Q3 2019 Earnings Call
You are currently on hold for Denny's charge squash or 2019 earnings conference call. At this time, we're assembling today's audience I'm trying to be underway Sharkey. We appreciate your patience and piece I mean on the line.
Good day and welcome to the Ginnies true <unk> Jude Calcitonin Gene earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference over to current Nichols Senior Director Investor Relations. Please go ahead.
Thank you should aid and good afternoon, everyone. Thank you for joining us for Denise third quarter 2019 earnings Conference call with me today for management or John Miller, Denise President and Chief Executive Officer, and work Wolfinger stays executive Vice President Chief administrative officer been Chief Financial Officer. Please.
Refer to our website at <unk> Investor Dot Denise Dotcom to fund our third quarter earnings press release, along with any reconciliation of non-GAAP financial measures mentioned on this call.
This call is being webcast in an archive of the webcast will be available on our website later today.
[noise] John will begin today's call with his introductory comments Mark will then provide a recap of our third quarter results discussed the progress of our Refranchising and development strategy and briefly comment on our annual guidance for 2019.
After that we'll open it up for some questions.
Before we begin.
I'd use it in accordance with the Safe Harbor provisions of the private Securities Litigation Reform Act of Nineteenone five the company knows the certain matters to be discussed by members of management. During this call. They constitute forward looking statements.
Management urges caution is considering its current trends in any outlook on earnings provided on this call.
Such statements are subject to risks uncertainties and other factors that may cause actual performance of duties to be materially different from the performance indicated or implied by such statements.
Such risks and factors are set forth. The company's most recent annual report on Form 10-K for the year ended December 26 2018.
And in any subsequent quarterly reports on Form 10-Q .
With that I'll now turn the call over to John Miller, Denise President and Chief Executive Officer. Thank you Kurt and good afternoon, everyone. Let me start by saying that the growth in progress of this brand continues to resonate with our customers as evidenced by our positive same store sales growth and that many franchisees have expressed their support for the returns on quality investor.
We are making to continually improve our food or service and their atmosphere. This enthusiasm and positive energy was quite clear at these Denise and your franchisee Association Convention held earlier. This month franchisees also expressed or appreciation for the way, which we collaborate together on all significant ignition initiatives and we're thrilled to be worked.
And with such a talented and passionate group of franchisees vendors and employees. In addition to the excitement from the convention this collective team and our company's effort to collectively and effectively execute against our strategic initiatives yielded positive domestic system wide same store sales during the third quarter, despite a choppy industry.
Environment I'm also delighted to report we have continued to make progress with our Refranchising transactions, we expect to be substantially complete with the sale of restaurants by the end of this year and then list of our transition to a more highly franchise brand I'm, especially proud of our team for their steadfast commitment to our vision of being the world's largest most admired.
And in blood family of local restaurants progress towards this vision is driven by our consistent execution of our four strategic pillars first delivering a differentiated and relevant brand with the goal of perpetuating consistent same store sales growth second operating great restaurants, third expanding guineas footprint throughout the U.S. in international markets.
And fourth driving profitable growth with a disciplined focus on cost and capital allocation for the benefit of our franchisees employees and shareholders. These pillars are supported by our continued investments in technology and training along with close collaboration with our franchisees on virtually all brands initiatives, we continue to.
Evolve our menu to meet guest expectations for higher quality and more craveable products.
Current limited time offer.
Features big Bourbon flavors, including a Bourbon Bacon Burger and an Apple Bourbon pancake breakfast. While also featured continuing to feature our recently intrude introduced array of Craig auctions. We've also been featuring the Super Slam starting at 599 as part of our everyday value offerings to drive traffic. Furthermore, expands.
Off premise strategy enables us to reach younger guests and increase our brand awareness. These off premise sales represented approximately 11% of total sales a company and franchise restaurants during the third quarter, which is up from approximately 7% the launch of Denny's on demand in mid 2017.
Delivery continues to drive the expansion in our off premise business with approximately 88% of our domestic system actively engaged with at least one delivery partner.
These transactions continue to be incremental and deliver total margin rates from the low teens to upper twentys percent after considering product cost labor cost and the delivery fee.
