Q1 2021 Denny's Corp Earnings Call
One of 21 earnings Conference call. Today's conference is being recorded at this time I'd like to turn the conference over at least for Curt Nichols, Vice President Investor Relations and financial planning and analysis. Please go ahead.
Thank you John and good afternoon, everyone. Thank you for joining us for Denny's first quarter of 2021 earnings Conference call.
Good day for management of John Miller Denny's.
The impact of officer, Mark Wolfinger, Denny's, President and Robert <unk>, Denny's Executive Vice President and Chief Financial Officer.
Please refer to all of our site Investor Dot Denny's Dot com to find our first quarter earnings press release of <unk>.
All of them and the reconciliation of any non-GAAP financial measures mentioned on the call today.
This call is being webcast at an archive of the webcast will be available on our website later today.
John will begin today's call with a business update call for.
To provide some comments of around restaurant of capacities of franchisees and development.
Robert will provide a recap of our first quarter financial results and current trends.
After that we'll open it up for questions.
Before we begin let me remind you that in accordance with the Safe Harbor provision of the private Securities Litigation Reform Act of 1095 at the company knows that certain matters to be discussed by members of management. During this call may constitute forward looking statements management urges caution in considering its current trends.
And any outlook on earnings provided during this call such statements are subject to risks uncertainties and other factors that may cause the actual performance of denny's to be materially different from the performance indicated or implied by such statements.
Thanks Ross.
Are set forth in the company's most recent annual report on form 10-K for the year ended December 30, <unk> 2020, and any subsequent forms 8-K equivalent of reports on forms from Keith.
Of that I'll now turn the call over to John knows Denny's Chief Executive Officer.
Thank you Curt and good afternoon, everyone I hope each of you remain safe and healthy since we last year at an update on Denny's and <unk>.
While the first quarter started off with uncertainty about the pace of reopening due to expanding vaccine deployment easing of restrictions and federal stimulus Im happy to say that we are quickly approaching 2019 sales levels in April I'm, even more encouraged by the stickiness of our off premise business as dining rooms have reopened this is a testament.
For the hard work and that of cake dedication of our teams to balance near term labor challenges, while welcoming guests back into our dining safely and still maintain focus on growing our off premise business. We remain focused on our four key guest centric themes reassurance value comfort and convenience and I will now touch briefly on each.
As guests return to our restaurants, it is more important than ever that we ensure the health and safety of our teams and guests who are committed to reassuring. Our guests. The denny's provides a safe dining experience by consistently executing our enhanced cleanliness and sanitation procedures at all consumer touch points. Our second area of focus is value we understand at Bay.
Comes in different forms and has a different meaning for each type of guest we consider that our value approach to be a comprehensive balance between price of abundance convenience and bundled value. Our third focus area is comfort we strive to ensure that denny's is a place where our guests feel welcome and valued where their dining with a large family whereas at par.
<unk> of one we believe our guests you beginning to experience for the time to build connections in an environment of both inviting and comfortable this is reflected in our new bowls and milk as well as our established heritage restaurant image, which received consistently positive guest feedback largely due to its welcoming and we lack scale and additionally, even as we face higher.
Bring challenges our operations team continues to reinforce the critical need for comfort by reminding our entire system of the rules, we live by including the expectation is that number one everyone is welcomed nine had been east number two everyone is treated like our favorite gas from number three everyone has shown kindness and respect and our final <unk>.
<unk> of consumer focus is convenience. We believe guests will continue to expect technology to bring enhanced value of their dining experience whether in our restaurants or through off premise of options are well established denny's on demand platform for our new virtual brands. We've been pleased with our ability to retain off from sales, which have been more than doubled since the start.
At the pandemic, even as dine in transactions have evolved turning to virtual brands I am excited to say that we.
Substantially completed our rollout of the Burger day in April this concept of allows us to focus on one of our strength, great burgers with new varieties using ingredients already in our pantry and during testing we established of success criteria for sales of $650 per week per restaurant results. During the tests were encouraging and gave us the confidence to.
<unk> national rollout of the brand Robert will give more specifics on the performance of these restaurants. However, these transactions are highly incremental and leverage underutilized labor to maximize kitchen efficiency and our second virtual concept called the meltdown is a door dash exclusive brand at features hand crafted sandwich melts with fresh ingredients.
And unique flavor combinations, while this brand is able to utilize approximately 70% of the items currently in our pantry for innovative culinary team just crafted new craveable products with premium ingredients, such as slow smoked brisket burn in test results have been similarly, encouraging for the meltdown and over half of our <unk>.
Domestic locations, we will be launching during the second quarter. In fact, we've already launched over 175 locations and an additional 175 expected to launch this week.
These brands provide opportunities not only at dinner and late night to leverage underutilized labor and kitchen space, but we're also seeing a meaningful number of transactions during the week versus for weekend in closing we are simply delighted to see the return of guests to our dining rooms were still at a place where people can come in and sit down and connect with one another of our grateful.
Food, but also of place with a continued focus on the health and safety of our guests employees and suppliers with sales approaching preprinted pandemic levels. The launch of two new virtual brands market share opportunities on the horizon, an extraordinary group of franchisees and our exceptional denny's team members I'm very optimistic about the future of it.
This brand so with that I'll turn the call over to Mark Wolfinger, Denny's President to discuss more about our franchisees and development margin.
Thank you, John and I want to add to.
Of your comments about our outstanding debt team and franchise system.
And I too look forward of what this brand can accomplish during the balance of this year.
While we currently have 11 of domestic restaurants that are temporarily closed I am very pleased to say that nearly all of our operating domestic restaurants of open value of rooms, with an effective capacity of approximately 75%.
This was very encouraging considering just two months ago, we had only 70% of our domestic restaurants with open dining rooms at an effective capacity from approximately 45%.
We experienced slight improvement in our 'twenty for southern operations during the quarter.
However, we still only have approximately one third of our domestic franchise restaurants operating 24 hours a day seven days of week.
As John mentioned, we are facing labor availability challenges and this is the primary headwind preventing franchisees from opening at late night.
To assist our franchisees with the estimate of 20000 employees that need to be hired we of.
Of engagement of vendor that will enhance our online recruiting to allow them of course to open positions on our career website in order to provide greater visibility to potential applicants.
Additionally, we will be hosting of national hiring event in June of next month.
