Q3 2020 Denny's Corp Earnings Call
[music].
Good day, everyone and welcome to the Denny's Corporation third quarter 2020 earnings Conference call. Today's call is being recorded at this time I'd like to turn things over to Curse Nichols, Vice President Investor Relations and financial planning and analysis. Please go ahead Sir.
Thank you Kelly and good afternoon, everyone. Thank you for joining us today <unk> third quarter 2014 earnings conference call.
Pardon me the variable management are John Miller, <unk>, Chief Executive Officer, Mark Wolfinger, Denny's, President Robert Moskow, <unk>, Senior Vice President and Chief Financial Officer.
Please refer to our website at the investors got beneath the dot Com to fund our third quarter earnings press release, along with any reconciliation of non-GAAP lean muscle milk pricing, what we call Mary Lynne.
This call is being webcast and an archive of the world's best will be available on our website later today.
Gone all together then just call it a business update Mark will then provide some comments about on Fridays and develop them.
Well, we'll provide the lease dropping bombs little corner resolved and current trends.
Before we'd be commenting on our annual guidance for 2020.
After that well open it up.
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.
One other just caution in considering its current trends and any outlook on earnings provided on the call. Today. So statements are subject to risks uncertainties and other investments.
They call it the actual performance have been used 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 27 2019.
And in any subsequent form 8-K and quarterly reports on form 10-Q.
With that I will now turn the call over to John Mowers, Denny's Chief Executive Officer. Thank.
Thank you Kurt and good afternoon, everyone. I Hope you could you have remain safe and healthy since we last year.
They are doing.
While we experienced sequential performance improvement throughout the third quarter as we continue to evolve our business. We accomplished this despite the continued disproportionately impact of the Cobi 19 can you make on the full service restaurant industry and this dynamically changing environment. We have been focused on four key guest centric teams we assure.
Current value comfort and convenience I'll now touch on each of these we understand and appreciate the concerns around general health of the ability to have a safe restaurant dining experience will persist for some time. Therefore, it is important that we reassure our guests have a safe dining experience, but consistently a pulling work.
To enhance communism sanitation procedures at all customer touch point, the pace of communication to our restaurants has been unwavering as we have continually reminded operators of our enhance protocols and shared best practices in the period of ever changing state and local requirements follow.
Following a tightening of Danya and restrictions in July our broadcast media messaging August featured a timely brands spot highlighting or enhance safety profile procedures, while also communicating auctions for curbside pickup.
Contactless delivery slides are ordering and outdoor seating or so.
Second area of focus is value means is known for everyday value would be value will remain important in this economic environment as guests seek to maximize their impact the impact of their dollars on quality good options for the whole family, we understand the value come in different forms and at the start of the third quarter, we focused on the price doesn't value.
Our well known to push to create value menu as well as the convenience based by your free delivery when ordering through our website or mobile app.
We are currently featuring the abundant value Super Slim.
The same time, we have expanded our bundled value platform of Shareable family pack. These family back off or a delicious convenient and cost effective way to feed a family of four.
Our third area of focus is comfort, we strive to ensure didn't use the place where our guests feel welcome and whether.
Or the dining with a large family, whereas a party of one we believe our guest the beginning to experience as a time to build connections within the environment that is both inviting uncomfortable are established heritage restaurant inventory has received consistently positive guest feedback largely dubious welcoming and relax field.
Our operators upward our operations team has also reinforced by the.
The critical need for comfort by reminding our entire system, but the rules, we will buy including the expectation is that number one everyone is welcome to dine at Denny's number two everyone is treated like our favorite gas to number three everyone has shown kindness inspect after issuing multiple streamlining.
We will begin the full core next week, providing more comfort food options, even though the menu is 24% smaller than our prepayment core being the fourth area of focus is convenience.
We believe guests will continue to expect top technology to bring enhanced value to their dining experience whether in our restaurants or through off premise auctions like are these on demand platform.
During the third quarter, we launched Apple pay for our dealers are demand iOS mobile app in continue to promote outdoor dining solutions in trade areas that currently preclude or significantly restrict indoor service currently over one third of the domestic system is offering outdoor dining.
We have also been rolling out curbside pickup parking signs to implement a better experience for our guests and team members, while promoting guests controlled digital orders from the parking lot average weekly sales for all off premise transactions are up over 95% since the beginning of the pandemic growing from approximately 4000 per week per store.
In February two approximately 7800 per week per store in September we have been pleased with our ability to sustain this higher level of off premise sales, even as easing restrictions across many parts of the country have yielded simultaneous growth in dining transactions domestic system wide same store sales declined approximately 34%.
For the third quarter, driven by an improving monthly trend due to easing dining restrictions in many parts of the country. In addition to the initiatives that I've noted.