Our heritage remodel program continues to perform well and consistently receives favorable guest feedback our franchisees completed 31 remodels during third quarter, resulting in approximately 87%. The system currently featuring the updated here to heritage image. This enhanced diner environment will continue to provide a significant.
Tailwind for our brand revitalization strategy over the next several years are learning and development team continues to create and deploy progressive curriculum to the dinni system through our ignite and E learning platform, which is currently focused on our delight and make it right service initiatives and our franchisees pride scores continue to rise.
Moving to development our growth initiatives have led to 370, new restaurant openings since the beginning of our revitalization efforts in 2011, representing over 20% of the current system franchisees opened 13 restaurants in third quarter and coat, including four international openings in the Philippines, Canada and Mexico.
Turning to our Refranchising development strategy, we completed the sale of 56 restaurants in the third quarter Adam closed on an additional six restaurants, so far in fourth quarter, resulting in a total of 110 restaurants sold since the announcement of our strategy one year ago. This is a total of between 115 and one.
125 to complete the Refranchising strategy.
While the sale of restaurants is expected to be substantially complete by the end of the year concurrent effort to upgrade the quality of our real estate portfolio through a series of like kind exchanges is still expected to extend into 2020 .
We continually assess our capital allocation strategy with the goal of balancing shareholder friendly returns with an optimal leverage profile. The supports denny's broader strategic initiatives. In addition to investing in our brand our long stern our longstanding internal review process continues to actively consider.
Multiple alternative uses of cash this practice is thorough and comprehensive with a full array of considerations from evaluating the acquisition of another concept to acquisitions Perkins for conversion like our flying J transaction earlier in the decade, two considering a dividend to our ongoing share repurchase program.
Each would do consideration to accretion and to risk we balance these various considerations with our leverage philosophy and more recently probe proceeds from Refranchising transactions.
We have remaining capacity in our revolving credit facility and intend to moderately increase leverage beyond the approximately three times EBITDA level from when we began our latest refranchising exercise near term leverage decreased temporarily from the notable inflow of Refranchising proceeds we remain steadfast however in our comes.
But to increase our leverage moderately and generate the most accretive risk adjusted shareholder returns through the timing and prudent assessment of these alternatives and closing as we transition to a more asset light business model, we remain focused on our brand enhancing strategies, including quality enhancements to our menu and everyday value focus.
The convenience of Denny's on demand investments in training to elevate the guest experience and our heritage remodel program. These strategies will continue to support our commitment to profitable system sales growth market share gains in generation of compelling returns on invested capital and highly accretive and shareholder friendly allocations of adjusted free cash.
So with that I'll turn the call over to Mark Wolfinger, Denise Chief Financial Officer, and Chief administrative officer.
Thank you John and good afternoon, everyone. Our third quarter highlights include growing domestic system wide same store sales by 1.1% and generating adjusted EBITDA of $24.2 million adjusted free cash flow was $3.7 million and adjusted net income per share increased 4.7%.
18 cents from 17 cents in the prior year quarter.
We ended the quarter with 1700, six total restaurants as Denise franchisees opened 13 restaurants. These openings were offset by nine franchise restaurant closings.
Franchise and license revenue increased 11.5% to $60.7 million, primarily due to the impact of our Refranchising development strategy and a 1.2% increase in domestic same store sales.
Franchise operating margin was 48.7% compared to 48.2% in the prior year quarter.
This margin rate expansion was driven by the company's Refranchising and development strategy, which yielded an improved occupancy margin and an increase in royalty revenue.
Moving to our company restaurant sales were impacted by our Refranchising and development strategy, which resulted in a lower number of equivalent company restaurants, and a 0.2% decline in same store sales.
Consequently sales were $63.6 million for the quarter or down approximately 38, 6%.
Company restaurant operating margin was 14.6% compared to 15.2% in the prior year quarter.
Primarily due to increases out and other operating costs and occupancy expense.
Other operating costs were impacted by an increase in repairs and maintenance costs related to the sale of company restaurants, and unfavorable legal settlement costs.
Occupancy expense was impacted by unfavorable general liability experience higher property insurance costs, and re franchised restaurants, where we own the real estate.
And this last case, a larger portion of the remaining company portfolio that is subject to a lease drives the total occupancy rate higher.
These cost increases were partially offset by a decrease in payroll and benefits costs from the leveraging benefit from franchise in restaurants.
