DENN

Denny's Corporation (DENN)

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Industry: Consumer Services
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Denny's Corporation (DENN)

Q2 2009 Earnings Call

August 4, 2009 5:00 pm ET

Executives

Enrique N. Mayor-Mora - Vice President of Planning and Investor Relations

Nelson J. Marchioli – President and Chief Executive Officer

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

Analysts

Michael Gallo – C.L. King & Associates, Inc.

Reza Vahab-Zadeh - Barclays Capital

Brian Hunt – Wells Fargo Securities

Mark Smith – Feltl & Company

Stephen Anderson - MKM Partners LLC

Ken Bann – Jefferies and Company

Reed Kim - Merrill Lynch

Presentation

Operator

Good afternoon everyone and welcome to Denny’s second quarter 2009 earnings release conference call. At this time I would like to inform all participants that your lines will be in a listen-only mode. After the speakers’ remarks there will be a question and answer session.

In order to accommodate all callers, please limit yourself to one question and one follow up question. If you would like to ask additional questions we ask that you remove yourself from the queue and then reenter. (Operator Instructions)

I would now like to turn the call over to Mr. Enrique Mayor-Mora, Vice President of Planning and Investor Relations.

Enrique N. Mayor-Mora

Thank you, Lynn. Good afternoon and thank you for joining us for Denny’s second quarter 2009 investor conference call. This call is being broadcast simultaneously over the internet. With me today from management are Nelson Marchioli, Denny’s President and Chief Executive Officer, and F. Mark Wolfinger, Denny’s Executive Vice President, Chief Administrative Officer, and Chief Financial Officer.

Nelson will begin today’s call with an overview of our business and our strategic initiative. After that, Mark will provide a financial review of our second quarter results.

Before we begin let me remind you that in accordance with the Safe Harbor provision for 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 encourages caution in considering its current trends with 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 31, 2008 and in any subsequent quarterly reports on Form 10-Q. Speaking of which, we will file our 10-Q this evening.

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

Nelson Marchioli

Thank you, Enrique. Good afternoon, everybody. Let me start by saying that I’m pleased that Denny’s has continued to deliver growth and profit despite the unprecedented pressures on same store sales in our industry.

Denny’s ongoing transition to a more franchise-based business model inclusive of a more effective organizational structure has allowed us to deliver profit growth consistently and with increased predictability.

Our second quarter performance also reflected cost reductions in our company-operated restaurants through efficiency gains. Our progress towards the more franchise-based business model was characterized in the second quarter by an adjusted income before tax increase of $1.6 million or 27% despite a $34 million or 18% decrease in revenue.

In addition, we opened 10 new franchise units in an environment where the restaurant and retail industries are cutting back development, sold 22 company operated units to franchisees, decreased G&A excluding bonuses, lowered interest and depreciation expenses, and voluntarily paid down $9 million of debt.

Since mid-2006, Denny’s has paid down $238 million or 43% of its debt. In addition, for the third quarter in a row, Denny’s franchise gross profit contribution exceeded that of the company units.

Denny’s transformation has increased our operating margins, earnings power, and system unit growth while lowering both our business and our financial risk. We firmly believe that our business model is now better suited to withstand and succeed in the challenging economic climate. The existing consumer environment is easily the most challenging that I’ve seen in my 8 years here at Denny’s.

NPD recently reported that the second quarter of 2009 was the worst sales performance in 28 years for the restaurant industry. [NapTrack] also reported a single digit drop in the casual segment for same store sales despite a fall in the segment’s check average.

The most important drivers of the industry’s sales challenges are decreasing consumer confidence and rising unemployment. In the short term, it does not seem that these indicators are expected to improve in any material fashion. That being said, we do recognize that some of our competitors are delivering same store sales results that are outperforming Denny’s. Plainly said, we are committed to improving our sales and guest counts.

Starting in mid-2008, our marketing programs pursued guest count growth through our positioning as Real Breakfast with strong lunch and dinner offerings and a clearly differentiated late night experience through our all nighter program. We believe this will continue to differentiate us from our competitors.

On the platform of Real Breakfast, Denny’s has a three-pronged approach to driving sales: a focus on core equity value, new product innovation, and improving the guest experience in our units. Denny’s is recognized as a great value for our guests.

As has been well-documented, the Super Bowl giveaway event in February strengthened our value perception and drove tremendous goodwill and purchase intent from our consumers. With the objective of further reinforcing the benefits we accrued from this event, we had a subsequent free event as part of the NCAA Final Four. On April 8 we gave away a free Grand Slamwich, an outstanding new product that takes our iconic Grand Slam and delivers it in a new sandwich format to everyone in America who also ordered a Grand Slam. This event drove a 20% guest count growth on the day and helped produce the brand’s strongest comp traffic trends during Easter week in the past four years.

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