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Denny’s Corporation (NASDAQ:DENN)

Q3 2010 Earnings Call

November 2, 2010 5:00 p.m. ET

Executives

Enrique Mayor-Mora - VP of IR

Debra Smithart-Oglesby - Interim CEO

Mark Wolfinger - EVP, ADO and CFO

Analysts

Michael Gallo – CL King

Mark Smith – Feltl & Company

Sam Yake - BGB Securities

Operator

Good afternoon, my name is TaMika, and I will be your conference operator today. At this time, I would like to welcome everyone to the Denny's third quarter 2010 earnings release. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to Mr. Enrique Mayor-Mora, Financial Planning and Investor Relations Officer. Mr. Mora, you may begin.

Enrique Mayor-Mora

Thank you, TaMika. Good afternoon, and thank you for joining us for Denny's third quarter 2010 investor conference call. This call is being broadcast simultaneously over the internet.

With me today from management are Debra Smithart-Oglesby, Denny's Interim Chief Executive Officer and Board Chair, who is traveling and calling in from Dallas; and Mark Wolfinger, Denny's Executive Vice President, Chief Administrative Officer, and Chief Financial Officer, who is here in Spartanburg, South Carolina.

Debra will begin today’s call with an overview of our business and our strategic initiative. After that, Mark will provide the financial review of our third quarter results. I will conclude the call with a review of Denny's full-year guidance.

As a reminder, the 10-Q will be filed by Monday, November 8.

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 risk, 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 30, 2009, and in any subsequent quarterly reports on Form 10-Q.

With that, I will now turn the call over to Debra Smithart-Oglesby, Denny's Interim CEO and Board Chair.

Debra Smithart-Oglesby

Thank you Enrique, and good afternoon everyone. I’ll be talking to you today about my areas of focus as the Interim CEO and the progress that we’re making against these priorities.

Now specifically, these include building a world-class leadership team, a commitment to driving guest count growth, the solid execution of the Flying J conversion, the refinancing of Denny's debt to a lower cost credit facility, and the initial findings from our cost structure review. And then additionally, I’ll touch on for a few moments our recent announcement that Denny's is testing a fast-casual café concept.

We continue to make progress in the third quarter in building the Denny's leadership team. As we discussed in our second quarter call, we brought aboard Frances Allen as our new Executive Vice President/Chief Marketing Officer back in July. This past September, we added Robert Rodriguez as an Executive Vice President/Chief Operating Officer. Robert brings 30 years of the industry experience including leadership positions with Dunkin Brands, McDonalds, and Pepsico.

The Denny's Board remains active in its search for a Chief Executive Officer. And we’ve engaged an international executive search firm, Spencer Stewart, to assist us in this search. As soon as the search is complete, Denny's will name its CEO and we expect that will occur by the end of this year.

We also continued in the third quarter to benefit from the active participation of our franchisees. Now, that was including two of our largest franchisees, Bob Langford and Bill Cox, each who have over 30 years of restaurant industry experience.

This partnership has supported our ability to act quickly. And to efficiently execute on the initiatives while giving us continued opportunity to build strong relationships throughout our franchise community as a whole.

Across the company, we have all been committed to driving sales and guest count growth. In the second quarter with the strong support of our franchisees, we launched nationally the 2-4-6-8 Value Menu in combination with limited-time offers at attractive value price points.

Now under this everyday-affordability platform, we’ve seen our guest count performance improve every month since the national rollout of this program. From April through September, our guest counts improved sequentially from a negative 5.6% up to a positive 2.3%. That’s an eight point improvement during this period of time.

And importantly, we continue to see positive progress in key markets across the country, including California, Texas, and Florida. The third quarter saw Denny's exceed the guest count performance of the mid-scale segment.

In the third quarter, we refreshed our 2-4-6-8 Menu, introduced a new build-your-own omelet limited-time offer, and we continued to see the redemption rates from our AARP program increase as well.

We also leveraged heavier media weight this year due to the reallocation of funds within our national advertising fund, and through the growth of our local marketing cooperatives, which now cover about 60% of our sales.