Total general and administrative expenses of $16.4 million were impacted by higher share based compensation expense, partially offset by a $700000 reduction and personnel costs.
These results contributed to adjusted EBITDA of $24.2 million.
Depreciation and amortization expense was approximately $2.4 million lower at $4.3 million, primarily resulting from a lower number of equivalent company restaurants due to our Refranchising development strategy and classifying restaurants as held for sale.
Interest expense was approximately $4.2 million compared to $5.3 million in the prior year quarter, primarily due to a decrease in the balance of our credit facility.
The provision for income taxes was $15.3 million, reflecting an effective income tax rate of 23.7%.
Adjusted net income per share was 18 cents compared to 17 cents and the prior year quarter.
Adjusted free cash flow after cash interest cash taxes, and cash capital expenditures was $3.7 million compared to $13.7 million in the prior year quarter.
Primarily due to increases in cash taxes related to the gains on the sale of company restaurants, and an increase in cash capital expenditures, partially offset by a decrease in cash interest.
Cash capital expenditures included facilities maintenance and real estate acquisitions of $10.6 million compared to $7.8 million in the prior year quarter.
Our quarter end debt to adjusted EBITDA leverage ratio was 2.3 times and we had approximately $230 million of total debt outstanding including $213 million under our revolving credit facility.
We allocated $12.8 million towards share repurchases during the quarter.
Between the end of the quarter and October 28, 2019, we allocate an additional $7.9 million to share repurchases, resulting in $58.7 million allocated to share repurchases year to date.
As of October 28, 2019, the company had approximately $70 million remaining and authorized share repurchases under is under its existing.
200 million dollar share repurchase authorization.
Since beginning our share repurchase program in late 2010, we've allocated over $482 million to repurchase over 50 million shares at an average price of $9 at 56 cents per share leading to a net reduction in our share count of approximately 41%.
Now I'd like to take a few minutes and update everyone on the status of our previously announced Refranchising and development strategy.
As a reminder of the company anticipates selling between 115 and 125 total company restaurants with between 70 and 80 attached development commitments.
We expect to receive multiples in the range of four and a half the five and a half times restaurant level EBITDA on these transactions, yielding total pre tax refranchising proceeds of between 125 and $135 million.
These refranchising transactions are expected to be substantially complete by the end of 2019.
Program to date, we've sold a total of 110 restaurants, including six restaurants sold thus far in the fourth quarter with over 75 attached development commitments.
We have received approximately $127 million in pretax proceeds.
Front end fees and other transaction fees at an EBITDA multiple approximately 4.8 times.
While this transition to a lower risk more asset light business model. Initially we'll have a dilutive impact on adjusted EBIT da we anticipate an accretive impact on adjusted earnings per share and enhanced adjusted free cash flow.
These accretive actions combined with Refranchising proceeds are expected to enable us to generate more compelling returns for our shareholders.
The EBITDA contribution to the restaurants, we expect to sell will be partially offset by royalty revenue rental income and cost rationalization.
We are beginning to rationalize approximately $11 million to $13 million of business costs with approximately 40% of the savings coming from reductions in field support functions currently captured in our company and franchise operating margins.
Approximately 35% of the savings will come from adjustments in our corporate DNA support structure.
And the remaining 25% will come from gradually migrating certain support costs from Denny's DNA to shared costs with franchisees over the next couple of years.
Following the conclusion of <unk> refranchising efforts and the trailing rationalization of business costs.
We expect to yield an adjusted EBITDA level that is similar to the results we delivered in 2018, excluding inflationary pressures.
While we will continue to operate a portfolio of company restaurants, and our highest volume trade areas such as the Las Vegas strip.
Our transition to a more asset light business model is expected reduced annual cash capital expenditures associated with maintenance and remodel costs between nine and $10 million.
The reduction in ongoing maintenance and remodel capital coupled with Refranchising proceeds and future royalty revenue on the associated development commitments will further support our commitment to shareholder friendly investments returns, including the return of capital to our shareholders.
The second part of our strategy includes upgrading the quality of a real estate portfolio through a series of like kind exchanges.
We anticipate generate approximately $30 million and proceeds from the sale of between 25 and 30% of the approximately 95 properties that we owned at the start of the strategy.
Those seats from the sale of real estate under lower volume restaurants will be redeployed to acquire higher quality real estate.
