a result of a $25.3 million reduction in debt from the prior year period. Other non-operating income increased $3.7 million in the fourth quarter due primarily to the changes in fair value of interest rate and natural gas hedging transactions.

We reported net loss in the fourth quarter of $3.2 million or $0.03 per diluted common share, a decrease of $17.9 million compared with the prior year period.

Again, the income decline is due primarily to fewer FGI transactions, which resulted in significantly lower asset sale gains and fewer upfront franchise fees.

Because of the significant impact to our P&L from non-operating, non-recurring, or non-cash items, we give earning guidance based on our internal profitability measure, adjusted income before taxes. We believe this measure best reflects the ongoing earnings of our business.

Our adjusted income before taxes in the fourth quarter was $7 million, an increase of $3.6 million or 107% over the prior year period. For the full year 2008, adjusted income increased $12.7 million dollars or 120% from 2007.

We are very pleased that we were able to generate significant adjusted income growth despite the difficult sales and margin environment for the restaurant industry. We believe this success is a direct result of our strategic initiatives, in particularly our FGI program and our debt reduction efforts.

To the summarize our P&L for the fourth quarter, the sale of company restaurants to franchisees contributed to a $38.9 million decline in company restaurant sales and a $5 million decrease in company restaurant income. We more than offset this lost company restaurant income through the combination of a $1.6 million increase in franchise income, a $3.4 million decrease in general and administrative expenses, a $2.2 million decrease in deprecation and amortization expenses, and a $1.6 million decrease in interest expense.

Turning to activity in the Denny’s restaurant portfolio during the fourth quarter, the system increased by a net three units as 12 new restaurants opened while 9 were closed. Three of the nine franchise closures in the fourth quarter and 11 of the 36 franchise restaurants closed in 2008 were related to one failed franchisee. The 12 new openings in the quarter were all franchise restaurants bringing the full year franchise openings to 31 and full year system openings to 34. These are the highest restaurant opening totals for both franchise and system since 2002. Our renewed emphasis on growth over the past years is delivering results.

Moving on to capital expenditures, our cash capital spending for the fourth quarter was $6.7 million, a decrease of $5.3 million compared with the prior year period. We expect our cash capital spending to continue trending downward as we reduce our company restaurant portfolio and remain selective in our new restaurant investments.

Turning to asset sales in the fourth quarter, we generated net proceeds of $5.3 million from the sale of 17 company restaurant operations and an additional $900,000 from the sale of real estate.

On a year-to-date basis, we have generated net sales proceeds of $35.5 million from the sale of 79 restaurant operations and $4.7 million from the sale of certain real estate assets.

Excluding those receivable taken for $2.7 million of the sales proceeds, we took in $37.5 million in cash during the year. We used these proceeds to reduce our outstanding debt by $25.3 million during the year. We continue to take a conservative approach in our cash management. While we paid down $10 million in debt during the fourth quarter, we did choose to keep $21 million dollars in cash at year end, given the uncertain outlook for the economy and capital markets.

We will continue to balance our debt reduction goals and our commitment to maintaining ample liquidity cushion.

Given the challenges facing our national economy and our industry, we are very pleased to have reduced our debt by $226 million or 41% over the last 3 years. We believe we are now in a financial position to manage through difficult operating environment.

I think it’s worth restating that we have no material debt maturities in the near term as our revolver is in place through December of 2011 and our term loan through March of 2012. Our senior notes mature afterwards in October of 2012.

That wraps up my review of our fourth quarter results. Before I have Alex walk you through our specific financial guidance, I will caution you that we have limited visibility in 2009 given the unprecedented economic uncertainties impacting our business.

Technomic, a well-known consumer research firm recently advised downward their growth expectations for the food service industry in 2009 and are now predicting the worst year for the industry since they began tracking it in 1972.

As a CFO at Denny’s, it is hard to project with much confidence against such a backdrop. I will say we are encouraged by what we feel is a strong marketing plan of 2009 and as Nelson discussed, the Super Bowl event has brought an incredible amount of excitement to the Denny’s brand; however, at this time, we cannot predict a change from our sales trends over the last few quarters. We also caution that the impact of further sales declines could lessen the margin and earnings benefits we have been generating through our ongoing business model optimizations.

With that, I will turn the call over to Alex Lewis.

Alex Lewis

Thank you, Mark, and good afternoon everyone. I’d like to take a few minutes to expand upon the business outlook section in today’s press release. There are a few important items to note prior to evaluating our 2009 financial guidance. The first of which is that 2009 returns to a typical 52-week calendar from the atypical calendar in 2008, which included 53 weeks and 14 in the fourth quarter. Again, we estimate that that additional week in 2008 contributed approximately $3 million to income.