We believe these staffing challenges are temporary and we are confident of our ability to reestablish our historical position was America's 24 hour of diners.
Turning to development franchisees opened three restaurants during the quarter, including two international restaurants. Additionally, franchisees closed for restaurants during the quarter, yielding a net decline of only one of restaurants, bringing our total number of restaurants to <unk> hundred 49 locations.
This deceleration and document declines underscores the confidence and future opportunities of our franchisees see within the brand.
I would now like to take a few moments to update you on the health of our franchise system with.
With off premise sales remain strong even as dining rooms reopen we are very pleased to see franchisee profitability continue to improve.
In the month of April over 80% of our domestic franchise restaurants exceeded the 70% of 2019 sales thresholds required to cover both fixed and variable costs and over 40% of the domestic system generated positive sales.
We are also currently supporting our franchisees and their efforts to secure funding through the second round of PPP and the rest of our revitalization of funds.
Franchisees represent.
Representing approximately 98% of the domestic franchise restaurants have applied for the second round of PPP and approximately 60% of those restaurants have received funding of the date.
Improving sales of additional federal stimulus available to franchisees and a net decline of one one restaurant during the first quarter gives us confidence at our franchise versus the ability to prevail and emerge on the other side of the pandemic more focused and driven than ever.
We look forward to seeing this historic recovery unfolds and returning to net restaurant growth in the future backed by our existing domestic and international development commitments, including over 75 commitments from our recently completed our Refranchising strategy.
Additionally, while we do not celebrate the disproportionate impact of closures to small chains and independent restaurants, we do believe that we will present, an opportunity to capture additional market share and confirm vacated space.
And then at locations as we move through 2021 and beyond.
We are of proven record of converting existing spaces into denny's locations in the last 10 years of approximately 60% of our openings have been for conversions.
These are less capital intensive opportunities provides enhanced rois for our franchisees and our experienced development teams is already assessing the landscape for future Denny's locations.
I'll now turn the call of and Robert <unk>, Denny's, Chief Financial Officer to discuss our quarterly performance Robert.
Thank you Mark and good afternoon, everyone at.
I'd now like to share a brief review of our first quarter results and current trends.
As a reminder, I will be comparing our 2021 domestic system wide same store sales to 2019 as we believe this comparison will provide a more consistent and informative representation of our recovery.
Additionally, we will continue our standard practice of comparing to the 2020 prior year in our press release.
Domestic system wide same store sales during the first quarter declined 20% compared to 2019.
We experienced sequential improvement on a monthly basis during the first quarter as stay at home orders and capacity restrictions began to EPS.
While transactions are steadily improving with only slight pricing, we are seeing higher check mostly from mix changes.
Specifically, we streamlined our two for six to eight menu and are seeing trades into more lunch and dinner items How's.
However, California, where approximately 25% of our domestic restaurants are located was restricted to off premise only through the middle of fiscal March.
Consequently, California restaurant weighed on the total domestic system wide same store sales results by approximately six percentage points during the first quarter.
Same store sales at domestic restaurant operating with open dining rooms of various capacities declined approximately 11% during the first quarter.
<unk> two a decline of approximately 42% at those domestic restaurants operating with closed diagnostics.
These results were heavily weighted towards January and February prior to the easing of restrictions.
In addition to the weight of government imposed restrictions on our business. We have also discussed the impact of stores operating with limited hours during the pandemic.
As Mark mentioned the availability of labor continues to challenge our path towards 'twenty for our operations with only one third of our domestic restaurants opened 24 seven.
Domestic restaurants, which were up at 24 hours in the first quarter at our same store sales decline of approximately 10% versus 2019 compared to a decline of approximately 27% at domestic restaurant operating with limited hours.
We estimate that our overall same store sales results in Q1 were impacted by approximately eight to 10 percentage points from restaurant operating with limited hours.
With that being said the easing of dining restrictions coupled with the fiscal stimulus and rollout of our two new virtual brands yielded preliminary April same store sales results within two percentage points of pre pandemic sales levels.
We were also encouraged at that preliminary sales results for April increased 11% for the 565 restaurant operating 24 hours with open dining rooms.
I want to spend a few moments providing more detail on the launch of our virtual brands.
As John mentioned these transactions are highly incremental and leverage underutilized labor to maximize kitchen efficiency.
In fact, approximately 70% of transactions from the Burger again occurred during the dinner and late night day parts compared to approximately 35% of transactions for the Denny's space brand.
Not only are we levered leveraging underutilized day parts, but the Burger Dan also over debt over index during the week days compared to the Denny's base brand, providing additional opportunities to leverage underutilized labor.
Approximately 75% of the Burger debt transactions that occurred during the week day compared to approximately 65% from organic space brand.
Over 1100 locations are live with the Burger again with an average check similar to denny's off premise transactions.
These locations are generating average weekly sales per restaurant of approximately $900.
While these transactions being highly incremental and over indexing at dinner and late night compared to Denny's based brand off premise sales margin range from the mid 20% to below 30% after considering product cost delivery fees and labor efficiencies.
Now turning to our first quarter results franchise and license revenue decreased 13, 6% to 47 point year of $1 million compared to the impact of COVID-19 on sales at franchise restaurants and fewer equivalent unit.
Franchise operating margin was $23 2 million or.
For 49, 5% of franchise and license revenue compared to $25 2 million or 46, 4% in the prior year quarter.
This decrease in margin was primarily due to the impact of COVID-19 on sales and fewer equivalent units, partially offset by abatements and bad debt expense recorded in the prior year quarter.
Company restaurant sales of $33 $6 million were down 26% due to the impact of the pandemic on sales and fewer equivalent units.
Company restaurant operating margin was $3 4 million or 10, 1% compared to $6 2 million or 14, 6% in the prior year quarter.
This change in margin was primarily due to the impact of the COVID-19 pandemic on sales and fewer equivalent units.
Total general and administrative expenses were $16 9 million compared to $7.7 million in the prior year quarter.
This change was due primarily to an increase in share based compensation expense end market valuation changes in our deferred compensation plan liabilities, both of which are non cash items and do not impact adjusted EBITDA.
As a reminder, in the prior year quarter, we reversed a meaningful amount of expense related to both our short term and long term incentive compensation plans given the uncertainty of both the duration and magnitude of the pandemic.