We continue to believe that value-oriented everyday affordable menu items supported by very focus marketing, improved hospitality, and execution at our restaurants will continue to drive this momentum throughout our system.

And furthermore, to support our marketing initiatives, we’ve rolled out a facilities-refresh program to our system. As the franchisor, we will lead in this process and anticipate approximately 50 company units to be refreshed by the end of this year. In the third quarter, we completed four of these units, and our expectation is that the franchise community will follow in 2011.

Let me now discuss the progress we’ve made in the Flying J conversions.

Immediately after the FTC approved the Pilot-Flying J merger, we announced our intention to convert 80 Flying J sites to Denny's this year out of a total opportunity of up to 140 units.

Through the third quarter, 53 Flying J sites have been converted to Denny's Restaurants, including 48 that we have converted in the third quarter. Of these 48 sites, 42 were open by our franchisees, and six open by the company. The unit level sales of these new openings continued to meet our initial expectations.

Now given the pace and the success that we’ve experienced to date, we’ve increased our Flying J conversion expectations for 2010 from 80 units to 91 units. This is being driven by the increase in sites being converted to company units. With the objective of completing the entire conversion opportunity by early next year while insuring profitable allocation of capital, the company has stepped in to convert selected Flying J sites.

Denny's expects to convert another 11 sites in the fourth quarter for a total of 21 company-operated sites in 2010. And we expect that approximately 25% of all of the Flying J conversion opportunities will be to company owned units.

In regards to our traditional growth, we continue to see benefits there as well from strong franchisee interest in our brand. In the third quarter, our franchisees opened another nine traditional units bringing our year-to-date openings to 21.

We also continued to pursue opportunities on university campuses across the country. In the third quarter, we opened at four more university locations, Florida State University, Northern Arizona, California Poly-Tech State, and Monroe Community College. These locations were opened in partnership with Sodexho and Aramark. We are now located on five campuses, and we and our partners have been very pleased with the performance and the impact on the Denny's brand, and the impact that we’re having in these locations.

In addition to the non-traditional travel centers and our university campus locations, we believe that the strength of the Denny's brand can be leveraged into a fast casual format. To this end, Denny's plans on opening a handful of company-operated café test locations over the next several months, including two by the end of 2010. Once the concept is up and running, we expect our franchisees to open the vast majority of our future units.

This café concept will offer our guests core products from the Denny's popular menu. And will be located in urban settings in footprints approximately 25% smaller than our traditional Denny's.

In this limited-service concept, guests will be able to order at a counter, and have runners brining out their food. From an investment standpoint, the model is built to deliver attractive rates of return by leveraging lower capital and lower labor requirements.

Subsequent to the end of the third quarter, the company’s financial position, flexibility, and credit profile was all strengthened by the $300 million refinancing of all of Denny's debts. The basic terms of this facility are as follows.

Lower-cost debt through a term loan rather than high-yield unsecured notes and improved maturity profile; no debt now matures until the third quarter of 2015. And we now have the flexibility to perform stockholder-friendly actions.

As communicated last quarter, we’ve also begun to take a full review of our cost structure to insure that resources are optimally aligned to our priorities. For the past three years, Denny's has consistently taken a sharp pencil to our cost structure. And we’ve been very effective in increasing our operating efficiencies, and decreasing operating and G&A cost.

Now specifically, we’ve lowered our G&A on a per-unit and a percent-of-sales basis to below the median of our peers. And we have delivered improving four-wall margins in part by improving efficiencies, and continuing to reduce costs in our units.

We are approaching this review with a similar commitment. We began this evaluation by looking for efficiency opportunities in our company units, and a full review of G&A to follow. To date, we’ve acted on tighter outlier management that has delivered half a million in cost savings in our company units in the third quarter alone.

At this point in time, we are not in a position to communicate our expectations beyond this, but we do intend on updating you at the appropriate time in the future.

I’ll conclude my comments today by restating that there have been clear leaders in this industry who have been driving sales despite the challenging economic environment, and the limited visibility that we have into the near future.