During the quarter, we sold two properties for approximately $2.1 million and acquired two properties for approximately $4.8 million through a series of like kind transactions.
Based on third quarter results and management's expectation at this time, we're tightening our same store sales guidance range to between 1.5% and 2.5% compared to our previous guidance range of 1% to 3%.
Additionally, we're now expecting 30 to 35, new restaurant openings compared to our previous guidance of 35 to 40, new restaurant openings.
We are reaffirming our current guidance of approximately flat net restaurant growth.
We are reaffirming our other again, our their annual guidance metrics, including adjusted EBITDA expectations in the range of $93 million to $96 million and adjusted free cash flow of $7 million to $10 million.
If the anticipated real estate transactions were excluded along with the incremental cash taxes from anticipated gains on refranchising transactions.
Our expectation for adjusted free cash flow would be between 53 and $56 million.
At the midpoint this represents between 6% and 9% growth from the 51.2 million and the $50 million, an adjusted free cash flow delivered in 2017 and 2018, respectively.
Wraps up our prepared remarks.
Remarks on I'll turn the call over the operated to begin the Q and a portion of our call operator.
Thank you.
I'd like to ask a question.
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Ask a question.
We'll now take gas price question from will Slabaugh from Stephens.
Please go ahead your line is open.
Yes. Thanks.
Just for talking I remember you mentioning other uses of cash. So I was wondering if you could tell us where you end the board may be a in that discussion and it's just something new or you're simply just talking about it more publicly in terms of weather and acquisition.
Or acquisitions for conversions or dividends.
Well, it's certainly not new will Thats great question I think what we're trying to do is just add clarity around the process has been around for a while here quite a number of years, where on a very regular basis. We talk about all the uses you can imagine sort of way those against risk in sort of where we are in the journey.
We've obviously favorite share repurchases and continue to do so at the moment.
But at the same time wanted to make sure that that array.
Was clearer to how robust that process actually is.
Got it.
And then as far as the result themselves we've heard about California in particular being a weak market for a lot of full service restaurants. So I was wondering if you could comment if you saw that or anything else that stood out to you during the quarter.
It was the quarter was the same as year to date will the the California, Arizona, Washington continue to lead the way for US, Ohio in Florida, and softer that's through both quarter and so our two weakest are the same year to date is as quarter.
Got it and lastly, we've heard a number of sort of conflicting opinions about the consumer already this earning season. So I was curious.
You had any updated thoughts there in terms of health of the consumer and if you saw anything in your business in terms of the customer either pulling on value more or less during that period.
I think we're in a value season.
And so you have to be well Chet goes up to cover primarily wage inflation that usually has a traffic consequent so.
So, it's sorta and balancing a large franchise system.
We think the healthiest thing for us to do right now is pay close attention to having a little bit of everything there for our guests. We have premium offers for those that feel.
Prosperous we have add on opportunities for those that shop, a deal, but then still one a little more we have improved menu quality in premium offers we have deals. So we have a little bit of everything.
Based on.
What's going on competitively and and where there are some pressure from price increases.
So as those go through you sort of have to soften that with a deal to push those through.
So overall I think the consumer is just a smart consumer.
Thats taken advantage of this.
Competitive.
Battle for share where inflation is driving prices, which has some traffic consequences, which creates a lot of dealing and the customer same im loving it [laughter] I have lots of choices.
So let the competition remains intense it's a good deal for consumers right now.
Great. Thank you.
Thank you well now take our next question from Nick Thanks, Kim from Wedbush Securities. Please go ahead.
Thank you any early thoughts on kebab commodities.
And next year.
Particularly on pork.
Nick its market, we really.
We're obviously sort of capturing that information as we speak as we go through our normal annual operating plan process, but.
We really haven't given any Indian any indication yet sorry.
Where we think that inflation is going to be in 2020, and we will obviously share more of that as we go through our annual guidance elements and in that 20.
Got it.
What's the run around how should we think about like the run rate other opex going forward, maybe you could.
Quantify the magnitude.
The one time impacts.
Corridor.
Yes, I'll start Nick I'd, just say that sort of the big picture is really choppy as you can see but the guidance is solid in the end I think as we've talked throughout the started this refranchising process and to the end the portfolio. We keep is very solid.