With the FGI program, we are pleased to announce that subsequent to yearend 2008 we completed the sale of an additional 25 company restaurants to franchisees.

Our FGI program has now resulted in the sale of 234 company restaurants or 45% of the original base of company unites, contributing to a rapid transition to a franchise-based business model. The 25 units sold so far this year have been delayed from 2008 into early 2009 because of complications in the financing process. Due to the shutdown in the credit market and the difficulty arranging transaction financing, we cannot confidently project the number of restaurants that we expect to sell in 2009.

We remain encouraged by the franchise demand for Denny’s restaurants and their energy to grow with Denny’s, but in this environment demand is not enough to ensure a transaction. We will continue to provide updates on the progress of FGI each quarter.

Projecting our financial guidance for FGI process is particularly difficult. The variation in equivalent units based on restaurants sold in the prior year and the current year resulted in wide revenue range.

The following estimates for full year 2009 are based on 2008 results and management expectations at this time. We expect full year company same store sales to improve sequentially from our fourth quarter results but remain negative in the range of negative 3 to negative 1%. Underlying this assumption, we anticipate less reliance on guest check increases and modest sequential improvement in guest traffic meaning less negative than in 2008.

We are expecting franchise restaurant sales from approximately 2 percentage points lower than company restaurants based on recent trends. . Underlying this assumption, we anticipate less reliance on guest check increases and modest sequential improvement in guest traffic meaning less negative than in 2008.

We are expecting franchise restaurant sales from approximately 2 percentage points lower than company restaurants based on recent trends. Also we expect our equivalent company units to decrease between 55 and 75 units for the full year 2009 due to FGI transactions in 08 and 09.

Our franchise equivalent unit should increase by a similar amount, depending on the number of franchise restaurant openings and closings.

We expect to open approximately three new company restaurants in 2009 and for franchisees to open approximately 30 new restaurants. Based on a conservative analysis of potential closures, we anticipate the system will decrease by a net five restaurants in 2009, similar as 2008. While we are certainly working toward net positive growth, the considerable variance between new store and closed store performance continues to provide revenue growth. Let me add some figures to that statement. The stores closed in 2008 had average sales volumes below $1 million, while the stores open in 2008 had average sales volume projections exceeding $1.6 million or 60% higher.

Due primarily to the impact of FGI, we expect company restaurant sales to decline by approximately $155 million to between $485 and $500 million. Conversely, franchise revenue is expected to increase to approximately $9 million to between $120 and $123 million.

At this time, we expect company restaurant operating margins will be approximately flat with 2008. This is due in part to sales deleveraging from our expectation of negative same store sales, which could have an impact from a percentage margin standpoint on a fixed cost component of our P&L. We must also overcome the benefit of the 53rd week in 2008. Offsetting a portion of these margin pressures if the margin lift provided to our restaurant portfolio by the sale of lower volume units.

We anticipate a modest increase in product cost as we compare against a record low in 2008. At this time, we expect our underlying commodity basket to increase 4 to 5% in 2009. We also have products and ingredient quality improvements planned that will contribute to higher food costs.

For payroll and benefits, we are targeting modest margin improvements from ongoing efficiency efforts and a softer labor pool. The other underlying items in our P&L such as grants, insurance, utilities and repairs are more fixed in nature and therefore more vulnerable to further sales decline.

One note related to rent, for those of you that model company from a credit standpoint and choose to capitalize operating rent, our operating rent expense in 2007 was approximately $50 million. It was approximately $50 million again in 2008 and will likely be so again in 2009. When we FGI a leased property, we remain on the head lease until the term expires and receive sublease income from the franchisee. Therefore, the expense shift from the company portion of our P&L to the franchise portion, but does not go away. What does change is the amount of sublease income we received to offset that $50 million in rent. In 2007, sublease income was approximately $22 million. In 2008, it was approximately $32 million. I can’t project 2009 sublease income without knowing the number of FGI transactions, but it will certainly continue to rise. We suggest modeling our operating rent expense on a net basis to better reflect the impact of our new business model.

Turning to our general administrative expenses for 2009, we expect to see our reported G&A decrease approximately $2 to $4 million from 2008. Underlying this assumption was a $2 million benefit to 2008 G&A from the accounting treatment for our deferred compensation plan.

Additionally, our 2009 plan includes approximately $3 million in higher incentive compensation expense as our results did not earn a full payout in 2008.