In closing I want to thank our leadership teams and franchise partners for their continued engagement steadfast resolve an unwavering commitment to this brand our collective efforts to reassure our guest provide can pelling value options and deliver the comfort our guests seek across technology enabled and convenient platforms has contributed.
As to the progress we made in the third quarter. These guest centric teams will also remain focused as we move forward with that I will turn the call over to Mark Wolfinger, the president to discuss more about our franchisees and development.
Thank you John the continued progress you mentioned in October as encouraging not only driven by seizing died in restrictions, but also the resilience and a tenacious spirit on our franchisees.
Currently 99% of our domestic system is opened with nearly 1300 restaurants operating with open dining rooms. However.
However, less than one third of our domestic franchise restaurants are operating 24 hours a day seven days a week.
While we cannot control state and local restrictions and the related impact on our sales trends.
We have incentivized, our franchisees to maximize their sales and profitability potential by expanding their operating hours.
For the fourth quarter, we have initiated two new programs. The first program provides an extension on the scheduled payment of deferred fees and rent to those restaurants with close dining rooms, due to state or local restrictions.
As well as those restaurants that are operating at least 18 hours a day.
The second program provides temporary royalty relief on late night sales to restaurants open 24 hours during the fourth quarter.
As we've mentioned before the late night day part represented approximately 18% of our sales prior to the pandemic.
We estimate that our overall same store sales results and Q3 are impacted by approximately eight to 10 percentage points from restaurants closed during this day part.
As a reminder, the average restaurant requires approximately 70% of its 2019 sales in order to cover both fixed and variable cost items.
We are pleased to say that during October approximately 60% of our domestic franchise restaurants are achieved in the 70% of 2019 sales level.
This was an improvement from approximately 45% during the third quarter.
On a related note in us we would as would be expected.
The pandemic us profit higher closures than our historical run rate.
During the third quarter 23 franchise restaurants closed along with one company restaurant, bringing the September year to date total to 55 closures.
Six of these closures were due to lease expirations.
The remaining 49 closures related to franchise restaurants, with a new lease averaging volumes of less than $1 million well below the franchise average prior to COVID-19.
The pandemic accelerated these closings, but with that we had otherwise anticipated in the next several years.
We do expect to have additional store closures and the near term.
However, we anticipate most of these situations will prove to be an acceleration of future period closures and we remain confident in the sustainability and longevity of our portfolio.
These closures were offset by five franchise restaurants that opened during the quarter, including three international restaurants, which brought our total number of restaurants to 1600 60 for lease.
These recent openings underscore the confidence and future opportunities our franchise see within the brand.
We look forward to returning net restaurant growth in the future and are confident we will do so back from over 75, Refranchising development commitments, along with our existing domestic and international commitments.
We also believe opportunities will exist to expand through conversions as we emerge from a pandemic.
Ill now turn the call over Robert Karasik than his chief financial officer to discuss the quarterly performance Robert.
Thank you Mark and good afternoon, everyone.
I will start with a brief overview of our first quarter results and.
To share an update on our business outlook for fiscal year 2020.
As John mentioned, we saw sequential improvement in our same store sales results during the quarter.
More specifically domestic system wide same store sales declined 39% in July 35% in August and 28% in September leading to a decline of 34% for the full quarter.
These sales results were influenced by capacity restrictions and reduced operating hours.
For example, with mostly close dining room since mid July, California restaurants weighed on the total third quarter same store sales results by approximately four percentage points.
On the other hand restaurants in Texas, which were operating under a 50% capacity limit throughout the quarter provided nearly a point of benefit to our overall quarterly same store sales results.
Domestic restaurant operating the open dining rooms delivered a same store sales decline of approximately 29% for the quarter compared to a decline of approximately 46% at those domestic domestic restaurant operating with closed dining rooms.
We have been pleased to see the improving top line trends continue into October during which domestic system wide same store sales declined approximately 26%.
In addition to the weight of government and pose dining room restrictions on our business. We've also discussed the impact of less than one third of our system operating 24 hours during the pandemic.
We are encouraged to see some franchisees extend our operating hours in October to take advantage of the incentives Mark described.
Domestic restaurants, which were opened 24 hours in October had a same store sales decline of less than 20%.
The number of domestic locations operating 24 hours has increased by approximately 10% during the month of October and currently represents slightly more than one third of our store base.
Franchise and license revenue decreased 27.8% to $43.8 million, primarily due to the impact of COVID-19 on sales at franchise restaurants.
Franchise operating margin was $19.7 million or 45% of franchise and license revenue.
Compared to $29.5 million or 48.7% in the prior year quarter.
This margin decrease was primarily due to the impact of COVID-19 arm sales at franchise restaurants.
