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Denny's Corporation (NASDAQ:DENN)

March 12, 2013 2:50 pm ET

Executives

F. Mark Wolfinger - Chief Financial Officer, Chief Administrative Officer, Executive Vice President and Director

Whit Kincaid

Robert Verostek

Analysts

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Joseph T. Buckley - BofA Merrill Lynch, Research Division

[Audio Gap] Bank of America Merrill Lynch restaurant analyst. We're pleased to resume the restaurant portion of our consumer conference with Denny's Corporation. Representing the company today are Robert Verostek, on my far left, who's the Vice President of Financial Planning; Whit Kincaid, runs Investor Relations; and Mark Wolfinger, who is CFO.

With that, I will turn over to Mark. Mark, welcome, thank you for joining us.

F. Mark Wolfinger

Thank you, Joe, and welcome, everybody to our discussion on Denny's. It's always a great time to go to Denny's 24/7. So starting with the forward-looking statements, nothing new there but again, as far as the additional information, obviously, it's available on our SEC filed documents and we just recently, I think it was as of yesterday, we filed our 10-K for the fiscal year 2012. Joining me as participants, I'm Mark Wolfinger, CFO for the company, has been at Denny's, 7.5 years and then, Robert Verostek, has been here for 14 years with 5 years plus in various financial roles.

So a little bit about Denny's and you probably -- if you read our PowerPoint presentations before, you certainly have seen this slide. But 2013, we are celebrating our 60th anniversary, that's 60 years, 60 years strong. We started in Southern California in 1953. And so if you visit California, you'll find that we have about 200 units in LA market and 400 in total in the state of California. So significant penetration out there. We have a very high brand awareness, 97%-plus brand awareness. What we find is, at some point, in everybody's life in the United States, you're probably been to a Denny's, it might be late-night when you're in college, it might be with your family on a Saturday afternoon. But ultimately, we all are very well aware of the brand name.

We're about 1,700 restaurants in 50 states, we're in all 50 states, we're also in 9 countries. And actually, we have a significant penetration in the country of Canada, we have 63 units in Canada. We're open 365, 24/7. One of our largest, if not the largest business day for us is Christmas day. When people are out on the road and the holidays and come to Denny's. So a very, very strong presence, we offer 4 dayparts, breakfast, lunch, dinner and late-night. And we're about $2.5 billion in systemwide sales.

One of the stories, certainly, that has evolved over the last few years, and I've mentioned that here's the fact that, as of the end of fiscal 2012, we're 90% franchised. So 10% company operated, 90% franchised. That was a mechanism under which we aggressively refranchise under our Franchise Growth Initiative or FGI, the acronym we've used between 2007 and 2012 to achieve that 90% franchise base. And again, with that, has come significant debt reduction, a much stronger balance sheet profile, and we'll talk about that as we go through this discussion.

A little bit about the revitalization of Denny's from the standpoint of America's Diner, I really think there's probably 2 key marketing aspects over the last couple years that has changed the brand. Certainly, the focus on America's Diner, sort of going back the heritage of Denny's, the diner that we all grew up with. And I think also a return to value, we'll talk about that value equation but certainly, strong awareness of our $2/$4/$6/$8 Value Menu, offering everyday value.

From a standpoint of same-store sales and traffic, significant improvement, really, since 2010 time frame and just this most recent fiscal year, achieved the second consecutive year of positive same-store sales. We've actually had 7 consecutive quarters of positive same-store sales for the system, and the highest overall since 2006. As far as distribution point expansion, we've opened almost 300 locations in the last 4 years, including our travel center conversion, which was 123 Flying J conversions that's mentioned here.

From a profitability and cash flow standpoint, significant changes well in our metrics. Our adjusted income before taxes, which is our definition of our pretax income grew 26% in 2012 and 37% in 2011. From a free cash flow standpoint, almost $100 million in free cash flow generation over the last 2 years.

Debt structure. We reduced our debt by $360 million or almost 2/3 reduction in debt since early 2006 and we've utilized our strong free cash flow generation over the last couple of years to repurchase shares buying back 11.5 million shares in the last 9 quarters.

A little bit about our franchise system. We ended 2012 with 272 franchise groups. What you'll see here is actually the top 36 operators that operate 11 or more units, really, make up over half of our system. So we have some very, very large operators that exist in the Denny system. Our largest operator has 80 stores, our second-largest operator has around 70 stores. So there's 150 stores held by the 2 largest operators.