Our income guidance is presented based on two metrics, which we detail in each earnings releases. Adjusted income before taxes and adjusted EBITDA. Adjusted income before taxes is our internal profitability metric, which we believe most closely represents our ongoing business income. We employ adjusted EBITDA, as it’s the metric used to determine compliance under our credit facility. Please refer to the historical reconciliation of these metrics to net income in today’s press release.

Our adjusted income before taxes estimate for 2009 a $15 to $20 million and $3 to $8 million below our 2008 results. Excluding the $3 million benefit from the 53rd week, we anticipate adjusted income will be flat to down $5 million in 2009, but this is on a $145 million dollar decrease in revenue. While our goal is to grow adjusted income, we are providing this guidance for 2009 based on the unprecedented challenges facing our industry.

Our adjusted EBITDA estimate for 2009 of $73 to $78 million is $10 to $15 million below our 2008 results. Compared with 2008, we expect depreciation and amortization will decrease by approximately $7 million. We expect cash restructuring and exit costs will decrease by approximately $4 million and we expect cash payments for share base compensation will increase approximately $1 million. Again, all those items are reflected in the reconciliation in our press release.

Two other items to note for 2009 are cash interest expense and cash capital spending. We expect cash interest expense to decrease approximately $2 million in 09 to $29 million based on modest debt reduction. Non-cash interest should follow 2008 at approximately $4 million, yielding a net interest expense of approximately $33 million for 2009.

Turning to capital expenditures, we completed 2008 with cash capital spending of approximately $28 million. Our estimate for 2009 is $5 million lower at $23 million. This decrease is attributable to a reduction in maintenance capital requirements as we reduced our company restaurant portfolio.

From a growth capital perspective, we expect a level of spending similar to 2008 with the planned opening of three company locations.

Before we wrap up the commentary portion of our call, I would like to add to Mark’s comments regarding liquidity management. At year end, we had approximately $70 million in liquidity comprised of $21 million in cash and $50 million available under our credit facility revolver. While we expect to be positive in 2009, we are comforted by our strong liquidity position as backup.

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

Question-And-Answer Session

Operator

(Operator instructions). Your first question comes from the line of Michael Gallo - C.L. King & Associates

Michael Gallo - C.L. King & Associates

Revenue guidance for 09, particularly on the company unit side, obviously there was the 25 units refranchised, it sounds like early 09. So pretty much completely out of the first quarter or almost out of the first quarter?

Nelson Marchioli

Well they happened by now.

Michael Gallo - C.L. King & Associates

Can you let us know what the proceeds for those were? It looks like the revenues on those stores might have been a little higher than the basket of stores you sold overall in 08?

Nelson Marchioli

No, I don’t think that’s the case at all and we’re not going to get into anything that’s happened so far in this quarter from a proceeds standpoint, but again, when you go back to the revenue guidance, we’re trying to follow amongst a lot of moving factors. What end of the comp do you have? How many FGI’s do you have? We’re trying to target in the middle and that’s where our revenue guidance is.

Michael Gallo - C.L. King & Associates

So it sounds like you have some additional FGI’s built into the number even though it’s hard to put a number on it?

Mark Wolfinger

Depending on which end of the spectrum you go, we’re certainly hoping to do more. We have demand to do more. The problem is having any confidence so you can get that financed right now.

Operator

Our next question comes from the line of Reza Vahab-Zadeh from Barclays Capital.

Reza Vahab-Zadeh - Barclays Capital

Nelson, I wasn’t sure if the strategy in 09 is focused more on building traffic or protecting your margins. Can you talk about that?

Nelson Marchioli

The simple word would be yes. It’s both. We have to find a balance, but it is about sales, traffic count, and margin, and we have to achieve all three. One can’t offset the other.

Reza Vahab-Zadeh - Barclays Capital

What can be done to improve traffic counts? Is it just the promotions that you touched on in the first quarter and more of that?

Nelson Marchioli

You may have heard me say this before the Super Bowl or maybe after. We talk about it as a executive management team here. One is about surviving this incredible economic environment that we’re in, but it’s also about outlasting competition and ultimately taking back share. So we’re going to be competitive. We have to still share. It’s about real breakfast versus sugary and candy breakfast and it’s about new unique products. One of the things the customer has told us in our private research last year was they didn’t come back to Denny’s because there wasn’t anything new. Well we’ve got new this year. We’ve got a grand slam which we introduced the first week in December. We have build your own grand slam and this year we’re going to introduce it with healthier options, because we know that’s a concern of our customers and we’re going to address that extremely aggressively. Sometime this year, you’re going to see a new product introduction we’re already testing on the west coast and that’s the grand slam burrito. We’re going to continue aggressive trial promotions. That’s how we’re going to protect margins. That’s how we’re going to drive additional traffic, just as we did after the Super Bowl event.