I firmly believe that we have begun to take the right steps to take the Denny's brand back to its rightful place as the leading family-dining restaurant chain in the nation.

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

Mark Wolfinger

Thank you Debra, and good afternoon everyone.

Our third quarter performance continued to deliver the benefits of our emerging business model while also showing significant progress towards our Flying J conversions, our sales and guest driving initiatives, and our ability to refinance our debt.

In the third quarter, Denny's had net system unit growth of a positive 56 units. After announcing completion of the merger of Pilot Travel Centers and Flying J Travel Centers at the end of June, we began converting the Flying J Restaurants, and successfully converted 48 conversions in the quarter; 42 of these sites were converted by franchisees, and six by the company. Our franchisees also opened nine traditional units.

In addition, we opened four university locations demonstrating the attractiveness of the Denny's brand in new distribution points.

We have seen a significant improvement in system sales and guest count within the quarter driven primarily by our everyday affordability strategy.

In the third quarter, same-store sales at company restaurants decreased 0.7 of a point, and decreased 1.2% at our franchise restaurants.

Looking at the details for company sales performance, we saw a same-store guest count increase a positive 2.3% in the quarter, which represents a 6% point improvement in trend from the second quarter.

We saw positive same-store guest counts in all 13 weeks of the quarter, and also saw a sequential improvement from month to month.

In the third quarter, average guest check decreased by 2.9%. This was driving by our 2-4-6-8 Value Menu, and a limited-time offering Sizzling Skillet starting at $3.99.

At the end of August, the Sizzling Skillet’s LTL was replaced by the Build-Your-Own Omelet starting at $4.99.

The decline in total-company restaurant sales in the third quarter largely reflects the continuing improvement of our franchise growth initiative, the continued impact of our franchise growth initiative, or FGI, as sales decreased by $9.4 million or 8% due to 27 fewer equivalent company restaurants compared to the same period last year.

I will now turn to the quarterly operating margin discussion. The decrease of 1.4% points in the third quarter for our company-operated units was primarily driven by higher product costs, higher restaurant management incentive compensation, higher new-store opening expense associated with the Flying J units, an unfavorable legal claims development offset by lower utility rates, lower repairs and maintenance expense, efficiency gains in labor, and the selling of lower margin units though FGI.

Product costs increased 0.6% point to 23.7% of sales primarily due to the impact of higher mix of value priced items and higher commodity costs. Payroll and benefit costs increased 0.4 of a point to 38.8% of sales primarily due to higher restaurant management incentive compensation partially offset by favorable workers’ compensation claim development, and efficiency improvements in team labor.

Occupancy expense decreased 1/10 of a point to 6.6% of sales, primarily due to lower general-liability claims development offset by the impact of ten new, leased Flying J units. Utility costs decreased 4/10ths of a point to 4.6%. Denny’s is benefiting from natural gas and electric rates that have fallen considerably from the levels seen in 2008 and early 2009 as well as from the recognition of 500,000 in losses on natural gas contracts during the prior year quarter.

Repairs and maintenance expense decreased ½ point to 1.6% of sales.

Marketing expense has increased 4/10th of a point to 4.3% of sales, primarily due to additional spending related to the Super Bowl and the testing of the 2-4-6-8 Value Menu Program. These costs are being recognized throughout the year based on sales.

Legal settlements increased ½ point to unfavorable claims development.

In summary, the gross profit from our company operations decreased $3 million on a sales decline of $9.4 million.

For the third quarter of 2010, Denny’s reported franchise and license revenue of $32.8 million compared with $29.5 million in the prior year quarter. The $3.3 million increase in franchise revenue was driven by a $2.1 million increase in franchise fee revenue, a $900,000 increase in royalties and a $300,000 increase in franchise occupancy revenue. The franchise fee increase resulted from opening 55 franchise units in the third quarter of this year, which included 42 Flying J Travel Center conversions and four university locations. The royalty revenue increase was due to 63 additional equivalent franchise restaurants.