These increases were partially offset by a $900000 decrease in corporate administrative expenses, primarily due to cost savings initiatives implemented after the start of the pandemic.
We estimate that approximately $3 5 million of permanent annualized savings have been realized over the last 12 months, which is reflected in this improvement.
These results collectively contributed to adjusted EBITDA of $11 8 million.
The provision for income taxes was $8 1 million, yielding an effective income tax rate of 25, 9%.
Adjusted net income per share was <unk> <unk>.
Compared to adjusted net.
Net income per share of <unk> 17 in the prior year Corp.
I am very pleased to say that during the first quarter, we generated our highest adjusted free cash flow of $5 $2 million since the beginning of the pandemic, bringing a significant portion of every adjusted EBITDA dollars to the bottom line.
And our adjusted free cash flow was cash capital expenditures, which included maintenance capital of $1 6 million compared to $2 8 million in the prior year quarter.
We ended the quarter with approximately $230 million of debt total debt outstanding including $215 million under our credit facility.
After considering cash on hand for remaining capacity under our credit facility and current liquidity covenants, we at approximately $87 million of total available liquidity at the end of the first quarter.
The pandemic has certainly affirm for us the value of our conservative leverage philosophy price.
Prior to the pandemic, we would of targeted longer term leverage some where between three times and four times adjusted EBITDA.
However, we are currently more comfortable with a range of between two times and three times.
As such subsequent to the end of the first quarter, we paid down an additional $15 million on our revolving credit facility, bringing our current outstanding balance to $200 million.
Turning to our business outlook, given the dynamic and evolving impact of the COVID-19 pandemic on our operations and uncertainty about the timing and extent of unanticipated recovery, we cannot reasonably provide our business outlook for the fiscal year ending December 2019.
2021 at this time.
As we work to overcome near term staffing challenges and returned more stores to 24 seven operations. We are optimistic about building upon our ongoing sales trends.
With that said cost associated with recruiting hiring and training new employees May proceed additional sales growth and as a consequence could have a temporary impact on margin.
Additionally, excluding deferred cut the deferred compensation valuation adjustments, which move with the market for the second quarter, we expect our core G&A corporate incentive compensation and Corp, based and share based sorry end share based compensation will be in line with Q.
<unk> results.
As a reminder, on December 15th 2020, we entered into the third amendment to our existing credit facility.
This reduced the revolver commitment to $375 million and has an additional step down to $350 million on the first day of the third quarter of 2021.
Financial maintenance covenants are waived through the first quarter of 2021, followed by the introduction of more favorable covenant levels in the second and third quarters of 2021.
Under the amendment capital expenditures are restricted to $12 million for mid May 2020 through the third quarter of 2021.
We have utilized approximately $4 million through the first quarter with an additional $8 million available.
Additionally, we are prohibited from paying dividends, making stock repurchases and other general investments until we deliver our third quarter results.
Therefore, we intend to deploy cash towards paying down our revolver as we continue to enhance our overall liquidity position.
We look forward to emerging from these constraints during the fourth quarter and continuing our long standing practice of returning capital to shareholders. While also investing in the business.
Finally, I want to mention how proud I am of our franchisees and the entire Denny's team who have remained focused on safely serving our guests whether dine in or off premise, while continuously managing business cost to support Denny's post pandemic recovery.
And 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 our prepared remarks, I will now turn the call over to the operator to begin the Q&A portion of our call.
John.
Thank you.
I'd like to ask a question. Please signal can see of star one on your telephone keypad.
You are using a speaker phone. Please make sure you hit mute function is turned out to one of your signal to reach our equipment margin.
And then at Star one if you'd like to ask a question. We will take our first question from James Rutherford from Stephens, Inc. Please go ahead.
Hey, Thanks for taking the questions and congrats on the improvement, especially here in April at really impressive.
Thanks, John I wanted to yeah, I wanted to ask about but I think I heard you.
The comment that the virtual brands are running in the mid <unk> to low <unk> margin.
I just wanted to ask for clarification on that what does that include the delivery fees and then of the broader question on the virtual brand. How are you marketing those today and what level of marketing investing that you think is necessary to sustain those for the long term.
Hey, James I'll start this is Robert so with regard to that clarifying question I can tell you that the the mid <unk> to low <unk> does include the impact from the the fees related to that sales inclusive of that.
And it.
It does leverage that underutilized labor that we're talking about as it is focused at it has a focus into those dinner and late night day parts, where we typically seek to have some traffic gains I'll pass it over to John for the marketing question James.
Thats a great question, the marketing brand Advisory Council with our Franchisee Association chair, who used to work from the corporate side same wielinski. He leads the marketing brand Advisory Council and he works with our Chief brand Officer, John Dillon and those of the kind of the topics that come up we want to build of equities deep debt would need and our brand for quality food.
Moving tumor along the channels, but there are some.
Debt.
Sort of at May resist family dining at a category they skipped.
Or are they just are experimental and when they go online to do at Ash and other outlets, they're looking for something new and interesting they have fatigue from being at home during COVID-19 and so there is going to be of high trial period, where people were exploring new brands. So we think we've got the balance just right here of promoting these two virtual brands of where it is.
Disclosed at their prepared by Denny's, but it's sort of of soft touch.
And it's not the headline but it's there for you if youre looking for and so we're using the Denny's brand building fund. These are sales that are generated through through of denny's and through social media and other.
Ways, we are promoting these brands mildly.
Meltdown is through door dash, only and so they're sort of assisting in that launch by being exclusive on the front side and then over time, we believe.
Even with our milk promotion going on in the core brand Denny's right now for some of these things can show up in our menu and build core equities to the brands both of the virtual brand and inside Denny's at the same time.
That's helpful and then on the 11% positive comp for the restaurants opened 24 seven in April do you feel like that kind of a result will be replicated by the rest of the system. When they opened 24, seven or something unique about those.
And how long do you think that you can kind of sustain that sort of level of sales. Thank you share well, obviously, it's little early to guide we're feeling our way through where we are at is very promising.
<unk> of that third.
Shows like it does.
The pace at which we can staff will be the challenge.
And so as staffing.
Challenges abate and the ability to cover those shifts more fully end.
The open expand those out as we expect them to become obviously, it's a capacity issue you've become a lot more positive. We're also pleased to see.
At this higher trial period with people used to be at home after five and ordering to go after five a day part of it has not doesn't have these equities and our positioning.