Reza Vahab-Zadeh - Barclays Capital

By the way, I cannot wait to try grand slam burrito. What about competition? Is there any increase in promotional and price contingency in recent times?

Nelson Marchioli

Everybody is discounting. Everybody wants to drive traffic and I just enjoy frankly the position that Denny’s now enjoys in the minds of the American public and most importantly with my franchisees and how strongly they feel about this brand and how strongly our employees and leadership feel about where we are. This Super Bowl promotion was more than a promotion. It was a game change, no pun intended.

Reza Vahab-Zadeh - Barclays Capital

What was the actual dollar impact in terms of EBIT of the 53rd week?

Alex Lewis

About $3 million.

Reza Vahab-Zadeh - Barclays Capital

On food cost inflation, are you largely long-time loaded on it?

Mark Wolfinger

I’d say we’re probably less than we have been in the past, just because the guidance from our purchasing folks, yeah, things have come down certainly very dramatically over the past few months and we’re wanting to try that bottom and find places to get back in.

Nelson Marchioli

We’re still trying to understand the demand in the foreign markets, because that really has been the real key here. We see prices at very favorable levels, particularly in some of the protein areas, but based on the worldwide economic situation, I think we’re in a better place today as my purchasing people are to just let’s wait and see. The market may be good to us.

Operator

Our next question comes from the line of Brian Hunt with Wachovia Capital.

Brian Hunt - Wachovia Capital

If you can give us an idea of maybe how hedged you are? It sounds like you are pretty much wide open on your purchases for 2009.

Nelson Marchioli

We’re not wide open. I’m sorry I may have mislead you. I’d say we’re at least 50%, maybe 60% locked, somewhere in that neighborhood, but it’s a moving target. Some things we locked in at terrific prices and then other things we locked in where we felt the market was pretty stable and it dropped further. So we play it close. We talk about it almost every day.

Brian Hunt - Wachovia Capital

If I look at your comments on food inflation of 4 to 5%, what’s driving that?

Mark Wolfinger

Part of the issue, Brian. Last year we beat PPI. Our costs went up 3% less than PPI. So in some cases, we’re rolling over contracts we weren’t in last year’s market on some things. We’re now re-upping on certain items that we bought a year or two ago. So we might still be higher than that a year or two ago. So we’re not exactly tied to market on every item. So that’s having some impact on why we’re seeing more nominal increases, if you will.

Brian Hunt - Wachovia Capital

Can you tell us how many stores are actively marketing under FGI?

Mark Wolfinger

We never really honestly specified that number. We obviously are now at an 80-20% mix and that was before the January transaction that Alex talked in his guidance. We continue to move towards a more franchised model. Clearly our new store opening piece is going to be heavily franchised, but I don’t want to disclose right now what that perfect percentage is and quite candidly, we’ll sort of know when we get there. I think to step back, we’ve been very pleased at FGI, as far as a program. We’ve been very pleased that our existing franchise base and stores that they have purchased from us and we’ve been also very pleased with a lot of the new franchises that have come into the Denny’s system over the last two years and we’ll continue to make sure that program is accretive in nature for our shareholders.

Brian Hunt - Wachovia Capital

Last question. Nelson, I was wondering if you could talk about what else you asked customers on their exit poll. Where have they gone to to eat versus Denny’s or do you feel like you have an opportunity to take share from your competitors based on this big Super Bowl event?

Nelson Marchioli

There’s no doubt in my mind we’re going to take back share. I’m not going to reveal at this point in time, perhaps on a later call, exactly, on the exit on the polls we did it was phenomenal the very satisfied and the extremely satisfied level and the number of people that had not visited with us prior that intended on coming back. It was extremely significant and the revisit intent was just so encouraging. It really is about taking back share.

In my remarks prior to the Super Bowl and after the Super Bowl event when I was being interviewed, I talked about reintroducing the Denny’s brand to America. I didn’t realize how accurate a statement that was when I made it. We have gotten thousands of emails and hits to our website about - I’d forgotten about Denny’s. I’d never been to Denny’s. It was a great opportunity for me to reunite with my family. These aren’t just one offs. It’s quite incredible. So it is about taking back share.

Operator

Our next question comes from the line of Mark Smith with Feltl & Company.

Mark Smith - Feltl & Company

Can you tell me out of the 33 or so new unit openings next year, how many of those would be pilot ones?