In addition to opening 55 franchise units during the third quarter, Denny’s franchisees closed five restaurants and purchased two company units.

Franchisee operating margin increased $1.6 million dollars to 20.8 million in the third quarter. This increase was driven by the increase in franchise fee revenue and 63 additional equivalent units primarily offset by temporary overhead costs associated with converting Flying J sites.

Franchise operating margins, as a percentage of franchise and license revenue was 63.3%, a decrease of 1.7% points compared with the same quarter last year. The franchise margin decrease was primarily due to temporary overhead costs associated with converting Flying J sites, offset by higher franchise fees.

The franchise side of our business contributed 57% of the gross profit, which is $4.8 million more than our company restaurants. This income shift continues to allow us to reduce the risk and increase the predictability of our earnings.

General and administrative expenses for the first quarter – for the third quarter increased $100,000 from the same period last year. This increase was primarily driven by senior executive recruiting costs incurred in the quarter, offset by lower share-based compensation expense.

The decrease in share-based compensation was due to the departure of certain employees at the end of 2009 and during the first half of 2010, and the adoption of lower cost, share-based compensation plans.

Depreciation amortization expense declined by $500,000 compared with the prior year period, primarily as a result of the sale of company-owned restaurants over the past year.

Operating gains, losses and other charges on a net basis, which reflect restructuring charges, exit costs, impairment charges and gains or losses in the sale of assets decreased $700,000 in the quarter. This decrease was primarily the result of a $1.7 million increase in restructuring exit costs in the quarter, which includes $1.5 million related to the departure of our former Chief Executive Officer.

The higher restructuring exit costs were offset by a $600,000 increase in gains and the sale of company restaurants and real estate to franchisees.

Operating income for the third quarter decreased $1.7 million from the prior year period to $18.6 million despite a $6.1 million decrease in total operating revenue attributable primarily to the sale of company restaurants.

Below operating income interest expense for the third quarter decreased $1.7 million, or 21.2% to $6.4 million as a result of the termination of our interest rate swap and a $42.5 million reduction in debt from the prior year period.

Other non-operating expense increased $600,000 in the third quarter primarily due to interest rate swap and gas hedging activities in the prior year.

Because of the significant impact or P&L from non-operating, non-recurring, or non-cash items, we give earnings 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 third quarter was $9.4 million, an increase of $300,000 over the prior year period.

Moving on to capital expenditures, our year-to-date cash capital spending was $13.2 million, an increase of $400,000 compared to the prior year period. The increase was driven by a $3 million increase in new construction expenditures reflecting the impact of opening ten company Flying J’s, Flying J units this year. This increase was offset by decreases in facilities and remodel expenditures, which continued to decline as we reduced our company restaurant portfolio.

The execution to our FGI program and our focus on cost containment allowed us to aggressively reduce debt during the last few years. And as a result, places us in a position to refinance our debt facilities.

Subsequent to the end of the third quarter, we closed on a $300 million senior secured credit facility, which will lower our borrowing costs, extend maturities, and give us increased flexibility to perform shareholder friendly actions. The new facility consists of a $50 million senior secured revolver, and a $250 million six year senior secured term loan.

Interest on the new term loan will be live or plus 475 basis points with a 1.75% live or floor. The term loan was issued at a 98.5% original issued discount, and will amortize quarterly equal to approximately 1% per year. The new facility has similar condiments to our old facility, a maximum leverage ratio, a maximum lease adjusted ratio, a minimum fixed charge coverage ratio, and limitations on capital expenditures. On November 1st, we redeemed the remaining portion of our 10% notes.

That wraps up our review of our third quarter results. I will not turn the call over to Enrique who will speak to our full year guidance.

Enrique Mayor-Mora

Thank you Mark, and good afternoon everyone.

Based on year-to-date results and management’s expectations at this time, Denny's is reaffirming its financial guidance for full year 2010. It is also raising its expectations related to unit developments and the refinancing of its debt have occurred subsequent to the end of the third quarter.