The other comment in the slide that's very interesting, in my view, is since 2007, we've actually brought in approximately 50 new franchise groups. So when you go back and look at that 272 number, about 50 of those franchise groups joined the brand since 2007. A large number of those franchisees joined us during the refranchising process, FGI, in 2007 and 2012. That includes the largest operator for Jack In The Box and the largest operator for Carl's Jr.

We've continued to partner with our franchisees. We worked very, very closely with the Denny's franchise board, that's a 12-member elected board from the franchise community. We also operate 3 different councils with them, sub-councils to that board, one in the operating side and one in the marketing side, and one in the development side. And obviously, we're in a franchise or support system so, again, we take pride in being a strong franchisor supporting our franchise community.

And as we mentioned here, we have an in-house purchasing group that buys for the entire franchise system. There's no markup on products from that purchasing group. And we also have a unique credit card program that 90% of the system participates in. It's an umbrella credit card program. The credit card processing fees are negotiated on a reduced rate because of the size of that participation, but the credit card receipts flow through the franchise or they flow through us first and then on to the franchisee. So from a credit profile standpoint, obviously, that dramatically improves certainly our receivable focus from the standpoint of being a franchisor.

On the marketing side, I mentioned the diner heritage, returning to the diner heritage. And this has really allows us to leverage what we all think about when we think about a diner. So clearly, when you think about Denny's, you think about breakfast. About half of the entrées we sell are breakfast entrées, we sell them throughout the 4 dayparts. But from a diner standpoint, we're really going back to the heritage of how Denny's developed. So you come to Denny's for a great burger, you come to Denny's for a great milkshake, that allows us to expand our dinner daypart with offerings like spaghetti and meatballs, pot roast, meat loaf, things along those line, that are more diner-esque in mentality and focus, and allows to expand the daypart for us.

Again, we run limited time offer product offerings, so 5 marketing modules a year. In fact, I think effective today, bacon is back at Denny's. Baconalia! is back. Very successful for us in the past, and so it is our new marketing module, that's marketing module #2 for us, limited time offer. So please, go on and try the great bacon at Denny's.

The Baconalia! seriously is very, very successful for us, we're very proud of that. And I think overall, we -- if you'd look at our core menu, we offer something for everybody. We certainly have great omelettes, we have great steaks, we offer Fit Fare and ultimately, we've got great offerings across all dayparts. And that's really what we emphasize, just great family dining.

So I mentioned the modules. Again, from our standpoint, we've got a situation where last year, we start off as Sizzling Skillets, and then you can see the run through on through to The Hobbit in the fourth quarter, which was a great movie tie-in for us. Very successful on our fourth quarter, drove considerable comp performance in our stores, very strong performance overall for us. So you can see the marketing modules again, because it exists in 2012.

In 2013, we started off with complete skillet meals. So again, leveraging the skillet platform, which has done very well for us here at Denny's. And I mentioned that effective this week, Baconalia! is back, it's our second marketing module. So you'll begin to see that as far as our advertising campaign as well.

I mentioned everyday affordability and value at Denny's. And I think this is a platform that we have come back to as a brand. We looked at the performance in our brand in 2009, early 2010 time frame, and felt that we needed to reintroduce value at Denny's. And we reintroduced or we introduced the $2/$4/$6/$8 platform, this is everyday value pricing. 4 items in each price category, 4 items at $2 category, 4 in the $4 category. But you can get a complete meal for as little as $4, and you can get a complete meal and beverage at the $8 price point. Very strong success for us, its continued to be in our restaurants. And dependent upon whether we promote $2/$4/$6/$8 or not promote it, we've seen mix that tends to average in that sort of 15% up to 20% range of menu mix. So this continues to be a very attractive value for our customer base.

From a core menu standpoint, I mentioned some of these items, hopefully, we're all getting hungry in the room. The top item there is the pot roast offering I mentioned, the spaghetti and meatballs is also here, but we also have great burgers. And again, this is part of our core menu focus and continue to improve in the core menu. So again, if you come into Denny's, you have the core menu offering, you have the limited time offers. Again, the current module is Baconalia! and great desserts and appetizers as well.

Our one other item here, we talked about coffee and might seem somewhat counterintuitive to talk about new coffee at Denny's, but we've reintroduced coffee at Denny's. We now offer 2 caffeinated choices, bold and regular, and decaf. This is a new program that we just introduced at the start of this calendar year with all new coffee equipment in each one of our stores as well.