The trial going on in both of our virtual brands and then also in our late night day part is promising so part of that is the fact that they are open and available to serve to go food and part of it is.
At their staff and available to do that and the guest is giving a good experience. So both from a culinary expectation and availability of capacity expectation of it does look promising is too early to guide how the whole system will perform.
Okay I appreciate those thoughts thank you.
Thanks James.
Thank you we'll take our next question is from Nick <unk>.
With Wedbush Securities. Please go ahead.
Thank you good to see April trends almost in line of pre COVID-19 levels.
Obviously, we were going to Refranchising in 2019 and post Refranchising.
There was an expectation of the company owned margin should be closer to 18%.
With sales back to pre COVID-19 levels or substantially there how should we think about margin in a post COVID-19 world.
On margin specifically.
Yeah, Hey, Nick this is Robert debt to hear your voice.
So yes you.
You are correct that at <unk>.
The Refranchising process of 2019, we did talk about those 18% to 19% margin.
A handful of puts and takes right now.
With regard to that so the first.
End of the.
To the good side would be debt, we are experiencing mixed benefits.
Our dinner and dinner and late night plates being sold moving away from some of that value. We're seeing that at through come through mixed benefits of check is up but not through really through pricing, but more for that mix. So we'll need to understand how that evolves as we move through the pandemic, we don't have <unk>.
It'll clarity on that.
The other the other kind of puts and takes there right. We do have commodity inflation. Historically, we would tell you that that's between 1% and 3% we price through that pretty efficiently historically.
Again, not not too many surprises there although again not looking to guide on that point labor is one of those areas that will have both.
Given of taken at the.
With regard to that would be the benefit would be to leveraging these underutilized day parts with these virtual brands and driving traffic into the dinner and late night day parts of it Thats just a gain that leveraging of efficiency just putting more traffic through there. Conversely in the short term as we mentioned there will be that the cost of.
Re staffing these units getting them up to speed, John just talked about the need to staff or to get to $24 seven Mark talked about our June staffing at initiative, our staff up day.
So that'll be a near term hit and then you have the administration talking about minimum wage increases, which will provide a debt we will be dealing with on a longer term timeframe.
Packaging.
We are very pleased to see debt the off premise is holding.
Even as we've moved into April.
<unk>.
Looking at chart Slide 11 in the Investor day about 9% to $10000 still of off premise sales, which was very similar to what we were seeing throughout the pandemic. So thats holding at that comes with an increased cost of debt that will weigh on margins, although fab right margins, although penny profit has definitely benefited.
From those.
And that doesn't even account all of the various initiatives that we worked for over the course of the pandemic, our op services group with finding various ways to save money.
We save some meaningful amounts of on the waste line, which would be offset the commodity. So there's a lot of puts and takes right now that we're dealing with that we don't have perfect clarity chart that we've looked at.
<unk> gained clarity and be able to ultimately of re guide, but I think the best I can give you is to give you a sense of how we're thinking about the various components.
That's very helpful.
April.
Can you maybe talk.
At April trends progressed, I guess, what I'm trying to ask of the exit April in positive territory.
So I think we were talking about down two so at two points of the pre pandemic level of April pretty choppy naked Brad from wouldn't give you.
As much insight as you think because we're rolling over a two week between 2019 and 2021 at two week kind of offsetting in the way Easter spring break rolled out. So there is some choppiness in the way April kind of progressed. So I don't think Thats why we didnt give at anything it's probably not as helpful. As you.
Might think at this point.
Okay. Okay.
And then on G&A.
I guess for the year end I appreciated the Q2 commentary for the year, how should we think about G&A.
Yes.
We did speak to again as we said pretty much Q2 would look a lot like Q1, we.
We did capture if you go and look at the chart on slide 33 in the Investor deck, we talked about the permanent cost reductions that we captured from the Refranchising of approximately $7 million, we talked about on that chart $7 million of pandemic savings of which we in my script, we talked about half of that.
Being permanent.
So while we were really kind of comfortable giving that next quarter, but not really calling it out too far into the future.
Again, it will target we will speak to you about ramp ups there when things begin to move around and we start moving around the country again, not trying to be coy, but we really wanted to focus on the next quarter.
Okay. Thank you very much.
Thanks, Nick.
Thank you.
Next question from Todd Brooks from CL King <unk> Associates. Please go ahead.
Hey, good afternoon, everybody congratulations on the bounce back share repurchase.
Yes, Thanks Todd.
From.
And not putting a clock on you guys for when you get there if you look at franchise volume kind of in that.
One 6% to 107% range in fiscal 19 pre pandemic.
Could you guys looking to build back to as far as.
How much how much off premise are you hoping to retain if we take what.
Looks like the incremental of any of the.
Of the virtual brands.
Just kind of has come out of the pandemic looking like relative to what women without without burdening of specific here.
Yes, that's of great questions John.
I think from from a brand and its relationship of the consumer.
I'll speak at 30000 feet for just a second.
Our goal is to sort of be the at home away from home.
America's diner with for active productive day parts of and do different things for consumers, but in the same neighborhood same.
You got breakfast.
Weekend breakfast you have.
<unk> and weekend lunch dinner and weekend and then you have late night and all for do slightly different things.
We're trying to we're the last eight of nine years, we focused on sort of the foundational appeal of the environment being of service model right for breakfast and lunch, we invested and pancakes.
Fresh buttermilk end.
Put in the better Burger program of better shakes and a few things the expanded our AUM at line put in some value propositions to share some frequency on the weekends and so we built some positive momentum basically focused on one five day for us and so now our goal is to sort of transform the brand to build deep equity.
And credibility for all for day parts as of diner.
And I think.
To end unlock.
Traffic building potential in all four day parts of is the goal when and how fast we get there.
And just sort of a high hard to guide from where we stand right here of post pandemic at the end of Q1.
But I would like to be able to continue to provide more color on that very question.
We're not quite ready to answer your question, specifically, but my view is the upside potential compared to other marketplace evidences of smaller brands with less volume power and advertising capabilities.
Once we get our momentum toward these things much like we did over the last several years on breakfast and lunch.
I think we've been really unlocks from power in this brand.
Okay, Great. Thanks Channel and then the second question I have is around the.
The labor availability standpoint, I guess.