In that 19% to 21% margin range at this sort of completion at the other end, which is too early to start guiding 20, yet, but but thats I'd say, we're confident about the overall program.
Falling in place and right now choppy mark might want to add some additional commentary about the current environment. Thanks, Johnny I think Nick when we looked at this and a little bit what was outlined in my script, but where we saw I'll say some of the Unfavorability that went through the company margin side was there was about 100 basis points and when.
Through repair and maintenance.
So that goes through the other operating cost line per se and.
We looked at that as we went through this the choppiness, but the transition really on this refranchise into development strategy. So wouldn't your parent stores for sale.
Our focus from this from the franchise or standpoint is to make sure that they.
Our appropriately fully repaired as we as we go through these transactions. So the bottom line is about 100 basis points.
Differential and repair and maintenance.
There was some unfavorable legal settlement costs.
Those came through probably about 70 basis points.
And then the other pieces that came through in the company margin piece.
Was the impact and general liability, we called GLP General liability and then a small piece went through the property insurance on rent line and I think when you when you add up all those numbers because I just went through a lot.
It's about 260 basis points between those various categories that had an unfavorable impact.
I think as I mentioned in my comments.
When you when you look at cost of goods and actually when you look at cost of goods is relatively flat year over year cost labor was actually favorable by a couple hundred basis points.
And we saw that a number of different line items within labor.
Team Labor management labor et cetera.
So I think back to John's comment I go back to the.
The investor deck that Weve used to talk about pre and post on company margin and again, we anticipate as we get beyond the Refranchising strategy. So we get into more of a normalized environment.
As those slides have shown we anticipate the company margins to be sort of a 19% range and I think we're continue to be very confident along those lines.
Got it and I just lastly.
Guess cancers as average check.
Break down I'm, sorry, if I missed that.
And.
Guidance implied range is that.
Relatively wide.
Wants to go I mean any color around.
Core according to the trends.
Yeah, I, obviously Q3 is what we can speak the most about we we did come into Q3. Following the Q2 of 18, which was was it which was a challenging quarter from us where we work did the star Wars promotion Didnt have a lot of product to promotion on air. So we came out of that with a strong value.
Offer, which which created quite a bit of traffic momentum Q3 that we're lapping this year. So so.
The early part of the quarter was off to a tough comparison, but we we had a very strong check growth over prior year because of a little.
Less of that by comparison, so check was up about 6.5% for the quarter. So suggest.
Traffic pretty soft for the quarter because of the values are going over the Super Slam comparison, we were willing however in our co ops and the management through our franchise system to make that trade to get that behind us so that creates a little bit of a choppy environment in the middle of all these franchise transactions as well check overall 10 to 11.
Collars, depending on the.
And you code what part of the country.
July and August the most choppy and then as we got that rollover behind this September rebounded to sort of pre July transaction trends and.
Obviously, just sort of ride on the predictions that we had and that persisted to some degree.
One quarter remaining you know the guidance I'd say is very solid in that range.
Midpoint that being in that 2% range.
Balance of the year.
Thank you very much.
Thank you well now take our next question.
From Oppenheimer. Please go ahead.
Great. Thanks, just on the sales trends can you just talk about maybe anything else you saw that change during the quarter.
Was there any change in like the off premise business or so that kinda seemed to slow down a little bit.
So just wanted to can talk about that at all.
The.
No I think everything just rolled in long sort of the year over year comparisons remain sort of steady and third party delivery year over year at about one to one and a half.
Growth in the to go business. It's a it's there was nothing remarkable I'd say one thing that was interesting is that we saw.
Similar competitive or peer set changes in the August .
And the July and August period so.
That was.
Conspicuous not that we weren't the only brand.
It had an interesting comparison to Q2.
Gotcha and.
The units that you're keeping your talked about them being in the 19% to 21% margin rage once you're through all of this im just wondering can you talk about what that has maybe look like over the last year or two or anywhere you can kind of quantify it just so we can have an idea of how those units have performed.
Yeah, I'd say, Michael its Mark I mean, I think is.
Go back to the chart that we've utilized there.
You know again.
On a go through the pre and post a little bit and might be a little repetitive having done this at various conferences, but.
The way we looked at it is.
This the stores that we've targeted to sell.