Company restaurant sales of $27.8 million were down 56.2% due to the impact of the pandemic as well as at 33 equivalent unit decline in our portfolio as a result of our 2019 Refranchising and development strategy.
Company restaurant operating margin was $500000 or 1.7% compared to $9.3 million or 14.6% in the prior year quarter.
This was due to the sales decline and related de leveraging impact of COVID-19, as well as the reduced company restaurant portfolio achieved through our 2019, Refranchising and development strategy.
Partially offset by approximately $1.5 million, a favorable reserve adjustments and tax credits related to the cares Act.
Total general and administrative expenses were $13.7 million compared to $16.4 million in the prior year quarter.
The improvement was primarily driven by a reduction in core DNA of approximately 20% due to proactive cost savings initiatives and previously announced reductions in personnel due to COVID-19.
Additionally, we recorded approximately $800000 in tax credits related to the care that.
These results collectively contributed to adjusted EBITDA of $8.0 million.
Depreciation and amortization expense was approximately $300000 lower at $4.0 million, primarily resulting from a lower number of equivalent company restaurants.
Interest expense was approximately $4.4 million compared to $4.2 million in the prior year quarter with the increase primarily due to the amortization of de designated interest rate swap losses from accumulated other comprehensive loss net.
The provision for income taxes was zero point $8 million, yielding an effective income tax rate of 11.2%.
Adjusted net income per share was one cents compared to adjusted net income per share of 18 cents in the prior year quarter.
Adjusted free cash flow after cash interest cash taxes, and cash capital expenditures was $2.1 million compared to $3.7 million in the prior year quarter, primarily due to a reduction in adjusted EBITDA offset by lower capital expenditures.
Cash capital expenditures, which included maintenance capital or $1 million compared to $10.6 million in the prior year quarter, primarily due to prior year real estate acquisitions and facilities maintenance related to our 2019, Refranchising and development strategy.
During the quarter, we raised $69.6 million net proceeds from a public offering of common stock, which we subsequently utilized to pay down our credit facility.
We ended the quarter with approximately $246 million, the total debt outstanding including $230 million under our credit facility.
Additionally, after considering cash on hand, and remaining capacity under our credit facility, we had approximately $104 million of total available liquidity after considering the liquidity covenant.
As a reminder, in May of this year, we entered into the second amendment to our existing credit facility, which temporarily Blaine certain financial covenants, including the leverage ratio, which was 5.7 times at the end of the quarter.
As same store sales improved sequentially throughout the quarter Soviet adjusted free cash flow.
In September we generated cash of between 1 million and $3 million. This.
This compares to what would have been a slightly positive adjusted free cash flow in fiscal June after excluding the impact of $3 million of royalty abatements extended to our franchise partners during that month.
Let me now take a few minutes to expand on the business outlook section.
Based on third quarter results.
And our expectation that the current business conditions will not materially decline, we anticipate the following annual guidance ranges.
It is important to note that fiscal year 2020 includes 53 weeks of activity.
We expect domestic system wide same store sales of between 70% and 75% of prior year.
We anticipate total general and administrative expenses of between 51 million and $54 million, including $7 million of share based compensation expense.
As a reminder share based compensation expense does not impact adjusted EBITDA.
We expect an adjusted EBITDA of at least $28 million.
Additionally, we anticipate cash tax refunds of between $5 million and $7 million related to prior year overpayment of estimated capital.
Cash capital expenditures are anticipated to be between 6 million and $8 million.
Adjusted free cash flow inclusive of the anticipated tax refund is expected to be at least $10 million.
Finally, I want to mention how proud I am of how our management team remains focused on managing business cost, while supporting Denny's recovery through the challenges of the COVID-19 pandemic in.
In doing so we have and will continue to leverage the strength of our asset light business model and fortified balance sheet to ensure the success of our dedicated franchisees and this brand.
That wraps up wraps up our prepared remarks, I will now turn the call over to the operator to begin the fund a portion of our call.
Thank you at this time, if you do have a question that will be star one I guess one for questions. We'll hear first today from mix.
Bush Securities.
Thank you.
Thank you for all the detail around.
Dining rooms and trends through to Q.
Q4.
Any chance you could help us a little bit more by maybe just focusing on the company owned units just because.
EBITDA from continuing at such a big part of of profitability.
Maybe just percentage of company owned units that.
Are still close in terms of dining rooms.
Capacity at the units that are open.
Maybe to transit the company owned units in the key in the quarter to date period.
All of that would help.
Hey, Nick Yes, I appreciate that and appreciate the question.
Yeah again, I, we didn't really break out that data is that way I can tell you as as we noted in previous calls in previous Investor calls that we done that.
Thats the company portfolio still trails, and a wife trailing and still trails the balance of the franchise system with regard to results, particularly in those areas that would be considered tourist area are higher out by dr. locations, our Disney locations.