The three key areas of raised expectations are new unit openings of 126 sites as compared to 111 sites. This increase reflects an accelerated pace of Flying J conversions with 91 sites anticipated in 2010 as compared to 80., increased development at university campus locations with six sites as compared to four, and a launce of two test sites for Denny's fast casual café.

Second, given the accelerated pace of Flying J openings, cash capital expenditures are expected to increase to $29 million as compared to $21 million. This increase is primarily being driven by the number of Flying J conversions that the company will undertake. The decision to open an additional 11 company operated Flying J units in 2010 with a per unit cost of $565,000 will increase Flying J conversion capital from $6 million to $12 million.

In addition, the two Denny's fast casual café test units are each expected to cost approximately $800,000.

Third, with all of Denny's debt refinance under the new credit facility, cash interest expense is expected to decrease from $23 million, from $24 million to $23 million in 2010. On an annualized basis, the new credit facility is expected to result in a reduction of cash interest of approximately $2.5 million.

Same store sales are expected to be within our previous guidance with company units ranging from down 4% to down 2%, and franchise range of down 5% to down 3%.

Adjusted EBITA is expected to be within the original guidance of $71 million to $75 million. This guidance now includes $2.3 million of restructure costs related to the departure of the former CEO.

Adjusted income before taxes, our internal profitability metric, is also expected to meet our original guidance of $23 million to $28 million. As a reminder, this guidance includes the $2 million of proxy related costs we incurred in the first half of the year.

When considering Denny's profitability outlook for the fourth quarter of 2010, it’s important to note first, the increase in company unit Flying J conversions in the fourth quarter will drive profitability in 2011. Not in 2010 due to the standard pre-opening and start-up costs associated with new units.

Second, as communicated in our 2009 year end call on February 17th, 2010, Denny's benefited in the fourth quarter of 2009 from worker’s compensation and general liability accrual reversals, and a credit card settlement benefit. Collectively, these drove $4.7 million of benefit to our profitability in the fourth quarter of 2009. We do not expect these to recur this year.

Third, with the refinancing of our debt, Denny's will recognize a charge of approximately $4 million in the fourth quarter. This charge is due to the write-off of deferred financing costs related to the previous debt structure, a portion of the costs related to the new debt structure, and costs associated with the bond tender.

That concludes management’s prepared comments for this call. I will now turn the call back over to the TaMika for the question and answer session.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Michael Gallo with CL King.

Michael Gallo – CL King

Hi. Good morning.

Mark Wolfinger

How are you?

Michael Gallo – CL King

Good afternoon, I guess. Congratulations on the improved results. A couple question, I just wanted to drill down into the Flying Js. Obviously, you’re doing more of them on the company side. What drove that? How many do you expect to do in total on the company side, and do you expect potentially that the 140 might even be increased or 140 is still your expectations with the total number Thank you.

Mark Wolfinger

Hi, Michael. It’s Mark, how are you?

Michael Gallo – CL King

Good, how are you?

Mark Wolfinger

Fine. First, let’s start back to the number, the total universe is 140 Flying Js, that’s in total. And you know obviously we’ve raised our guidance for this year as far as the number of conversions. So we’re currently at 91 in total, which again, the split is, the total is 21 on the company side and 70 on the franchise side.

I think on the specific you had as far as the increase on the company side, our focus was to make sure that we maintain our commitment and our timeline with Pilot. We also obviously are taking advantage of what I would say are very good progress on the conversion side. We continue to do four or five a week. And you know, coming out of the gate after the FDC approval, obviously, we’re going to be a bit conservation in that conversion process. But obviously, things have gone quite well for us in that conversion process.

I’m sorry, was there any other part of your question –

Michael Gallo – CL King

Yeah. Just to understand that again, you know, come back to these units that you plan to operate long term as company units just because performance is good or are there units that you just wanted to get out and convert and you might refranchise down the road. Just what the thinking was on that.

Mark Wolfinger

Well, right now we do plan to operate these companies long term. You know, if by chance they’d be part of a refranchising strategy further down the line, then that might make sense for us as we’ve gone through our refranchising strategies overall. But right now we do plan to operate them as company-operated stores.

