DENN

Denny's Corporation (DENN)

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Industry: Consumer Services
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Denny’s Corporation (DENN)

Q3 2012 Earnings Call

October 30, 2012 5:00 PM ET

Executives

Whit Kincaid – Senior Director, IR

John Miller – President and CEO

Mark Wolfinger – EVP, Chief Administrative Officer and CFO

Analysts

JR – Stephens

Mark Smith – Feltl & Co

Conrad Lyon – B Riley & Co

Tony Brenner – ROTH Capital Partners

Michael Gallo – CL King

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Denny’s Third Quarter 2012 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) Thank you.

I would now like to turn today’s presentation over to Mr. Whit Kincaid, Senior Director of Investor Relations. Please go ahead.

Whit Kincaid

Thank you, Susan. Good afternoon, and thank you for joining us for Denny’s third quarter 2012 investor call. This call is being broadcast simultaneously over the Internet. With me today from management are, John Miller, Denny’s President and Chief Executive Officer; and Mark Wolfinger, Denny’s Executive Vice President, Chief Administrative Officer and Chief Financial Officer.

John will begin today’s call with his introductory comments. After that, Mark will provide a financial review of our third quarter results. I will conclude the call with a commentary on Denny’s 2012 full-year guidance and initial thoughts on 2013. As a reminder, we will be filing the 10-Q by the due date of November 5, 2012.

Before we begin, let me remind you that in accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, the company knows that certain matters to be discussed by members of management during this call may constitute forward-looking statements.

Management urges caution in considering its current trends and any outlook on earnings provided on this call. Such statements are subject to risks, uncertainties and other factors that may cause the actual performance of Denny’s to be materially different from the performance indicated or implied by such statements. Such risks and factors are set forth in the company’s most recent Annual Report on Form 10-K for the year-ended December 28, 2011 and in any subsequent quarterly reports on Form 10-Q.

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

John Miller

Thank you, Whit. Good afternoon, everyone. In the third quarter our adjusted income before taxes increased 9% and we generated almost $13 million of free cash flow. It is a testament to the resilience of our almost 60-year-old brand that we have been able to achieve these results despite the ongoing challenging consumer economic environment. Our franchise-focused business model provides financial stability and flexibility while enabling us to generate significant free cash flow that can be used to further strengthen our brand and increase long-term shareholder value.

While we achieved our sixth consecutive quarter of system-wide same-store sales – positive system-wide same-store sales, we’re not pleased with the sequential decline in same-store traffic. We are confident that we have the right brand-building strategies in place to enable us to continue to revitalize and grow the Denny’s brand. We see evidence that we are moving in the right direction with our positive sales performance relative to key industry benchmarks and the positive results we are seeing in key states like California and Texas, where we have nearly 600 locations and are seeing improvements in employment.

We continue to focus on evolving to better meet the needs of our guest at our franchisees. Next week we’ll have the Denny’s Annual Franchise Convention hosted by the Denny’s Franchisee Association. Our partnership is as strong as ever and we are eager to continue to move the brand forward despite the headwinds. We remain focused on executing against our three key objectives implemented to help Denny’s grow our position as one of the largest American full-service restaurant brands in the world.

Our first key objective is the revitalization of Denny’s heritage as America’s Diner, which provides the promise of everyday value crave-able family favorites and indulgent items served in a come-as-you-are friendly and inviting atmosphere. With our America’s Diner brand positioning as our compass, we are in the early stages of effectively broadening our approach from the more narrowly focused breakfast-all-day platform.

Contributing to our third quarter results was our continued focus on our tiered pricing strategy designed to deliver both compelling new product offerings and everyday affordability, as well as drive sales beyond breakfast. Everyday affordability is regaining its prominence with our guest, who continue to seek value to meet their own economic challenges.

In response, we have been moving towards a more targeted everyday value strategy, leveraging the attractive pricing tiers in our popular $2 $4 $6 $8 Value Menu. As part of this effort we refreshed a few of these products, placed more pictures on the menu, and increased our media support for our value messaging. These efforts have helped increase the mix of our $2 $4 $6 $8 Value Menu from under 16% in the second quarter to over 18% by the end of the third quarter.

We will continue to work closely with our franchisees to leverage one of the most recognizable everyday value platforms in full-service dining. Our tiered pricing strategy helps balance the impact from our increased focus on everyday affordability by driving trades at the higher-priced limited-time-only products such as the “Build Your Own Burger”.

Favorable product mix added 80 basis points to our guest check average compared to the prior year quarter, affirming that can we have – that we can have success with our multi-tiered approach. We believe that the key to our collective success will be the balance of everyday affordability and limited-time-only products. Our limited-time-only offerings leverage Denny’s core strength as a diner and drive consumer interest, while delivering an enhanced dining experience for our guest. We launched our Build Your Own Burger and Milk Shake limited-time-only module towards the end of the summer and we will conclude the program at the end of next week.

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