Nevada location, so that they do trail.
With regard to that they had and they still do with regard to all of those various specific breakouts I don't actually have that information sitting in front of me, maybe we could figure out how to get back to you as looking at current over here how to get that to you in a without specific information going tend to one person sales.
Hi, Bruce.
Yes, other than that Greg Nick I apologize that we we don't again not trying to be clandestinely again to your point, we really tried to break out as much detail as as we possibly could so all I can tell you that all of our company units are opened they remain sales and there is none of them are in a temporarily closed status.
So they are all saints and they would be and to the extent that they are allowed to have on premise dining.
All of them would be taking advantage of that if a county or state allowed for on premise dining we would certainly company unit would certainly be open.
Perfect understood.
In terms of.
I guess.
Some some some of the peers out there have hospital cautions around the potential for that.
A reversal of those capacities given.
At the time the potential of the second wave and trends we are seeing out there.
I guess what steps are you taking in case, we do have to go back that.
Forward.
Yes.
Yes, John so.
Yes, well that's true there there's no day by day there are cautions.
And to sales for one step back.
There are parts of the country that are taking a more conservative view for instance.
The noise right now with some cookies have been put in place.
In the city and throughout.
CDC has new definitions about distancing exposure on the other hand places that have been conservative or with openings are seven deals in a more a few new counties had some update sales of just a couple of hours ago within moments ago, where additional stores that have been take out only will be added to diners.
So I think that at the heart of the question Morris our communication are.
How do we handle these things.
So we have a daily fee that goes to our franchisees was withdrawn offset so the deal announcements on whats opening, let's which looks dangerous was totally spiking literally soon.
Key gating daily with our franchise system on sort of what to expect next halsey around the next corner.
Communicating on a daily basis about late night hours and how to prepare to extend hours if they haven't yet and the results are those that have.
We're getting real time weekly updates to our steering body, which which is ahead of our franchisee Association board that looks after all of the advisory councils.
Plus EBITDA as sort of an extended in body.
Re engage franchisees until sort of guide best practices in their local communities and assist with Brean strategies and also frankly the challenges I think we've been aggressively not aggressive enough in through that daily Communication Weekly Council will say, hey, lets make sure the dining room setup as Investor day.
Hey, there is lets look at plexiglass between tables looks like that county that won't be allowed don't bother there just yet so so we're literally by by geography, making regular daily coaching calls.
In Germany as prepared as possible.
Headwind to this event related to one of those sales for late night hours allow franchisees have the wall desire, sometimes are willing booking away a few more lease there is a little bit of investment hurdle to get over to retrain roadmap crew and get them onboard that as train them. During the day shift to cut them was at night. So those are some of those headwinds we have it today.
For our concepts laying off but we're working through it and as Mark pointed out in his talking points. Our franchisees are adding was extended hours each week more being added.
Hey, Nick good to go.
On backer was able Dave let me give you a little bit of additional information on top of what Jon just shared about the 24 hours with.
This is as of today right does that not a specific has not as of the the balance sheet date, but as of today with regard to company units again. This is a breakout of company in 66 company units of Levin, our opened at 25% capacity 13 are opened at 50% capacity.
12 are opened with 75% capacity 18 ours within that social distancing status, which is a I think that six foot radius definition and Ben 12, our off premise on so thats kind of the breakout of the various status of on Prem and off Prem only so.
Hopefully hopefully that adds a little bit more for you.
Thank you very much that's very helpful.
We'll hear next from Todd Brooks with CL, King and associates.
Okay.
Good afternoon everybody.
Two quick questions one.
Hi, how are you. So we walk through the mechanics of the royalty relief that you talked about in Q4 for those franchisees, but do.
We opened and the 24 seven.
Operating model just.
What would either anticipated.
Dragging is or if you look at a per unit to reopen.
Type of royalty for lease kit that you would expect that would be helpful.
Todd This is Robert so with regard to that the mechanics, there are pretty straight forward with regard to that relief.
ESA unit it moves to 24 seven is open 24, seven our late night Ana in during our late night day part they receive a three percentage point decrease in royalty rate isolated to those hours for the fourth quarter.
So again, it's not the it's just isolated from that Kenny our Tenpm defied am Daypart for units that are opened during that timeframe. So with regard to drag the way we visualize it it actually is not Q, if the Congress of a drag that while we have.
We will be giving up some royalties the royalties we would have to have been a receding otherwise. So it actually is a way to to build that and build back to our 24 seven day part more quickly as you noticed in my comments even in the month of October those 24 seven units were led their same store sales performance.
Klein with less than 20%. So we really believe in getting them there as John noted in the previous follow up question are there are some cost of getting it getting these units back open 24, seven and thus the our our willingness to put our money where our mouth beta to help incentivize those units getting open more clear.