Understanding it was highlighted from not being able to reopen many more stores in the 'twenty four seven model.
I guess two questions one.
Is it of current pinch for operations at all of that requiring any kind of overtime or labor inefficiency.
Surface of Spike in demand that you've seen over the course of late March into April and secondly is the expectation that this is fairly transitory and when we get to September and the.
Exploration of the enhanced benefits that debt.
Youre expecting just fees.
The market really hopefully ease some of that.
You can really start to make a push against the $24 seven reopened. Thanks. Thanks, now I think I think thats exactly right at what you. Just described is exactly what's going on we have a broad array of circumstantial or situational.
Headwinds depending on the area of the store of the strength of the general manager at <unk>.
<unk> cooking and late night shifts to cover some of those I can't do enjoying at staff that can invest in a daytime cook enjoyed and convert them to a nighttime cook so let's limit those hours for now until really ready don't want of abuse of the guest some sort of let's try it in.
Guest complaints of a little bits of a pullback. So there are some overtime consequences or not it's sort of all over the map.
We do think.
Some have the view that it will mitigate earlier than September as people see back to school of not normally a strong hiring period for full service of people want to wake of lessening of grab one of those coker surge of other say wait till a few weeks after it expires before youll see people highly motivated it's hard to know.
Because we have a third of the system already there yes.
Yes, thats two thirds missing but end.
Because of their outperformed for the rest of the system of our franchisees are highly motivated moving that direction as soon as they are able. So we do think this will pass in due time.
And I don't know if you kind of P&L or modeling related question for Robert or no.
So if I answered it.
It's really just operational pinch now as people are scrambling to get through the restaurant level and then it was kind of a few end or when you thought it might mitigate it so that was that was great. Thanks.
Thank you remember one of my next question from Michael Tamas with Oppenheimer and company. Please go ahead.
Alright, Thanks, hope everybody's doing well when I look at at a minus cash hey.
Hey, guys when I look across the system.
At April and just kind of focus on the sales volume that you disclosed for on premise and compare that day.
For 2019 the.
The math roughly says that youre doing a little bit better than the capacity at 75% would've implied on premise just wondering.
Is that fairly accurate and then why do you think that is it seems to be a common theme, we're seeing across the restaurant.
Do you think youre able to sort of generate higher sales and what's your capacity on premise.
Separating the off premise from that thanks.
Yes, so I think that's in sort of the funding flow of of weak all day parts are not equal.
So.
Our Monday night, whether it's 25% of capacity of 100% capacity, we probably need of 13% of the total capacity to be even with 2019.
That was made up number but for illustration, so so but whereas on the other hand, when you were at only 75% on Saturday from Tinder do you still compromised and the number of people you can share so.
John.
Throughout the course of Q1, you have until late in the quarter, California is still not open.
It's a real tricky.
Set of math to figure out exactly.
At 5% capacity for the whole quarter is of funding number.
You have to you have to apply for where the day parts of the busiest you have to see the third party has really helped at the five in late night and you have to see how our footprint is sort of a.
Right towards states that will of had compared to most national chains, we are of a higher percentage of our total footprint in.
More restricted area. So it's.
I think that helps to answer it.
If you turn to the earnings release, I think sort of there is a table in there that really helps to kind of.
Explained some of how that end.
<unk>.
I'll, probably added confusion instead of clarity of dry.
No no no no problem at all.
And then just on the unit closures.
They were really low.
Great to see in the first quarter. Just wondering is there any update that you guys have terms of.
Where do you think that ultimately shakes out was that just sort of of timing in the first quarter or has the sales booths that we've seen recently healthy unit economics to the point, where maybe some of those closures that were on the table are no longer on the table.
Michael Hi, it's Mark I'll try to address your question here I think first of all just to repeat the number of new.
Diving in on as we have for closures in first quarter. We opened three stores. So the net loss was one unit.
We obviously like anybody else, we went back in history and take a look at that and that's actually the lowest closure number we had delays at the last eight years in Q1.
We actually closed 16 in Q1 of 2020, so that was last year and as you recall, we closed 73 stores in total during 2020.
At this point, obviously, we haven't given any guidance or outlook towards closures.
Part of that.
We believe although obviously is.
It was not a lot of data to prove it but certainly at a lot of that is the fact that the.
The number of closures with at Lash and 73 of that is a double of normal year for us.
First comment second comment is obviously, we're in round two of the PPP support and other type of government support programs, which have worked very well for our franchise system, we talked about.
Nearly 100% of our franchisees received round one of PPP.
Around two of Bvd is close to finishing but it's not entirely finished yet so clearly that's an encouraging part.
And perhaps of led to only for closures in Q1.
But I would tell you again, just as a matter of recall last year.
You'll remember that other 73 closures of about 67 of those were low volume.
And really much the same pattern.
For that we close which for all domestic closures for bills for Walt we're low volume total volume side as well so again likely give you clearer guidance Canada's point.
Perhaps sometime in the future quarters, but it gives you a little bit of commentary behind the closure number.
Yes.
I might also add real quick.
<unk> completed our our April meeting with our franchisees for the first time, we were together lives since February of last year.
And the positive outlook, among both of our vendor community and our franchisees.
It was claimed.
Positive and enthusiastic about our strategic initiatives in two of our direction of the brand. So I think I think there is a desire to sort of hold on to locations, but again, that's not guidance as much as it is sort of.
The sentiment of our of our system.
Thanks again.
Thanks, Michael.
Thank you we'll take our next question from Jake Bartlett with true Securities.
Great. Thanks for taking the question.
My first is on the off premise sales and just looking at the chart we referenced.
It's pretty impressive.
See you in March and April off premise sales.
Remaining high as the on premise.
Sales are increasing so much.
I'm just wondering whether there's anything particular, you did to support the off premise sales that were emerging.
Restrictions or ending anything like special offers or or not and then now maybe in answering that question.
Whereas if you of any idea of any expectation of of where off premise sales could really settle out.
Hey, Yes. This is Robert so yeah. It is an impressive chart. We are very pleased with that chart actually Jake So with regard to was there any promotional activity.
I was looking over at curve, we believe that there was a two week stint in there where we had of free delivery program going on in there, but nothing at completely.
Completely out of the norm for the way that we've run that segment of our business over the last year. So nothing that would be propping that up at a significantly as online or on premise transactions came back so again thats still a very encouraging.