Ron volume wise between a million nine in $2.1 million margin sort of in the 10% to 12% range.
The overall current portfolio. When we started this process. So again I'll start with the current portfolio was a little bit higher than that 2.3 million, 15.3% margin. So again targeting the sale of stores that were in the million nine to two one volume range, 10% to 12% margin and so when you get on the other side of it.
And again, obviously, we've done all the analytics behind this that's how we've we've mentioned the 19% to 21% margin in the remaining store base. That's remaining store base that would remain as company assets.
With volumes in the two seven to two nine range and you can imagine the amount of analytics of went through this as we looked at a combination of performance of these stores, but also looking at the the kind of tight range.
Range coverage, we wanted from the field management structure.
So again looking at the two or three history of the of the stores sort of going through the analytics and obviously than we landed on the store base that we wanted to keep in the store base that we've been selling its interesting again with all the dynamics of the numbers.
Again, we certainly have been very.
Very pleased with the kind of multiples were getting on the sale these assets.
The proceeds that are coming in and the development agreements I think the development agreements I think in my comments I mentioned, we're we targeted 70 to 80 and I think with the latest activity, including the early transactions in the month of October So small that first month for the fourth quarter were 75 or more and development agreements already.
So again the combination of all these has been it's been quite positive.
Got you thanks.
Quick last one of the leverage are you talking about taking it up modestly over time, but obviously over the last couple of quarters. It's been coming down. So is there a trigger point that's sort of allows you to start increasing that leverages at once you're actually through the refranchising or just something we've got to start to see soon sooner rather than later thanks.
Yeah, I think it I know it we've we've spent a lot of time on the saw from standpoint of obviously it was outlined when we put the original strategy together on Refranchise into development and at that point in time. When we started the process. We were just slightly over three times Levered, maybe there is 3.0 to levered.
And then.
We came down and leverage in the previous quarter to about 2.5, and obviously the most recent quarter were two three now.
The significant decline and leverage in the most recent quarter was the fact that we sold 56 units and got $70 million of cash and so.
When you think about the share repurchase side of that obviously, we didn't take the entire 70 million and put it back through the share repurchase side.
Let me go back to what we said originally originally when we were three times Levered, Mike We said that we would focus on a modest increase in leverage.
I think at that time, our long term range for leverage was two and a half to three and a half times. So again, we're still focused on that moderate increase this quarter was a bit different primarily because of the $70 million in cash that came in during the quarter, which obviously was a result of all the transactions that occurred in the quarter itself.
I think the the other comment I would add to John's script is the fact that.
The other thing we want to continue to emphasize is that we're very focused on accretive returned to our stakeholders.
We obviously one of the things that we focused on in the strategy is the fact that our annual free cash flow number would improve because of the lower store base in the and the savings and Capex.
So firmly committed to that and even on the adjusted free cash flow for this year as I mentioned now that's up and sort of the mid $50 million range. When you back out the impact of cash taxes on transactions and the 10 31 exchange process. The the purchase of the real estate, that's going through Capex. So we're already starting to see that free cash flow change.
And then obviously our balance sheet to 2.3 times Levered.
You know is is not a moderate increase off a three times and we recognize that and obviously, we're still targeting an increase in leverage long term.
And just as a reminder, our current debt facility.
Is two years old it's a five year facility. The facility was put in place and October 17, So were two years into it at this point. So we obviously have plenty of time in that facility as well.
And.
Hopefully I've answered your question in a rather long winded way.
Perfect. Thank you.
Thank you.
Take our next question from Brett Levy from MKM Partners. Please go ahead.
Great. Thank you and thank you for taking my question.
Lee it's going to be three if you don't mind I guess the first one is across the menu just how are you thinking about everything from.
You too how much pricing you think you have the ability to take it also.
If you could elaborate a little bit more on why.
You're looking at the beyond test, what what would the driving forces.
Second question is with respect to M&A. How are you thinking about that if that is something that is really on the forefront is that something upscale or is that something that might be more of a bolt on a modest acquisition like what would a cracker barrel recently did and then just any of the biggest concerns or learnings that came out in a franchise.
The.
Convention that you could share thank you.
All right.
Maybe a half a dozen questions in there, but sure let's talk about across the menu and then the pricing component of that from across the menu. We sort of we are America's diner, we are anywhere from 55% to 60% all day mix of breakfast items.