Great, but it's isolated the Q4, it's isolated to that 10 P.M. to five and day part and it's isolated to units that get I've been 24 seven.
Okay very helpful. Thanks, and then.
If you look at franchisees due to reopen for the late night and should we couldn't get back to kind of act down.
20% type of same store sales level, which was four wall margin looking like for that franchise fee that gets back to that level.
Had a really good question tied so let me let me.
We try to get it to the display so when we when we talked about company asked which was our EBITDA which worthy.
And we originally guided earlier this year.
We guided to 18% to 19% for company operating margin those are on the vendor.
Company units right those units that are approaching $3 million sales sale would be positive less than that so you have that so at a 100% sales kind of have that target reference for the company. As we've also said and we I think we reiterated again today that the breakeven level margins our average. Furthermore, it appears.
Currently 70% of system wide sales. So again, if you take that you take the haircut from a company volumes of 3 million to a franchised average unit volume of 170 and look in the FDD that's positive mid teens number both gross.
Those are just freight for hypothesis for illustrative purposes lets say that that 15%.
I think it would be somewhat linear between the 70 and 100% level. So if they were to achieve 85% that we'll see like in summary, our enhanced mid to upper single digits range again that is really big hits from in the air type of analysis with regard to.
That but we need to get these units as open 24, seven we need to get California opened two two on premise dining we need to get back to it to 85, and 90 plus percent of sales to drive back to that double digit to.
Mid teens type of margins, but it's still going to be a single.
Single digit Dunbar number so.
Okay very helpful. And then the final question I have is.
Within the.
The guidance you kind of assuming that we get back to.
170% to 75% of last years.
Sales volumes.
For the full year wonder what are the assumptions around the two moving parts that they get you to that level. What are you assuming as far as further openings of the close California stores and then how much of the days are you assuming reopens around 24 seven model over the course of the fourth quarter. Thanks.
Yes, so I think the probably the best way to look at that if you look at the October results.
Yes, we quoted I think it was in my script that we were down off to 26%. So we were Conversely that would suggest that we added 74% in the month of October.
The prior year sales so we are.
Somewhat in that range at lease for Q4, if the a is my statement said as long as things don't materially decline was that the caveat to the forecast.
They borrow as things are materially declined we're already kind of in that range. So and that is I think if we do the cash if you look at California right now.
We are happy is probably about 50 50 more than 50% of California had on premise dining currently I mean look county by County for R&D and Thats public information.
So I think the more units that did they get I've been at 24 seven.
The better off we are the more units that have California on Prem dining the better we are but the reality is is where October was with the one third of the north of slightly north of one third of units opened 24 seven and.
Maybe slightly north of half that from California units opened the on Prem we were in that kind of that 70 that right at that 75% of sales already.
Yeah.
Okay, great. Thanks, Robert.
Yes, Sir.
Okay.
First Securities, we'll hear next from Jake Bartlett.
Great. Thanks for taking the question.
My question is actually building I just want to make sure you understand that the comments about the guidance.
Five or 26% seen for sales in the fourth quarter I get roughly was down 31% for same store sales. So is there some sort of waiting depletions that you should be aware of that and I guess, maybe more explicit about what it implies for the fourth quarter as a whole.
So yes it is.
Yes, there are and thank you for the question the as a revenue. So you got to have a six week.
Period end December and say that that would be influencing these numbers. So again you have that.
Type of of of impact within there so it's weighted heavier those.
Those numbers will likely be weighted heavier just because you have.
More units opened during that timeframe earlier in the year we.
Candidly, we were able to.
When this thing first hit at one point in time I think we are down to seven units that are open and operating so there is a probably an out outside impact to that 14 week period and the number of units.
That are ongoing and I don't think lease specifically implied that's why we gave the range candidly, a 70% to 75% to not necessarily get pinned down to a very specific number again, we hope, California mountains out the.
We hope that 24, our incentive.
Hello to new franchisees to get to 24 seven.
But the reality is this some of this is a is out of our control, Illinois is an example of that to the other side.
Thus the range and not really wanting to get tied down to kind of a specific range for Q4.
Got it I appreciate that maybe I just want to make sure. We think about kind of where we are in October.
Well as you think you would that be in the middle of the range for the annual GAAP guidance or.
And just just with I can we can.
I can do the waiting I guess separately, but is that in the ballpark that where youre currently would would keep you in the middle of the guidance.
Yes.
The interesting question Dick I don't know if I've done that math myself I know that the 26%.
For October the down 26% for down October again, we don't expect to materially decline from that again, we hope to build from that but from that point, but I don't know if I haven't paid candidly haven't done the math to myself to understand what that that midpoint would suggest for that 70% to 75% range I apologize.
No there were any attempting to get a floor with curtain Kayla in follow up.