All of their sales.
So the other part of your question I'm, sorry was it was with where we're at that will eventually cap at that stay at the.
$1 million question right is because we are not back to a complement of 100% of our units open completely so what I can tell you a little of some interesting information that we've captured.
Here over the last little bit of it is the way some of the segments have moved so our boomers.
Interestingly, we thought that that may have been in area.
Of that of concern, but on a percentage basis of our transactions they actually held up quite well.
Over the pandemic timeframe at this is information from some consumer insight the information that we received that they held on.
And largely.
Some of the insight that we captured was as they were less impacted by things such as furloughs and requiring a job. So in large part they've come through we believe that they will move back in a more aggressively to on prem dining as they become more and more vaccinated. So there is an upside there.
Firstly the area that.
Debt, we thought may be less susceptible to the pandemic itself actually in our insight consumer insight.
The millennial group actually trails they were at.
As compared to the boomers, they actually were impacted.
By job of reductions furloughs, and losing jobs. So they were.
As a percentage of our makeup day actually trails slightly they are now coming back.
They are utilizing that the off Prem.
On a per day again, if you think about how we've talked about off Prem historically.
On Prem dining with predominant to boomers are the when you look at that charging at from kind of left of REIT younger older an on prem skewed over off premise skewed younger it's moving back towards that.
But again I thought that was pretty interesting information all of that to say is we're still working through that rates again not.
Not trying to be coy here, either we just don't know where that's going to land we are very optimistic.
Again, if you think about the virtual brands, particularly the Burger Dan that I gave details on of 100 units with $900 a week at per unit and sales. We are very encouraged by that we are very encouraged by what we're seeing on the chart here on slide 11, but again, just don't know where to guide that where that will ultimately.
Fallout just wanted to.
Some optimism here.
No I appreciate it would have been impressive if you actually knew the answer to that question.
But.
My next question is about I mean, there's some particular forces at work here, namely of between 47 operations that are limiting.
We are limiting sales versus what we're hearing from from a number of other casual dining concepts.
I'm wondering also whether the exposure of the breakfast whether that is still.
And meaningful meaningful drag versus kind of the concepts that don't rely on breakfast.
Can you frame, how how breakfast sales at.
<unk> been trending as we started to open up here.
So this is John again right.
Right now.
Again it varies by of.
Operating hours so as we've improved sales breakfast was good because we are open.
<unk>.
And that day part has actually performed pretty well for us year to date, it's our best performing weekend breakfast, our best performing day part of raw and that's where we have the deepest equities and then of course.
With virtual brands didn't relate nice doesn't really well. So so it's a great question, but so far what I'd say is the more people want to do breakfast and all of the complication of of managing an all day menu at breakfast go ahead and give it a go and go loud on air and advertise it and Youll help us out quite a bit.
Selling some of our breakfast where at.
Happy to see these initiatives unfold great great.
Great.
Last question on the labor piece and I understand there is no. There is pressures now and youre anxious to get people hired John.
Is that a hell of a long tail effect, meaning if you have.
Maybe one question of how youre, attracting those people with purely higher wages I guess, you can't lower the wages when when the market eases, but how do you do you think this is willie.
Longer term impacts on the bid near term pressure that we're seeing now.
Jake This is Robert again, I would say that we will work through this I don't think that in large part it has been salary or wages at that has been the fee.
Issue of getting staffed at this point in time, we just can't even really find the the individuals' to interview currently so.
Mark spoke to we will have a hiring day in June we have deployed additional recruiters and consultants to help the franchisees staff.
So I'm not sure that its the wage issue at hand at the near term will be the staffing up the training and all of that will work for that.
Candidly in the current periods.
Across both the company and franchise, we're running less labor than what we would like some of the labor lines actually probably leveraging more of them than what we would even care for but longer term I think it's the question really is beyond what the pandemic will bring but at the general approach too.
How wages and minimum wages will evolve.
And we do believe at in a moderate increase in minimum minimum wage and at tempered way.
So we'll look at that and we'll continue to focus upon that and work through that.
To understand how that will impact us, but I think that's the bigger influence things and what the longer term pandemic will throw at us.
Got it makes sense I appreciate it.
Thanks, Nick.
Thank you and your next from John <unk> with Wells Fargo.
Great. Thanks.
Yes, I'll jump around maybe at the cost side of the equation.
Model for sticking in there if I may it looks like some of the franchise of occupancy costs have kind of leveled out here below where you've been trending at least through 2009 late 2019 at an early 2020 and even some of other direct costs, which might be of maybe it was tied to.
Our debt expense, but I'm curious if you could help us think about.
Particularly the occupancy side, where that could settle out over time.
That's my first question.
Hey, John This is Robert when you think about our portfolio.
Of real estate debt that we own and then we sub leased to franchisees. We have about 82 units that we own I believe of about 68 of those sit under the franchise units and then we have another 220 or so debt, but that we are on the master lease and sublease.
To our franchisees, what's happening there and it's at very pretty consistent pattern, we roll off of about 20 of those leases every year of 20 to 25 of those leases so youll lose the corresponding revenue.
And the corresponding occupancy expense on the franchise P&L. So those kind of work in concert at all.
Over 2020.
What you are working with for various deferrals that debt, we had put in place of that'll make that year look pretty choppy at the franchise margin itself year over year is a function of the deferrals that we made of the corresponding assumptions that we've made around bad debt.
In regard to those I think there is of $1 million of half dollar amount of royalty that we put on over the course of 2020 related to those deferrals.
And as we have moved in Q2 2021 end those deferrals have begun to be repaid we can roll off some of that bad debt expense debt that we had put up so I think there is of $250000.
Margin improvement for the bad debt expense that we had rolled off in the current quarter.
For debt, we had booked in the prior year, so a lot of moving pieces in there but.
Isolated to the occupancy expense nothing.
Overly dramatic other than the general Peel off of about 10% of those master leases.
Some leases that we are on the master.
Okay, Yes, Im just trying to figure out in terms of thinking about that franchise profit line going forward of the margin percentage I guess I mean, it does seem like an ability to get back to 2019 levels is not out of other question at all anytime soon I think I was at 48 8 million 19 for not mistaken.
Yes.
We're just talking about at in the room to add another complicating factor.
Is the way that marketing is flowing through there.