From a segment standpoint, you look at Denny's and visit our restaurants and to me, these 4 key segments describe strongly our customer base. Clearly, it's family with kids, you see that a lot on Saturday and Sunday mornings, perhaps a families stopping off after a baseball game or soccer game with the kids. We, certainly, strongly appeal to and attract the Millennial generation, not just at late-night but other dayparts as well. And we've leveraged that on-campus as well. And I'm going to talk about our nontraditional locations on campus. But clearly, very focused on that 18 to 22-year-old bracket, sort of the younger side of the millennial bracket.

Boomers, obviously a very strong part of our population, and the Hispanic population as well. We have very strong geographic presence in California, certainly in Arizona, Nevada, but also a very strong appeal on the Hispanic side as well.

From a media standpoint, just a couple points to make on the slide. We have been a strong national advertiser for a number of years, really, since back 2003, 2004 time frame. One of the comments on this slide talks about local co-ops, that is 90% of our system. And back in 2009 time frame, we began to establish local co-ops with our franchisees and markets across the U.S. So we advertise on air, nationally, 35 to 40 weeks a year, depending upon the cost of on-air time. It's really off-air time that was a critical focus from our standpoint. We formed local co-ops beginning in 2009. Those are driven by an additional contribution that comes out of each store, approximately 0.5 point of sales into the local co-op, which is matched by 0.5 point coming out of the national ad fund. So these local co-ops are very strong during the times when we are not on national TV. It allows these local markets to participate in sporting events, promote those, do radio ads, things along those lines, as a strong co-op between the company and the franchise based on a local basis.

We also have a very strong tie-in with AARP, which is referenced as far as the 20% off here. And that has also worked very well, again, more towards that boomer population, but another key focal point for us as far as the population segment.

From a sales history standpoint and this, obviously, has a lot of numbers and bars on it. But really, we have taken this and divided into 2 key sections. I mentioned the introduction of $2/$4/$6/$8 Everyday Value and that's really the first part of the uptick in sales that you see here, which is obviously the gold or yellow arrow here. That was introduced nationally in the second quarter of 2010 and you can see the immediate improvement in comps, albeit there were some trade-off in check average but strong customer traffic response. In fact, during the third quarter of 2010, we saw exceptionally strong traffic. Each one of those weeks was strong positive traffic for us.

And then the reintroduction or the introduction of America's Diner theme, which began in early 2011 time frame. When you put those together between value and returning back to our heritage as America's Diner, we've seen a strong positive comp response across the system. And I mentioned 7 consecutive quarters of positive comp, very strong fourth quarter, we have a positive 1.7% systemwide comps. Again, rolling over from the fourth quarter of 2011, positive 1.6%. So again, very strong performance overall and again, driven by those 2 key marketing strategy focal points.

Unit growth. Really, 2 key areas here on this slide. First, back in the 2005, 2006 time frame, very limited number of formal development agreements in place for the brand, as far as franchise growth. In 2007, we started our FGI refranchising strategy with the sale of the company units, there were development agreements that were signed. And you begin to see a movement in overall store openings. If you look at 2006 and look at 2009 time frame, really going from sort of a mid-20s number up close to 40 openings.

The spike in openings is really driven around the relationship that we've developed with Pilot-Flying J. Initially, with Pilot travel centers, a large travel center truck stop operators. Pilot absorbed -- acquired the brand of Flying J, which offered a huge opportunity for our brand to convert the Flying J locations into Denny's restaurants. So between 2010 and 2011 time frame, we did 123 travel center conversions. Again, these were existing restaurants with a Flying J locations, which we converted into the Denny's brand. It was a very attractive investment on the part of our franchisees, about half the cost of the new store that do convert those buildings. But you can see the improvement in openings, well over 100 openings in 2010. And in 2011, we also had another 23 Flying J openings in 2011 as well. So strong unit performance, that was a huge accretive transaction for us and obviously, drove growth in those 2 time frames. In 2012, we opened 40 locations, again, no Flying J locations opened in 2012.