Mark Wolfinger

It’s Mark, Mark. We normally don’t disclose that. I will tell you that we currently operate three Pilot locations. That’s two company locations and one franchise. We believe that number will improve. It will grow during 2009. We are very excited and pleased with the terrific relationship with a company like Pilot. So probably of the 33 I would say the number which is three today is going to increase by a delta greater than three, but I don’t want to give a specific number at this point in time.

Mark Smith - Feltl & Company

Can you give us any more insight on the impairment charges in the fourth quarter?

Mark Wolfinger

Most of that was related to the transaction pending in New York. There was some losses on some of those units and since we knew those were going to be transacted, we were already at that point, we went ahead and took that impairment in the fourth quarter.

Mark Smith - Feltl & Company

Just to confirm, Alex, in your statement, the G&A, did you say $2 to $4 million decrease?

Alex Lewis

Right. $2 to $4 million decrease year over year, recognizing that last year’s number had a $2 million dollar benefit from the deferred comp plan accounting and which is offset. It’s a benefit to G&A and it’s offset in the non-up line. So there’s was a $2 million adjustment on the other non-operating expense line in 08. Then also recognizing that as we start the year, we start with a full bonus accrual and that would indicate $3 million dollars more of bonus incentive compensation in 09 if you were to make full plan.

Operator

Your next question comes from Den Kashaba - KSS Capital Partners.

Den Kashaba - KSS Capital Partners

Of the CapEx up $23 million, how much of that is maintenance CapEx and how much of that is scheduled for growth projects?

Mark Wolfinger

There’s other capital as well, might be corporate capital, but we’re pretty consistent in saying that we run in cash for maintenance capital of about $26,000 or so a unit a year and we also have a remodel every seven years or so and so if you divide that out, you’re looking at another $30,000 or so. We tend to model for what you would consider maintenance and what you would consider remodels, you know, $55,000 or so a year per unit.

Den Kashaba - KSS Capital Partners

That would assume somewhere in the $10-12-13 million dollars. Is that correct?

Mark Wolfinger

That’s a fair assumption.

Den Kashaba - KSS Capital Partners

And then the rest would be for the three new company owned restaurants?

Mark Wolfinger

That’s right. We said we anticipate three company openings.

Den Kashaba - KSS Capital Partners

Now are those all Pilot restaurants?

Mark Wolfinger

No, not necessarily. What I said earlier was the fact that we currently operate three Pilots. There’s one operated by one of our franchisees and two operated by the company side of our business. We anticipate that will obviously grow in number, but that will be a combination of both franchise and company openings and we’re very excited about what’s in the pipeline for Pilot.

Den Kashaba - KSS Capital Partners

You’re got three of them?

Mark Wolfinger

That’s correct.

Den Kashaba - KSS Capital Partners

When you look at them in terms of traffic patterns and profitability and all the various metrics that you look at, how do they stack up to existing franchise restaurants and how do they stack up to maybe company owned and maybe it’s best if you talk a little bit about how they stack up to other new restaurants that you’ve opened but ones not affiliated with that Pilot strategy.

Mark Wolfinger

We put in our presentation. We’re very pleased with what Pilots are doing. Their average volumes, you know, the average volume across the brand is in the million six range and the Pilots average about $2 million in sales. So they do better than new franchise restaurants in general. They do better than new company restaurants in general, but now on the company side, typically we’re not going to do a unit. Our units are typically these days either Pilots or marquis locations. That might be Orlando, that might be Hawaii, that might be Vegas, but it’s going to be very typically high foot traffic type locations where we have a very strong track record. So that’s the limit of the selective investments the company is going to make.

Den Kashaba - KSS Capital Partners

Does the Pilot restaurants met your expectations?

Mark Wolfinger

Very much so.

Operator

Our final question for today comes from the line of Michael Gallo - C.L. King & Associates

Michael Gallo - C.L. King & Associates

Just a follow-up question on to-go. Obviously in 2008, it seemed like it was more about customers coming in and getting the existing products. It seems like you have more products, particularly with products like the grand slam which are more portable in nature. I was wondering what your expectations are for to-go in 2009?

Nelson Marchioli

We’re also focusing in select markets on catering, but we think there’s more upside opportunity on the to-go side of our business. It’s very profitable for us. You’ll see us continuing to tag our ads on television with the fact that take-out is available and you will see the grand slamwich and this burrito, clearly as we said before, we’re going to have more portable and affordable products for our customers and this to-go piece is a critical part of that. So you will see us being more of a player in the to-go and on-the-go side of things.

Operator

Thank you. There are no further questions at this time. I would now like to turn the call back over to you, Mr. Lewis.

Alex Lewis

Thank you. With that, we will close today. If you have any questions, please feel free to give me a call as a follow-up and we look forward to talking to you again in the first quarter.

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