Because of the way of Rev. Rec came in.
And on a lower base of advertising dollars that were collected last year and into this year. It makes the margin percent look higher so.
If you move back to a more permanent full of level of collections of royalties and advertising that that may put some pressure on that.
The advertising is dollar cost neutral, but it makes that rates look pretty funky at prior to Rev Rec or of our EBITDA franchise margins were 80%.
So again that movement within that advertising line can make that look.
Pretty odd that from time to.
Okay and then just.
Thinking about the debt.
The cost side of the equation of the virtual brand obviously.
Knowing exactly where sales will settle out.
It is challenging it sounds like you're having some great success early on which is great but in terms of thinking about.
Particularly late night.
What sort of incremental costs might need to come in at.
Those sales growth, maybe you need another couple of kitchen, and perhaps supplies, but yes.
Is that 20% to 30% or so incremental margin that youre seeing on the.
Transactions of all the fees today.
Ability, especially for that move higher over time or there is some governors in place, but ill keep that kind of in check.
Yes, there is no governor of per Se just of traditional fixed variable model. So.
Labor will come to get more labor for all of the transactions is fundamentally have restaurant scheduling works.
Being no exception, so the more transactions for gift check for a minute the more labor and we'd be allocated so the more transactions of that come in during a soft day part of the more leverage you get in that margin.
Could improve and then at stair steps when you finally sort of reached the threshold at another cut at Cook at May step down for a moment of it is still incremental pennies in all cases, the fact that it's highly incremental we like the idea of having a couple of virtual brands around so long as our complimentary to the station and the complexity of what it sort of has to learn.
And manage so they're not really operating multiple brands within the brand of the kinds of things that we sell on sort.
In our wheelhouse, so to speak so in that sense of their incremental no matter. What I understand you are trying to get some precision around of model.
What's the fixed variable model here on virtual brands.
And so that's the comp with any of these are new and therefore complicated, but I think over time they'll proved not to be at and treat them in the near term I think like any to go transaction, whether they're at the end user of virtual transaction there.
They're to go they're not as profitable as dine in but they are profitable and beneficial and incremental.
I don't know Robert you want to add anything because of margin. So yes, John John with regard to that John I would suggest.
Called it out previously that the denny's on demand transactions things from the base brand Brian High teens.
Mid Twenty's with regard to margin we called out.
At the mid Twenty's to low thirties with regard to the virtual brand in there.
We did take into account. The fact that we are leveraging day parts, where labor has not been the most efficiently deployed for US we have to have cooked on the line regardless of the number of people that come into the units of that that is the differential.
In large part we have accounted for that underutilized.
Capturing the efficiency of that underutilized in that 20 to low 30% range.
Got it no I appreciate that color and then lastly, just kind of following up for some of the conversation earlier I think of you talked a little bit about.
The closure piece of it but I'm curious more of.
At the opening side Mark I think in the prepared remarks of talked about the idea of yes. There are some.
Some units coming out there of some some stores, perhaps on the conversion side that might be out there at Tempe have you started having conversations with franchisees.
About an appetite picking up for re accelerating unit growth or is it still too early in the recovery phase for those discussion will be taking price.
I'm going to answer the question of two pieces of this maybe John will jump in here as well at having just come off the conference of reference with the franchise and so John and his early still.
But at the same time.
As I mentioned at all of the.
Assistance has come obviously of the two rounds of Pvp.
And the fact that obviously, we've seen this sales turnaround that we discussed both in the amount of margin, but also a for specifically you can imagine out there of the energy is really building in our franchise system.
We've said before.
We're really over the last decade as far as new unit openings were really pretty much of conversion machine of the brand.
And I think we've talked about the fact of nearly 60% of our new unit openings over the last decade of really been conversions of an existing building. So we know there's a lot of real estate out there. There's a lot of opportunity interest rates are still low.
Theres a lot of flexibility and landlords.
So we've got.
Brand and our franchise system.
<unk>.
Is building in a dynamic way as we go through this recovery so.
Not a specific answer to your question, but just more of a tone I think of what we're seeing John Yes, I agree that the only thing I'd add as you remember in Mark's script that we talked about he said over 75% of these development of amendments came from Refranchising effort I believe at at 70 878 precisely.
And so those will unfold in time and to your question about timing. It is a little early for us to go lean hard and say hey, let's step up for these commitments. So there was some grace around Remodels and restarting the development program that they will they will come in time the unit economics are solid and because of the conversion.
<unk>, we believe that.
Those will favor our development numbers that it's too early to predict when that kicks in.
Got it I appreciate the kind of in <unk>.
My questions. Thanks.
Thanks, John.
Okay.
Thank you for your next question from Erika <unk> with Keybanc capital markets.
Hey, Thanks for the question.
Everyone I'm curious about your marketing plans.
First of all of your marketing plans. This year if demand exceeds supply right now in staffing may not be in position to keep pace with sales.
All of you altering your spending on marketing and advertising can you state of the funds for time that it makes sense just curious of how much flexibility at Cimarron surplus of med <unk>.
Yes, as you can imagine getting through 2020, we tested the limits with.
Advertising buyers, both digital and broadcast on how far depress commitments into independent of that into weight stop delay for Keith.
Weeks instead of those so we've done quite a bit of that.
I think generally you on advertising and fish one of the issue of biting.
We've had we are staffed at breakfast generally and we're having stronger breakfast response and recovery. That's one of the deeper expertise of our brand of ours. So we're not afraid to push out some of our breakfast initiatives right now during the first quarter. We had a couple of weeks with free delivery of a couple of weeks with pre pancakes.
So some of those sort of.
We're supporting to go which made sense of third party delivery. During Q1, while people are still not getting out and Theyre. One of his main restrictions lifted just quite yet so I think we're trying to time things.
With the expectations of how the year unfolds as we get into the holidays is usually holiday specific promotions.
And holiday Entre specials in Turkey, dinners, and the like and we expect that we will be staffed by the end, but if not then we'll we'll balance of the media plan Accordingly.
That's helpful and just another one of labor.
I'm wondering how the current labor conditions change the economic model of at least nine business, presumably at the EMEA at the pace of overtime or perhaps at some other incentives for staff that day parts I was wondering how the addition of.
We look to build back.
Late night day part.
The rest of your store base wondering how that could impact those store level margin from <unk>.
Yeah.