As far as opportunity for development, we look at it a couple of different ways for the Denny's brand. And this gives you a very strong feeling for where Denny's has developed and penetrated very well over the years. And obviously, where the opportunity would lie from a certain market standpoint. So again, the way I read this chart is in the San Diego market, we have 32% of all family dining market share dollars -- market share with 39 units. But when you move over to the right-hand side, you look at how underpenetrated we are in certain markets, including this DMA, New York, where we only have 7 locations. In like, Los Angeles, we almost have 200 locations in the market of Los Angeles, again, the brand started in Southern California. But the opportunity for us, from a traditional opening standpoint, continues to lie in these markets where we are dramatically underpenetrated. So even in places like Atlanta and Charlotte and the South, and we're based in Spartanburg, South Carolina, but those markets are dramatically underpenetrated with the Denny's brand.

I mentioned development agreements, the fact that we really didn't have much in place from a development agreement standpoint back in 2005, 2006 time frame. As noticed here or mentioned here, we have 124 new units committed to in development agreements unopened at this point in time. And those probably stretched over about a 5 year time frame as far as the number of years under which they were opened. So again, strong penetration in certain markets, underpenetrated in other markets from a traditional standpoint, 124 development agreements in place for new unit growth in the U.S.

On the university side, which we also call nontraditional, we entered this marketplace in early 2010 time frame. We have 12 locations that are on university campuses, college campuses, 11 of those 12 are in the U.S. We just opened our first Canadian nontraditional university location in 2012. And these operating models range from a food court setting to a full-service restaurant on campus. So you can see some of the logos here, I mean, we have our Fresh Express, which is more of a food court type of setting in these universities. But we have full-service restaurants, Florida State, as an example, we have a full-service Denny's on campus at Florida State. These partnerships are with licensees, large institutional licensees like a Sodexo, Aramark and Compass. And we also have partnerships directly with the food service organization that runs food service on campus as well, if the university decides not to outsource that food service. So again, it's not our capital involved, these are licensee-franchisee type of relationships, but puts us on campus and front of that 18 to 22-year-old student. Very, very excited about the opportunity here.

Internationally, again, the brand I think has significant opportunity as far as growth internationally. We have 98 restaurants outside the U.S., of which 63 are in Canada. And again, that's part of our international measurement. We're actually the largest full-service operator in Canada from the standpoint of a U.S. brand. We've opened 11 stores in the last 2 years internationally, again, our primary focus back in '05 and '06 time frame was on the domestic development piece, I've talked about Flying J and how we ramped up domestic development. We looked at international as a long-term growth opportunity for this brand.

As far as impact on income, and we use a measurement internal to Denny's, it's a non-GAAP measurement for pretax income, adjusted income before taxes. And the reason we've used that measurement the last several years is the number of asset transactions that have gone through for the sale of company stores, so this backs out those asset gains. But you can see that we've had, basically, a twelvefold of growth. The company made about $4 million pretax in 2005. Last year's pretax adjusted income was $47 million. Again, that is exclusive, does not include the impact of the asset sales from the refranchising activity.

And overall, operating revenue has declined because, obviously, as we've sold company stores and collected back $0.04 in royalty or 4% royalty, clearly, that GAAP revenue is declining. And as we mentioned in our year-end call, we've exited that refranchising process. So we really have 2013 to come through sort of that final transition. But we've exited out this aggressive refranchising process we called FGI.

And from a cash flow standpoint, this model generates significant strong free cash flow metrics. About $50 million in free cash flow per year, I mentioned $96 million over the last 2 years. And again, as you look at this, our adjusted EBITDA has declined over the years as we've sold off restaurants. But as far as free cash flow generation, if you looked at -- if you go back all the way to the 2005 time frame, the business generated $11 million of free cash flow on $108 million of EBITDA. Last year on the $78 million of EBITDA, we generated $49 million of free cash flow. So much stronger cash on cash returns in this business, again, driven by 90% franchise model, but 10% strong company operated base.

And on the debt side, we have deleveraged, certainly, dramatically over the last several years. Again, prior to starting the refranchising process and the focus on asset returns, we were over 5x levered and had a little bit over $550 million in debt at that point in time. As of the end of fiscal '12, we're under 2.5x levered, 2.4 levered and about $190 million of debt left. So a dramatic deleveraging story in that time frame as well. In 2012, so actually, less than a year ago, April 2012, we actually put our first bank facility together over the last several years, $190 million term loan. Again, our average interest rate is about 3% on our debt given that we're tagged against LIBOR at this point in time.