Overtime as we come toward the end of our heritage remodel program.
Our aspiration for the brand is to.
Sort of exploit the all day breakfast lunch dinner and late night day parts more fully them we than we do today today, we have a stronger reputation around breakfast all day than we do as.
Brands it enjoy the credibility.
As being sort of a full diner menu. So we've built burger credibility, if you melts and skillets, but mostly we sell a lot of breakfast all day, so across the menu we've made some quality investments improvements, but we've not been.
Loud and proud about merchandising those are pushing that agenda, just yet but.
But we believe that we will get there in time when it comes to pricing.
The simple math around pricing is that a good portion of.
You know the brands and higher wage inflation no different it denny's are taking prices too.
Mitigate the inflationary pressures from wage inflation and.
And so if you try to get that all at once and one step instead of two.
That's a little bit of a step process, where if you take too much price. It can have bigger traffic consequences in cost more to get guest back. If you don't if you take it in steps than you had been you give up a little margin near term so the balance between pricing power and consumer sentiment around price has has sort of entered.
The.
It's created challenges.
For brands, and where there is high wage inflation and effectively what's happening is across the industry not just our brand, but many are sort of mitigating some of the price increase.
With consumers that are willing to pay for the items, they love or equities. They built in the brand offset by consumers that might leak in say I'll make a different choices that price coming back with the deal or an offer to motivate them to stay and so the process and precision around getting those calendars and promotional activity just right represents brands that are doing.
A little better than others in the marketplace, but but that's what's going on so when you asked the question about pricing power across the menu it's a complex.
Answer tied into mix and trades and add on sales in premium offers sort all blended into line, it's not a simple as a barbell strategy, but theres a lot that goes into the to the market planning and co op management throughout different regions of the country, where there's different sensitivities.
Beyond is really a consumer expectation you have those that are already opting out for worry about what goes in it to make it.
That would be the kind of crowd that doesn't want genetically modified corn, that's been around for 100 years and they're there weve those others that don't want anything modified.
And so they're not drawn in this product gather say, but I want a hamburger or something that takes like one but I don't want red meat. So so it is a consumer preference we think.
Consumer should make their own to so adult decisions and make their own choice of loans were responsible and transparent and menu merchandising.
This this we think will be here for a while we don't know I'm, usually pretty good at predicting fads and trends, but this one we'll wait and see but theres two front runners in the market that are dominating the news and and getting quite a bit trial until we didn't think we should be.
Leading edge that we shouldn't be left behind either and so thats why the test.
The M&A activity.
Because there's really you know nothing actionable other than just the clarity in the script here to say that we do these kinds of things on a regular basis I would say if I were to give any more color to it'd be along the lines of our discussions and those discussions basically say it ought to complement our portfolio and that's about as far as we've gotten so hopefully that adds.
A little bit of an answer to your question.
If we were able to do anything.
And again these conversations have been around for quite a number of years and and so far there has not been a compelling reason to do that.
But it's always into consideration set and then the last question was around franchising I apologize I mentioned convention that you mentioned you take it was a key takeaways I'd say the key takeaway. There is there's there was great attendance.
A very.
Positive alive, the one of the fun as parts of the convention is always.
The the fireside chat, where we take questions.
On the to what people were feeling out there this year the questions were around.
Very questions that you have.
So what's going on with the consumer how much dealing will persist from competitors.
How do we hold on to our share those kinds of questions.
But it but as a very positive convention I think the key takeaways are.
That more and more people are.
Happy to be in the system, there seems to be more momentum for scale in our system and there has been in the past and quite a bit of interest of people that are smaller they would like to become larger in the dinni system.
Other key takeaways Mark said today.
That covers a John lot very very positive energy.
Thank you very much.
Thanks, Brett.
Thank you again as a reminder, if he would like to ask a question Sarawak telephone keypad.
Well now take our next question from Todd books from C.L., King and Associates. Please go ahead.
Good evening, Thanks for taking my questions.
First question would be if you look at the off premise penetration kind of sticking it that 11% level I know you talked about.
88% of a system being engaged with at least one partner as you're thinking about where off premises can go as a percent of sales and if you can talk about.
Maybe stores that are engaged with multiple partners and seeing what that lifts the penetration to when you use more than one partner.