You've described it accurately at is a it is a process.
Of adding back personnel for that day part.
At the with the view that when you open youll have the transactions to support that labor, but first of those folks have to come on that is incremental to another day for our get trained and then moves on the roster. So it's a step function change.
At 24 hour operations save for a handful of locations.
In our system for 60 plus years. So it is at is a staffing rigor and scheduling challenge that is familiar to our brand and so it would not be done by stretching people too far of excess over John It would be done by filling the roster with regularly filled positions during those day parts.
Near term because of staffing challenges clearly there are some overtime challenges.
For the entire industry not just denny's.
Got it and maybe just the last question for me on capital allocation.
Net sales are seemingly at a full recovery versus or hosted for recovery versus 2019 at imagine at the EBITDA recovery will follow over the next year or so so with that.
Could you discuss any of your current thinking of capital allocation in the past in other plants take leverage above three times.
Wondering if the pandemic of need you more cautious with perhaps more confident having stress test of the model that you might consider moving above that at three times level of Lumpiness permissible to do so later this year.
Hey, Eric This is Robert Yeah, excellent question and I appreciate the opportunity to talk on that.
With regard to our near term philosophy with the pandemic really did cement for us at least in the near term debt.
We really benefited from the lower leverage profile that we had in place.
So we had talked prior who of coming through the Refranchising strategy of 2019, we talked about taking leverage up we talked about of three to four times range I talked today about really being comfortable in the two to three times range.
And the reality is as you point back at sales come back EBITDA will come back while our hands because of the debt Amendment that we signed we signed one in May and then followed up in December just to give us ultimate flexibility our hands are tied from returning value capital to shareholders until we report our Q3.
Earnings so that'll put us into Q4, so the EBITDA that we're generating the cash that we're generating off of that.
We will deploy against our credit facility, that's where it can go our hands are tied with returning value to shareholders capital to shareholders.
For a degree they're tied with Capex. So as I noted, we paid down at the additional $15 million on our revolver of post.
The balance sheet date, so we sit at about $200 million with regard to our credit facility currently at.
<unk>.
With what you said, yes of sales return.
At EBITDA will continue to grow we will use that cash to pay down our revolver of short term, we will reassess beyond that but we do really value returning capital to shareholders on slide 39 funds and we're very proud of in our investor deck, We talk about the $554 million that we returned to.
Shareholders beginning in 2010 that represented a 44% net reduction in our outstanding shares and that price.
Was just over $10 in doing so so we are very proud of that chart and look to add to that chart at.
Once we have that flexibility to do so.
Beginning in Q4.
Sort of helpful. Thank you for the question.
Thank you.
Thank you and we'll take our final question from Brent <unk> with <unk> partners.
Great. Thanks for taking the question.
Good job on the numbers.
Again, thank you.
Two different questions. One is if you could just give a little bit more granular.
Hey, John numbers on the virtual brands at 24, seven and just you gave us some good insights into the average number is but what are you seeing from those that have been established.
Earliest in terms of 'twenty for seven or in terms of the virtual brand and then the second question is.
With respect of Remodels and heritage.
You've given yourself, a little bit of a pause in neo and the.
Of the ability to open them.
This change any thoughts on what you might need or might want to do.
Given the success, you're seeing with on demand and virtual.
Yes.
Let's start with the portfolio Robert and then if you don't from India.
You can answer that at 24 seven share virtual.
So on the Remodels, we did we did give a pause we felt like that it was important for our franchisees to regain their footing and.
Over the long term those relationships and sensitivities too.
Their challenges, we think is critically important and while PTT played a tremendous role in assuring.
Confidence.
They'd come through it you don't know as you are coming through at how long from the labs and obviously there is a lot more light at the end of a ton on the silver lining from the from the PPP program.
But so we're just now in the range of those discussions about where things go from here.
We do have again in the regular development brand Advisory Council meetings, where a certain group of franchisees of dedicated to the representing our entire franchise body on all things related to development. So they focus on prototype imagery focus on heritage remodel scheme as they focus on cost optimization of that.
And they focus on what parts of sort of matter to the gas some of the consumer insight data from them.
So while we have taken this pause.
Sort of enrich the amount of data that we were able to share with at body.
How powerful the heritage remodel and then the next round of remodel programs can be and they continue to return.
Mid single digit lifts over of modest investment so our franchisees are committed.
There is no objection they liked the program and they like the process in which we engage them in.
Creating remodel scopes, it's really just a matter of timing to get back on track end.
Again, we haven't guided yet.
And then Robert if you want to talk about providing a little more precision of around 24 seven.
The balance of the question Yeah. So hey, Brett This is Robert with regard to the virtual brands in the end 24, seven give you some additional specificity with regard to the virtual brands.
You can see on slides 26, and 27, we put the bullet.
End of map charts at within there that show where the brands are rolled out.
The reality is at and it's really exciting with regard to the burgard end specifically.
90% of the 24 seven units of 565 units that I talked about have actually deployed the Burger Dan So 90% of that 565 of deployed the Burger debt. It again at the Ada helps to talk about the lead into that of 11% pause.
At a number that we had seen.
In the month of April coming from that because again the need to add strength into those dinner and late night day parts of the areas warehouse and staff.
It helps them staff helps the sales within there so.
It's really exciting with regard to that we did and again just to just to be to reiterate the point, we have deployed 1100 of those units.
Of the Bourbon and units.
The sales the average weekly sales amongst those units as you can see on slide 11 here, our $900 per unit per week.
The simple math would suggest almost $1 million of we coming from the Burger Dan.
<unk> itself, we will provide additional clarity with regard to the meltdown. We are equally excited about that brand, but we just rolled out the first 175 of those or so and getting ready to launch at the next 175 very soon so as you can see as we promised previous on previous call.
Or is that at once the data maturing debt, we will provide insight we did that with the believe again that will be the same as we work through the meltdown.
Inc.
Thank you and with debt that does conclude our question and answer session I'd like to turn the conference back over to Mr. Nicols for any additional or closing remarks.
Thank you Cody I'd like to thank everyone again for joining us on today's call and we look forward to speaking with you one of our next earnings conference call in early August.
We will discuss our second quarter of 2000 total results.
Thank you all and have a great evening.
Thank you and that does conclude today's conference. We do thank you all for your participation you may now disconnect.
The.
Okay.
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