Last comment here as far as the debt structure. We have another step down on our cost to debt in 2000 -- which we anticipate will be 2014 when we delever from 2.4x to under 2x leverage standpoint. And then, part of our free cash flow usage, as shown on this slide, is returning value to shareholders, stockholders. Beginning in the fourth quarter of 2010 in which the refinancing we had done late third quarter of 2010, we began to buy shares back, we were able to buy shares back and we repurchased about $11.5 million shares of stock in the last -- over the last 26 months, spending almost $50 million in free cash flow to do that. So again, if you look at the balance of our free cash flow usage, it's a combination of continued debt reduction but obviously, high share buyback process.

So just to close, and then we're going to go with a few questions here, Joe. Obviously, you've got this iconic brand, we're 60 years old, celebrating our 60th anniversary here at Denny's this year, 2013. We have a franchise-focused business model, but we still oversee and operate 10% of the company store base. And just to put that in perspective, the average unit volume for Denny's on an annual basis is about $1.4 million. Our company base, the 160-plus company stores that 10% company base, average between $1.9 million and $2 million in a year base. So a significant differential because those company stores are located in places like the Las Vegas Strip, around Disney in Orlando, around Disney in LA, so very high volume types of trade areas in that company base. So it gives us a different type of leverage than 100% franchise in total.

Again, I talked about all the multiple distribution points. We obviously have significant opportunity for traditional growth in the states, nontraditional development on campus, nontraditional development on airports. And then on the international side, obviously, we have huge potential for the brand. And the last comment is just on the free cash flow metrics for the brand. I mentioned about $96 million of free cash flow the last 2 years. We continue to generate close to $50 million of free cash flow in this brand, again, using that free cash flow for both debt reduction and share repurchase.

So thank you very much. Joe, I'll turn it back over to you.

Question-and-Answer Session

Joseph T. Buckley - BofA Merrill Lynch, Research Division

We'll now move in to the Q&A period. I have a few questions to ask, but I encourage audience participation and please just wait until the microphone gets to you before asking a question. You may have answered this talking about the AUVs and the company operating units, but seeing 90% franchise in a world where numerous SKUs or brands have gone very close to a 100% franchise, is there any plan or interest in raising that franchise mix even higher?

F. Mark Wolfinger

Well, I'll tell you, Joe. We have, when we started the FGI process back in 2007, we began to talk about our aspirational goal was to be 90/10. What we found in the process of the -- refranchising process, is that we have some very, very strong company operated restaurants that we would like to hold onto long term. For a couple of reasons, one, it gives us skin in the game with our franchise community. And so when it comes to commodity prices or labor costs, things along that line, we clearly have an interest in what is going on there because we are company operators. And for the second part is, those restaurants generate tremendous amount of free cash flow. So when you look at the volumes that we generate on Las Vegas Strip, as an example, that makes all the sense in the world to our stakeholders to hold onto that kind of restaurant base and it does give that additional leverage to us, operating your high-volume, 10% company base.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. The $2/$4/$6/$8 Menu, talk about the consistency of the product offering and is it offered across all dayparts, those value options?

F. Mark Wolfinger

It is offered across all dayparts, $2/$4/$6/$8. Again, the compelling value there is that our average check is somewhere between $8.5 and $9 on an average check. And so obviously, those price points are attractive from that standpoint. You don't need a coupon, it's an everyday value, everyday discount. And those product offerings on $2/$4/$6/$8, I think as we mentioned before, we have engineered those products to be certainty friendly from a percentage margin standpoint, obviously, different from a check average standpoint. But we also see a lot of the $2 price point as add-ons, as an example, but that continues to be a great value for us. And we can move that mix around, depending upon whether we're promoting that or not promoting that. So as an example, coming out of the holidays, where folks might not have as much cash in their wallet, so they've got credit card bills, that may be a time where we'll turn on advertising for $2/$4/$6/$8, and talk about the great, great value at Denny's.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. You have one in the audience.

Unknown Analyst

Can you sort of talk about your experiences right now in your major geographic areas, maybe if you're seeing across Florida, Texas, California or any other region?

F. Mark Wolfinger

Sure. Whit, do you talk a little bit about the geographic spread?

Whit Kincaid

Yes. Mark mentioned our kind of geography. For us, Denny's, about 50% of the brand would be, California is about 25% of our units; and then after that, it's Florida, Texas, Arizona, those are kind of the big states for us. So we're clearly seeing, really, I would say, over the last 4 or 5 quarters improvement, and specifically California, Texas. And if you look historically, yes, those are the states that, obviously, got hit the hardest with the housing and the recession. And clearly, we've seen kind of a bottom in -- those states have kind of led the way for our comps in terms of really comping above the average for us, and we've seen that consistently.