Sounds great sounds good.
Lately My other question was on while I appreciate the detail about C for sales at the stores with opened 92 engine was with off premise only and I had a question we're looking at.
In October off premise and new stores were down 33%, a really significant increase from July down 65.
Is that including stores, where you have off hand or sorry.
Your dining or what accounts just.
Such a huge improvement for off premise only and I guess in the context of the.
$7800 a week for off premise that I'm, just trying to reconcile that 7800 with the down 33% same store sales.
As as Jake you're spot on that day off premise only in our definition would be would be include unit that had patios and as such so our off premise means that they cannot see inside our restaurants to although they may be under intense in the past.
Taking lots of the I think that really what you what you're pointing out there is really a testament to our operations team and our franchisees and their entrepreneurial spirit to maximize every guest opportunity to serve them I've seen pictures take up of.
The set up where there are four tenths, where there is artificial turf, where there are mr. isn't electricity and use ACA and if they are pretty impressive type setups and it really as to your point I think you caught on to one of the areas that was really.
Really a good thing I think we have about 310 minutes or so that that are taking advantage of those type of opportunities. So.
Again, you're spot on that that that is really the reason why you can go from early on with the off premise being really a dire number to where we are today, which again really on the back of our ops team educating and helping our franchisees and our franchisees really maximizing the guest experience.
Got it that's really what's impressive you I guess is equal to about that is there any seasonality to that I know in California remains beautiful all year round in the sales side, but.
Is there any.
Could that change as you go through the winter months that that that capacity.
I think it really points to our Smile States Jake I do think that we will continue in large part to be able to execute against this strategy and again, if you think California, Arizona, Texas, Florida, we will likely have that opportunity and frankly, where this opportunity really never existed in the Midwest immediately.
As public in where we thought we would be able to take advantage of that and on an extended timeframe yes.
I think the.
The positive momentum that by the way in real quick is.
While you have people willing to buy and we were pretty weather or mild weather like Jagger weather.
Today that are really hot it creates burden.
In California.
Theres been a lot of smoke in the air in there. So so again.
We've got a scrappy franchise system and we're not the only brand we have done some lease is obviously, so credit to sort of the nature of our industry, but also there have been headwinds to our successful is to do some of those things are abating. So with positive news in negative news, our one offsets the other Reits as I think rubber suggested the ship.
Continue to get those mounted thermal is with our operators learn how to do curbside.
And and buying through were to pull off an order or an order that already would have to go to pick up on the way somewhere in the city neatly into the habit of the longest ear sizes like so so while that's not the same design and make no mistake about it extended hours and extended capacity or the best thing that can happen.
Will service the needs including.
These thing to do is mitigated to some degree.
Just tagging onto that really quick Jake.
Reminded into the room that is probably better off prem our attention and take dining patio dining probably becomes more available in states such as Arizona as the weather's becomes more temperate as opposed to some of the summertime when those temperatures are well above 130, there's gives and takes across that as John.
Just alluded.
Great well sitting here in Massachusetts, I'm jealous. Thanks, a lot. Please take your question.
Thanks Jake.
We'll hear now from James Rutherford with Stephens.
Hey, Thanks for taking the questions I really appreciate all the detail you gave on the on the operating status for units. The cops here, it's really helpful. Our side.
I had a question about the comment about heightened near term closures I think this is Ben.
The theme for a couple of quarters now I just was hoping you could help us think about the potential magnitude of that I mean.
It seems that with improving comps the unit closures would maybe slow sequentially, but given that these are based on lease expiration I just wanted to clarify that comment please.
As Jay Thanks.
Thanks for the comment about the detail we tried to be really helpful. Here pretty good news.
From an unprecedented time with regard to closure. They I think one of the interesting things that really kind of tease out of the data here as we were preparing for this call and we pointed out in the script is that.
90% of the closures that we've experienced to date have been below.
Million dollars in HBV, so that kind of represents a pull forward of.
Potential closures now.
The other piece of information I'll share this was not enough script, but but is a relevant piece of information to have for this discussion is that based on 2019 average unit volumes. There still are 50 to 75 units that fall in that $7 million category. So this is.
I've talked throughout time about having that sub debt.
Less than probably 200 units that were $1 million and Leslie will move it on road shows us that and this is probably a more concrete.
Example, from us or a specific detail from us that that nearly 50 of the ones. We closed already this year had that volume.
Of $1 million or less and we still have 50 to 75 that fall into that category. Thus the idea of what while costs are still improving and bad and we pointed out that 60% of our franchisees franchise units that are open are above that kind of that breakeven, 70% threshold level that doesnt mean that there was.
Still be near term pressure on closures and and likely probably into that set that I just described.