Sure well the multiple partners do a little bit better on the averages. It is more complex. So higher volume restaurants are drawn to the little more because they have staffing and.
Lighter volume restaurants are little concerned about it for the off peak shifts.
There.
You know they can be caught.
Missing a transaction if you have a multiple tablet sitting at the front desk on a slow night.
The fear of.
Missing in order, making somebody angry is been one of the concern just a transitional concern as we learn how to get good at it.
But the stores that are good at it and managed multiple devices have sort of teaching the rest of the system how to do it in the adoption rate has sort of stepped up with every passing quarter. We're now at 88% I think that can get into the mid ninetys overtime and I think 11% total to go.
It does have a limit I don't know what that is I would suspect that somewhere around the middle to upper teens.
No it somewhere in that range. When you start to go that's pretty good right there and to drive it beyond that might mean your business model as altered more than you won two.
We are not necessarily pushing to get there at some accelerated rate, but rather watching the margins in the investment in the complexity and as technology improves for integration between tablets and automatically getting orders to the kitchen, we want to push more of those habits to those devices rather than have.
All you can get at the moment.
We think we have a very good start and then we'll just continue to train the guest to use the the more convenient more reliable versions for the benefit of service and frankly margin and then and then and then continue to sort of build it from there, but but I do believe this 11% will.
Continue to modestly expand.
Great. Thank you and then secondly on the Refranchising process and the fact that we're getting towards the end of.
The process as we get towards the end of 2019, what at this point drives.
The outcome of Refranchising Refranchising 115 units versus 125 is this.
Okay. These are some of our crown jewels that we wanted to keep the people are coming and they're willing to pay up for them and we would sell those incremental 10 units or what what at this point drives where we landed in that 115 to 125 spectrum.
It's a good question Todd is obviously, we're committed in I think you you have.
As a verdict correctly I think what we're seeing is that one the demand for these units has been very strong and.
It's not unusual as we are it wasn't unusuals, we went through the process to have multiple bids from multiple franchisees for the same group of stores and so high demand.
Both West Coast East Coast mid centrally you us.
But at the same time.
We've maintained a pretty strong discipline around multiples.
I'm going around development agreements. So again it has to meet certain criteria.
And so I think from our standpoint, we've got obviously, a few transactions left to get up into that range of sort of final final numbers.
But ultimately it's going to be driven by.
The focus on stakeholder value and what makes sense for multiples multiple standpoint, and the development agreement standpoint. So as an example, if we were doing a transaction. This is hypothetical only doing a transaction where the multiple the bids that came in didn't meet our multiple criteria and or the development agreement number did not meet our criteria. We would go to second half.
Hard look by the transaction team here internally.
But again overall the program, we've seen high demand from franchisees.
Both inside and outside the system and.
To your to your point this thing is close to being wrapped up.
Okay, Great. No final quick question I know historically in times of kind of disaster related.
Upheaval, there's there's puts and takes to the impact on.
Restaurants, as far as being a place for people to go with or without power.
But at the same time, there's there's a lot disruption in California right. Now can you just maybe talk qualitatively about the impact to the California store base based on.
The wildfire trends this year.
Yeah. So first of all philosophically, we're not one to rush to excuses when there is travel so you.
Rarely get us talking about whether or fire or hurricane impact unless there is really an up materiality to call attention to.
The.
To the extent that there's an issue is any particular unit, we do have a about a quarter of our.
Brand based in California.
So.
So so it's a good question to you know to qualify what the impact could be so I would say that so far to the extent that there's any challenges of traffic or groups cut off or access to daily routines to dine with us it's not been evident in any material way at this stage and there when there are empty.
Next in a handful locations, there's usually a corresponding cabin fever effect.
On the other side of it that makes up for it so I'd say for us right now.
We're not we're not we don't see anything to call attention to the stage.
To make any guiding harvests.
Great. Thanks for your time.
Thanks Todd.
Okay.
Thank you there are no further questions into queue at this time I'd like to pass the call back to current sniffles for any closing remarks.
Thank you said age I'd like to thank everyone for joining us on todays call.
We look forward to our next earnings conference call in February during which we will discuss our fourth quarter 2019 results.
Thank you and have good evening.
Ladies and gentlemen, this concludes today's call. Thank you for your participation you may now disconnect.