Unknown Analyst

You talked about the success of the movie tie-in with The Hobbit, is that something that you look forward -- or as you look forward in your marketing plan, is that something that you look to continue as movie time?

F. Mark Wolfinger

I mean, that's the second year where we've had a strong movie tie -- second year in a row, sorry, with a strong movie tie-in. The one that we did in 2011 was Arthur Christmas, which was also strongly successful for us. But again, what we found with The Hobbit is it extends beyond the holidays for us. Obviously, a very popular movie sequel. And again, it's certainly very helpful to our business to attract across the customer base. So I would say that we really, really enjoy that from a joint marketing standpoint.

Unknown Analyst

Now that you're done with the FGI, any thoughts on your P&L, any places where you might be able to continue to accentuate your operating margin? Maybe cut something in G&A or anything there. Just talk about margins or where you are now, now that the FGI is complete.

F. Mark Wolfinger

Do you want to answer that in sort of in the scheme of guidance when we gave the guidance.

Robert Verostek

Yes. Really, for this year, I think one of the challenges certainly in this year 2013, now that we're through the refranchising strategy that started back in 2007. So our EBITDA guidance is relatively flat the last year around $78 million, this year guidance is $76 million to $80 million. Certainly, from a kind of a percent margin standpoint, you're going to have lower kind of company revenue. But yes, we think the primary opportunities to grow margin going forward is improving our sales per unit basis, as well as growing our system at the unit. So really growing the system of almost 1,700 units. So we think going forward, our guidance for G&A relatively -- really flat for this year, last year is a little over $60 million, this year it's $59 million to $61 million. So we think that's how we're going to leverage and be able to grow those EBITDA margin. And we focus on both, company, franchise, as well as EBITDA.

F. Mark Wolfinger

Do you have a reference for field G&A during the refranchising...

Whit Kincaid

Yes. Thank you. Really, through the refranchising strategy we've taken a fair amount of G&A out of kind of the system, so to speak. Field G&A, so this would be either really supporting your company unit. We also have field G&A supporting our franchise unit. But Field G&A is down, around 40%, since the refranchising strategy. Corporate G&A is around -- it's really down around 20% on a per unit basis. So yes, we think we've done a good job of taking that down. We've actually been making investments, really, the last couple of years, it was a modest investment in G&A, really to support our growth strategy. So this is to get the right people to say, to sign up international, to support nontraditional growth that Mark talked about in the university campuses. Also, operations we've made kind of restructured our operations from a more of a franchise kind of support structure and we think that's -- but at the same time, we continue to be efficient in terms of trying to find ways to offset those investments in our P&L.

F. Mark Wolfinger

And just one clarification. When we talk about field G&A, there's G&A which you see in our GAAP financial statements, but field G&A really is the costs that run through, actually, the operating margins for either company or franchise restaurants. So within the operating margin, it's not broken out separately as G&A as we define it from a GAAP standpoint.

Unknown Analyst

Two questions, one for the big picture. I mentioned as we were chatting before the presentation, we've had a very heavy family restaurant presence here at the conference today and tomorrow. And the sector has been better from a sales perspective than casual dining as of late, and I know how much research you do on your customers or where they're coming from, but do you think the lower check is driving some trade down at this point for -- well, for Denny's specifically but for the sector?

F. Mark Wolfinger

I can only speak to, I think, certainly, on our brand, Joe. I mean, I think, our everyday value offering is very, very important. I think those price points, 2$,4$,6$,8$, again, that $8 price point includes beverage, $4 price point includes the value slam, which is very attractive as far as full breakfast for $4. So I think that, combined with, again, the strong America's diner advertising, I think, might continue to benefit us. And I think to Whit's earlier comment, the question that came up on geography, I think also has benefited us. Again, California is a state, when we were chatting earlier today, we have nearly 200 locations in the LA market. We have less than 200 locations in the entire state of Texas. And we've grown considerably in the state of Texas over the last few years, but LA is a very, very important for us. Again, I think as the state-by-state economies have began to recover, and we talked about this in our conference call at year end, in California being 400 -- and it's 400 of our units, 25% of our domestic base, that's very, very important to us. So I think that's also helping us as well.