Michael Gallo – CL King

Okay. That’s very helpful. I’ll get back in the queue.

Mark Wolfinger

Thank you, Michael.

Operator

Your next question comes from Mark Smith with Feltl & Company.

Enrique Mayor-Mora

Hi, Mark.

Mark Smith – Feltl & Company

Hey. Just wanted to follow up on the question on why more company operated. Have there been any issues with demand for the Flying J conversions from franchisee or any problems with them getting financed?

Mark Wolfinger

No, really from the standpoint, Mark, and this is Mark Wolfinger, there really hasn’t been any kind of demand issue overall from the franchise side of the business on these Flying Js. Obviously, we want to make sure that the geography makes sense because, you know, the 140 locations are spread throughout the U.S.

And on the financing side, you know, we’ve continued to see a pretty strong market out there for financing. And as you might recall, we put together a financing pool as it relates to this specific transaction and we’ve had our franchisees use that pool in financing, but we’ve also seen some of our franchisees got to other third-party financing entities.

So again, you know, when you look at these stores, and you look at a $565,000 capital investment for what was a preexisting sales base before conversion and we’ve seen improvement after conversion as far as sales volumes, you know, this is a compelling investment opportunity.

Mark Smith – Feltl & Company

Just to confirm, it’s not because franchisees don’t want them that you’re taking these on?

Mark Wolfinger

No, that’s not the case.

Mark Smith – Feltl & Company

Okay, perfect. Second, can you just remind us the pre-opening expense on these conversions?

Enrique Mayor-Mora

Sure. Preopening runs about $125,000 per unit. And there’s also, for the first three to four months of any unit, there’s naturally efficiency – inefficiencies and learning that you garner at that point in time. So it’s pretty much around the fourth month that the units start to run efficiently, but pre-opening costs about $125,000 per unit.

Mark Smith – Feltl & Company

I was just looking at commodities, any new updates on contracts that you guys may have on commodities?

Enrique Mayor-Mora

Yeah. The outlook for next year, now we’re looking at commodity pressure now, somewhere between 2 and 3% for the system next year. And as of now, as of today we’re locked in to about 1/3 of basket for next year. We’ve got closure in meats at this point in time, and grain based commodities.

Mark Smith – Feltl & Company

Okay. And then last question, just looking at your new fast-casual test sites, can you give us locations for those two?

Mark Wolfinger

It’s Mark Wolfinger. The first two are going to be in the State of California, out West. As you might recall from our presentations, we have about 25% of our stores in the State of California and again, the first one will be opening here very soon and the second one is also, as I think Debra commented, scheduled to open during the fourth quarter.

Operator

Your next question comes from the line of Sam Yake with BGB Securities.

Sam Yake – BGB Securities

Hello. Congratulations on a real good quarter.

Enrique Mayor-Mora

Thank you, Sam.

Sam Yake – BGB Securities

I just had a question. You said under the new financing credit facility that you said you had the flexibility to perform stockholder-friendly actions. I’m wondering if could please elaborate on that? Are there any restrictions at all on cash dividends and stock buybacks, or are you very flexible?

Enrique Mayor-Mora

There’s still conveyance we have with the term loan, there’s still conditions, but certainly relative to where we have been in the past with our credit facilities where we had very little to no flexibility to form any stockholder-friendly activities such as share repurchases or dividend payments. We have considerably more flexibility now.

Sam Yake – BGB Securities

So is there anything preventing you from doing it now other than your desire to just pay down debt a little more?

Mark Wolfinger

I think our view at this point in time is that we would like to get over the investments we’re making in Flying J as a system, get past that, which we expect to be completed by early next year. And at that point in time, really move forward on activities.

Sam Yake – BGB Securities

Okay. And I just had one other question and that is on the FGI program. It kind of slowed down a little bit. Are you still aggressively pursuing that, and I’ve heard in the industry franchisees are having a tough time getting financing. Is that kind of what’s holding up further, you know, further FGI transactions?