Now we do believe ultimately again this is the the dichotomy between near term and longer term that near term that we will expect more closures, but longer term. These are probably pull forward of closures that would have happened otherwise in in later 21 or 22 and beyond.
So while you get the idea that net unit growth is probably bolstered buyers by getting back of development commitments from our 2000 2019, Refranchising strategy and when that comes back about we did extend those commitments by a year when the pandemic hit so when you're.
Looking out a year from now in the pool for these these closures we are bullish but near term, we still probably need to wade through some additional closures.
Got it that's helpful.
Circling back on the outdoor dining discussion from a minute ago, maybe I missed it but could you help quantify the level of outdoor dining sales you're seeing in those 300 or so units that are offering that today.
Hey, yes, it's a mixed bag I mean, you'll have stores, who have outdoor dining blowing away. Another stored outdoors on we'll have another one so lease trade area has very different after five dynamics lunch dynamics in breakfast and late night gun units.
I would say that on the whole outdoor dining versus non outdoor dining in markets that are taking out only we outperform.
On the averages but.
So fairly random array of results.
Fair enough.
Fair enough on that I, just wanted to check that off I missed your one last question from me is on the DNA guidance.
It implies a pretty big step up in the fourth quarter is that all stock based compensation or is that the underlying cash.
Cash DNA movements in the fourth quarter.
Again Thats a another excellent question and that is largely focused right into that stock based compensation or you saw the 8-K that we issued within the last month.
That was focused around our bid the incentive that 2018 2019 incentive plan.
And the accounting that was required coming from that a lot of that had been reversed off in previous periods.
And with that.
With that modification that was detailed in that 8-K, the accounting required that we book additional expense to much of that increase that you noted we'll be focused into the stock based comp the benefits from.
The cost rationalization, both in our tightened approach to travel which is a virtually nil at this point in time to the impact to the to the personnel. We hired back in May we impacted approximately 50 people permanently dislocating.
The family has been 50, or so of our family and friends from here those benefits in that core DNA. We as you recall, we breakout our DNA and detail between core short term incentive long term incentive in this deferred comp.
Accounting machination that we have to work through that core will continue to benefit from the actions that we've taken.
Excellent thanks for the detail.
Interesting.
And from a timer, we'll hear from Michael cannot.
Thanks, Ron as well you mentioned about a third of the units per 24 hours in October. So Im just wondering can you kind of talk about what percentage of units could actually be opened for late late late night given the various restrictions.
Going into around the country.
Thanks.
Yeah, Michael I will later cover data points. So we are about we are north of a third slightly north of a third we picked up about 10% in the month of October when we initiated that incentives. So we continue literally I have been on calls personally with some of our larger franchisees and walking through the day.
Data with them to talk about that I ate at my fingertips right. Now this piece of information, we may be able to get to but at my fingertips I don't know the local or state restrictions with regard to ours, but it is far beyond the third that was that we have now the I would say I view, we wouldn't.
I don't know the specific number but it is far beyond the third that we talk about the put 1200 87 stores have opened dining rooms. Those are likely to go first because of the staffing in terms of volumes being open becomes easier.
Easier to make the hurdle into the late night hours, but that's not necessarily true of every location maybe some stores that are already 24 hours, but have no in store and so those items, so theres not a hard and fast rule, but I think that that's a pretty good that 287.
It is sort of the the step change will happen there first.
Got it. Thanks, what do you think was the trigger to get that 10% of extra stores opened in October and what do you think purchase franchisees over the edge over the next coming weeks and months.
Open late it.
Is there any commitment beyond the fourth quarter to stay open to get that royalty relief as well or did it just.
At quarter end whatever happens after that did not impact that we'll see.
This is the fourth quarter only both I think sequential sales improvement on covenants improvements on staffing improvements terms.
Cash flow solutions and late night, our extension. So I think part of it is the incentives from the franchise or part of his data communications.
Business case for late night hours.
Bias for younger audiences from these on demand high trial for after the five and late night low sales point toward adding back the brand equities. We have is 24 hour brand.
Yes, and then on the units that are open for in store dining is there an opportunity through partition.
Youre, taking advantage of slower dayparts sort of increase the level of sales or seems like between September and October you're hearing indoor dining open restaurants sort of leveled off there. So just trying to think about what the opportunity is going forward. Thanks.
Sure part of our.
Our weekly calls and data communications will be explore all these kinds of options that may extend capacity or with consumers more confidence.
It's been a long time now since our road map.
Several months ago.
This area of comfort and so the security safety.
The topic of our conversation machine to consumers and so there are areas, where the people really have taken to this plexiglas between boots and tables in poor separators.
No foot pedals on backing doors sales.
Inpatient stations are on the non room and there are others that the.
Have not responded as much to it or were those being sort of bias in the news against it.
And so is this sort of varies by area across the country. We had a very high adoption rate in the billing system a lot of stores put those systems in pretty quickly.