Unknown Analyst

Have you done anything on the advertising mix in terms of international, local and maybe over the last couple of years, but also in 2013?

F. Mark Wolfinger

I think the biggest change there over the last several years is -- on one of the slides that we saw here is the emphasis on local co-ops. I think that's been a big move for us. I mean, we have done things like changing our ad agency a few years ago, certainly, our focus -- when you look at our creative campaign on a national basis, what you see on national TV, is clearly a lot of emphasis around America's diner, the friendliness of the diner, the interaction that's taking place between the customers in that location and the servers and just that atmosphere. But at the local level, I think that's probably been the more dramatic change for us is establishing co-ops back in 2009 which, again, is sort of this matching fund between an extra 0.5 point that comes out of the store base and then 0.5 point that comes from the national ad fund. And what that allows those local markets to do is be able to fill in the time frame when we're not on national -- certainly, national advertising at that point. So again, it ties in much more closer locally.

Unknown Analyst

Just sort of on the international opportunity, can you sort of give us an idea of how big of an opportunity you think that is and sort of how quickly you want to open up or grow that?

F. Mark Wolfinger

Have we given any guidance on that?

Whit Kincaid

Yes. I mean, we really haven't given specifics, we feel like it's a little too early to give specific guidance. Our approach is really looking for partners, not using our capital. So these are well-capitalized folks, they might have QSR backgrounds, they might have other full-service background, they might be more kind of hotel operators. And so that's kind of been our model historically and that's our approach going forward. We've had success in Central America. Most of our 98 units are in Canada, Western Canada, so we've been very successful there. Our AUVs outside of the United States are around $2 million. And some of our newer partners, Honduras, we just opened our third unit there, a great example is our partner there is the Yum! franchisee and a Pepsi bottler. So well capitalized, has kind of the existing infrastructure and is now into their third unit of a 9-store development deal. We're excited about Chile, that's the partnership we signed up this past summer. This would be -- hoping the first opening would happen really in the next 12 months. That would mark our first unit in South America. So we're opportunistic, we're aggressively looking for partners, I would say in all parts of the globe and many of the same suspects that other brands are obviously going after as well.

Unknown Analyst

On the alternative site units, how consistent with the brand are those operations, in terms of the breadth of the menu and daypart focus and things of that sort.

F. Mark Wolfinger

It's interesting, what you would find on the college campuses and again, whether its Auburn, Florida State or Cal Poly, we've got some great university lineups. But there's actually, I probably would say there's 3 different operating models. So you don't necessarily find a full-service Denny's that you'd find in a traditional setting. And so just as an example, if you go to Florida State on campus, as I mentioned in my comments, it's a full-service Denny's on campus with basically all the menu offerings. If you went to Cal State San Bernadino, that's in a food court relatively limited menu. So you've got a sort of this range from full-service range to express. If you go to Cal Poly Pomona, I would define that as fast casual. Again, slightly smaller menu, but very much a peak hour type of situation. We're kidding earlier today that you don't find a lot of breakfast business at the university setting. So at 8:30 in the morning, there aren't a lot of students in the restaurants, but what you do find is during breaks and classes, like at 2:00 in the afternoon, if you've got a class that ends at 1:30, the next class starts at 2:30, there's a big rush on campus at the Denny's. And you find strong evening business. But what we see here is that you can put our brand on campus with the right location, it isn't necessarily at the student union. So Cal Poly, we're right in the middle of student apartments, it's sort of the place to be. The Denny's location with a lot of outdoor seating. University of Idaho, we're actually down near the dormitories away from the student unions. Again, that also serves to how you sort of attract customers and traffic. But we're very, very excited about this opportunity.

Unknown Analyst

Were the travel center conversions to kind of full Denny's as we think about it in other settings?

F. Mark Wolfinger

You’re talking about the travel centers?

Unknown Analyst

Yes, yes.

F. Mark Wolfinger

Yes. Those are full scale Denny's. And again, the opportunity there is certainly with the Flying J opportunity, which we did 123 conversions. Those were full 4,000 square-foot existing restaurants. So to convert them to Denny's was not just an attractive opportunity from an investment standpoint, but those were pre-existing restaurants from you had a sales history as well, which obviously is very different from a risk profile and a brand-new trader in.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Thank you very much. We appreciate you coming.

F. Mark Wolfinger

Thank you. Appreciate it.

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