Mark Wolfinger

Hi Sam. This is Mark. You know, we obviously have, you know, we started the program back in 2007. I would say that it’s slowed down a bit, but it’s also slowed down from the standpoint of our franchise system is making a significant investment both in the Flying J units as well as our new-unit builds that are going on in the franchise system.

The second piece is that, you know, we still have certain stores in the U.S. that we’ve targeted for refranchising activity but we want to make sure it makes sense from an overall stakeholder standpoint to do those transactions. There’s still interest out there on the part of our franchise community. We just want to make sure that we move them forward accordingly.

It is beginning to come down a bit, to tail off a bit. You know, our target mix between our franchise and company stores is a 90/10 split and we’re about 86% today on the franchise side. So there aren’t nearly as many stores left to sell as obviously what we’ve already sold.

Sam Yake – BGB Securities

Okay. Thanks so much.

Operator

Your next question comes from the line of Tony Brenner with Roth Capital Partners.

Mark Wolfinger

Hi, Tony.

Tony Brenner – Roth Capital Partners

Good afternoon. Could you please go through the components of the operating gains; losses and other charged line items, that 1.9 million?

Enrique Mayor-Mora

Yeah. I’d be more than happy to. I think that may be, let me pull it up here. From a restructuring standpoint, we did have, as Mark talked about in his piece, we had about 1.5 million restructure dealing with the final settlement with Nelson that hit our restructure. We had about 600,000 more in operating gains from the sale of the two units plus some real estate, we sold about four sites underlying real estate to franchisees as well. Those are the two biggest components in the restructuring gain.

Tony Brenner – Roth Capital Partners

It was a restructuring gain of 1.5 or charge?

Enrique Mayor-Mora

There was a charge of 1.5 million.

Tony Brenner – Roth Capital Partners

So I’m wondering how you get a total gain of 1.9 million?

Enrique Mayor-Mora

Well, there’s also 3.7 of gain, right, which is 600,000 greater than we had last year in the same quarter. But we also had gains from the sale of the two sites through FGI, plus underlying real estate sales of four sites that combine for 3.7 million of gain in the quarter. I’d be more than happy to follow up on any further details. Those are really the two components within gains and restructuring.

Tony Brenner – Roth Capital Partners

And talking about discounts improving, I think you said sequentially it improved every week year-over-year comparison, improved every week during the quarter. Is there any reason that wouldn’t carry over and result in positive numbers again in the fourth quarter?

Enrique Mayor-Mora

In the fourth quarter – we’re certainly encouraged by the trend that we’ve been experiencing really since April; what we’ve seen sequentially improving guest counts months to month. And I think one of the things to be cognizant of is in October of last year, we did roll out a build-your-own burger promotion that actually worked effectively for us in the month of October. That being said, we are encouraged and continue to be encouraged by our trends in guest counts and sales for the fourth quarter.

Tony Brenner – Roth Capital Partners

Okay. Thank you. I plan to attend your First-Casual opening on Friday, which is the first time it opens, I believe.

Enrique Mayor-Mora

That’s great. We’re really excited about that. Thank you, Tony.

Debra Smithart

Great.

Tony Brenner – Roth Capital Partners

Okay.

Operator

(Operator Instructions) Your next question is a follow-up from the line of Michael Gallo with CL King.

Michael Gallo – CL King

Hi. I just had a follow up on the guidance reiteration. If I go back to the second quarter release, I think you had indicated that originally, or back then the low end of the 23 to 28 million for adjusted income before taxes, are you know saying just back to the original range to 23 to 28 million?

Enrique Mayor-Mora

That’s exactly right.

Michael Gallo – CL King

Okay. I just wanted to clarify that. Thanks a lot.

Operator

(Operator Instructions) And there are no further questions.

Enrique Mayor-Mora

All right. Well, I’d like to thank everyone for joining us today for our third quarter conference call. We look forward to following up with you in our fourth quarter year-end call and I’m available for any further questions as well. Thank you, and have a wonderful evening.

Operator

Thank you for participating in today’s conference call. You may now disconnect.

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