And then it slows it does take some investment I think it's I don't have the number could we have the number.
I think it's over 400, plus the grass, but those either want to the pricing.
Let let us verify the accuracy that comment.
Got it fair enough all right. Thank you.
Thanks, Michael.
And again, if you have a question that is going at this time, we'll hear now from Brett Levy with MKM partners.
Great. Thanks, and appreciate you taking the question and appreciate the detail that you provided us.
I guess, we could call. It your I'll start with that top line first and then move down a little.
I appreciate the color on.
California, Texas, but would you be able to give us any sense of what the top quartile or top 10% of your sister, we're doing and if or how many are generating positive comps.
Hey, Brett this is Robert.
With regard to that way, we really tried to break it out because they didnt come those guard rails with regard to kind of Texas, and California again being the we had nearly 400 units in California, and 200 units and in Texas that represents.
Nearly what is that 40% of the system right, there roughly 35% to 40%.
So again really thought that that was pretty good guardrails that the challenge with what we're dealing with right now.
It is the data just moves so quickly that depending upon day, depending on which you which units are aligned to open are allowed to close in the iden kind of 41 way today.
And as a new tomorrow, so we really kind of lease.
To provide kind of these the best overlay that will give you a sense of the direction and we want to keep pointing back in it because this is true.
The more that we can get pretty healthy.
Fee restrictions you can we can get to more on premise dining there is a as linear correlation to the improvement in same store sales and that holds net add that hold also for 24 seven.
It's a very linear correlation between that so we are highly focused on those two pieces and again. It goes to California is just north of half the units being open the more though get opened the better off we are and it really is that linear.
The the fewer the restrictions that more 24 seven to better the resolve bar.
Along those lines can you give any color on how the southeast doing given that that was obviously.
Among the earliest and they are among the.
Lease stringent in terms of restraints.
Texas is doing a little better than Florida.
The best I can do at the moment.
In California at worst in both.
Mhm.
California, Washington and represents the biggest challenges.
Florida, Arizona, Texas represents the better news.
Yes, that's fair enough.
When we think of SGN AG.
How should we think about.
The levels of what you will layer on as you start to see sales recover is that 21, and just the pace at which some of your spending should materialize, whether it's anything from the travel referring to just additional spending on corporate.
Yes, Hey, Brett This route again with regard to that we have we have.
We have always been.
Quite good at controlling our existing land.
As you would expect when as you enter into a pandemic you've become hyper focused on the things that you can actually controlling cost clearly DNA is one of those areas.
I think that you will see us continue to focus on that area as easy as restriction lease and we move through 2000 and into 21, it's just part of our DNA testing it would hit always intended our.
Part of our DNA to control. This line I think you will see continued focus on controlling that really don't.
You have more components out there you can pick visible.
Okay.
And I can't tell you when that is but I'm fairly certain that it extends at some point in the 2021, which will require us to continue to be diligent with our DNA spending.
And then just my final question similar on the Capex side.
When do you foresee returning to more of the project oriented pursuits, whether it.
Okay to your franchise.
Upgrading the existing sales for really accelerating the build out.
Yes, so with regard to that the biggest expenditures that we were going through other than some of these real estate acquisitions that were getting caught up in a in a 10 31 that made that the free cash flow will look a little funny, but we tried to talk through that.
In in detail to get there. The other biggest expenditure was really into the Remodels and we were right on the cusp of launching in two what we call. The heritage 2.0, we had tested that and we were getting ready to launch into that with regard to our franchisees, we did and we have already communicated to them into off.
For green leaf that they would not need to complete remodels prior to 2022.
So with regard to that now.
Now to the extent that we can get back to.
Get back to producing cash flow and can pay out of that we are very bullish on the results from our heritage 2.0.
But again I think that would be predicated upon getting back to some level of sales.
Malady at some point in time, but again, we are very bullish on the on our remodel scheme and want to get back there. The franchisees have been given more finding them through the end of 2022 are through the beginning sorry, the beginning of 2022 high.
And we will have the flex from a company perspective won't wants them.
Time to to one be revenue normal is.
We'll update with some reconnaissance here.
575 units have pressured gross installs currently.
Thank you very much and.
And just one other clean up no for for everyone on the phone with regard to the 50 to 75 units that are sub seven.
$7 million. They again just to be clear that that was a nearer term comment that was not necessarily isolated into Q4, a relative near term versus the longer term.
And with no other questions I would like to turn things back to Kurt for any closing remarks.
Thank you Kelly I'd like to thank everyone for joining us on todays call. We look forward to our next earnings conference on February during which we will discuss our fourth quarter 2021 zone.
You all have a great.
Again that does conclude today's conference. Thank you all for joining us.
Mhm.
And.
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Matt.