Q2 2021 Denny's Corp Earnings Call
Yeah.
[music].
Good day and welcome to the Denny's Corporation Q2, 2021 earnings call.
Today's conference is being recorded at this time I would like to turn the conference on would you Curt Nichols Vice President of Investor Relations. Please go ahead.
Thank you and good afternoon, everyone. We appreciate you joining us for Denny's second quarter 2021 earnings Conference call.
The demand for management are John Miller, Denny's, Chief Executive Officer, Mark Wolfinger, Denny's, President and Robert for Austin, Denny's Executive Vice President and Chief Financial Officer.
Please refer to on our website at Investor Day, Denny's Dot com.
Our second quarter earnings press release, along with a reconciliation of any non-GAAP financial measures mentioned on the call today.
This call is being webcast and an archived webcast will be available on our last call.
John will begin today's call with a business update Martin will provide some comments around restaurants capacities, our franchisees and development.
Robert will provide a recap of our second quarter financial results and current trends.
After that we will open it up for questions.
Before we begin let me remind you that in a quantity for the safe Harbor provision of the private Securities Litigation Reform Act of 1095.
Company knows that certain matters to be discussed on our members of management. During this call may constitute forward looking statements.
<unk> 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.
Such risks and factors are set forth in the company is for most recent annual report on form 10-K for the year ended December 32020, and in any subsequent forms 8-K and quarterly reports on form 10-Q.
That I will now turn the call over to John Miller, Denny's Chief Executive Officer.
Thank you Curt and good afternoon, everyone I do hope that each of you have remained safe and healthy since we last shared an update on denny's and we are very encouraged by our second quarter domestic system wide same store sales results, which achieved approximately 99% of 2019 levels. Despite savvy challenges that have hindered our ability to return to 24.7 operate.
<unk> across our system. This performance included same store sales of $1, 9% above 2019 levels for our company restaurants for the second quarter as tourism and travel are gaining momentum on an even more encouraged by the stickiness of our denny's baseband off premise business, which has grown from its pre pandemic trend of 12% to over <unk>.
80% during the second quarter. Additionally, we are seeing an incremental 3% of average weekly sales through our 2 new virtual brand at the Burger It in and the meltdown. We were very pleased the positive sales momentum continued in July with preliminary domestic system wide same store sales 2.7% above 2019 levels, including <unk>.
2.4% at domestic franchise locations and 6% at company locations. Furthermore, approximately half of the domestic system generated positive sales in the month of July in each of our top 4 states were positive as well. These results are a testament to the hard work and dedication of our teams safely welcoming guests back into our dining room.
While remaining focused on growing our off premise business. Our teams have accomplished this while enduring industry wide staffing challenges that have impacted our ability to execute on our highest potential, especially during our late night day part. However, we are excited and encouraged by our recent Americas dining hiring tour we deployed.
Our mobile relief diner that typically supports people during hardships such as natural disasters to bring awareness to our hiring efforts. This week on tour with our new career website that includes open positions for all company and franchise restaurants in 1 centralized location supported our efforts to recruit applicants for over 20000 open.
Physicians in our restaurants, we remain focused on our 4 key guest centric themes. These are reassurance value comfort and convenience and I will now touch briefly on each of these as guests return to our restaurants. It is more important than ever that we ensure the health and safety of our teams and guests. So we are committed to reassuring our guests that denny's provides a safe.
Dining experience by consistently executing our enhanced cleanliness and sanitation procedures at all consumer touch points, a point of great importance in light of recent searches and Covid cases across the country on our second area of focus is value. We understand the value comes in different forms and has a different meaning for each type of guests we consider our value for.
It should be a comprehensive balance between price abundance convenience and bundled value on our third focus is comfort we strive to ensure that denny's is a place where our guests feel welcomed and valued where the dining with a large family or is it part of 1 we believe our guests view the denny's experience as a time to build connections and the environment.
That is both inviting and comfortable with consistent and reliable service. Our final wary of consumer focuses convenience. We believe guests will continue to.
<unk> technology to bring enhanced value.
To their dining experience, whether in our restaurants or through off premise options like our well established denny's on demand platform.
Of our.
And that of our 2 new virtual brands, our first virtual brand. The Burger debt is live in over 100 locations and allows us to focus on 1 of our strength great burgers with new varieties using ingredients that are already in the pantry and our second virtual brand called the meltdown has a door dash exclusive brand that features hand crafted sandwich melts with fresh ingredients.
And unique flavor combinations, while this brand can utilize approximately 70% of the items currently in our pantry, our innovative culinary teams had crafted new craveable products with the addition of some new premium ingredients. We started the rollout of the meltdown on April 2 approximately half of our domestic system and expect to be.
Abstention to complete during the third quarter and Robert will give more specifics on the performance of these brands. However, we believe these transactions are highly incremental and leverage underutilized labor to maximize kitchen efficiency. Furthermore, these brands provide opportunities not only at dinner and late night to leverage underutilized labor and kitchen space, but we're also seeing in <unk>.
<unk> number of transactions during the week versus the weekend and closing it's amazing how far we've come since the beginning of the pandemic. Many things have changed in the restaurant industry, but 1 thing remains the same we're still the place where people come in and sit down and connect with 1 another over great food and despite near term labor challenges that will subside in due course or sales of <unk>.
Now surpassed pre pandemic levels, we've launched 2 new virtual brands driving incremental traffic during underutilized day parts and we still believe that our market share opportunities on the horizon. We have an extraordinary group of dedicated franchisees and an exceptional denny's team, which makes me very optimistic about the future of this brand with that I'd like to turn the call over now to Mark <unk>.
Wolfinger, Denny's president to discuss more about our franchisees and developed.
Thank you John our outstanding team and franchise system are driving a lot of exciting momentum for this iconic brand.
I'm very pleased to say at the beginning of May all of our operating domestic restaurants had open dining rooms, and we currently have on effective capacity of approximately 99%.
We are eager to return to our historical position as America's 24 hour diner, and I'm seeing a 5% increase in the effective operating hours since the beginning of the year to our current level of 19 hours per day.
We have worked with our franchise system franchisee by franchisee unit by unit to map out a plan to increase our effective operating hours per day, assuming staffing challenges subside F&B enhanced federal unemployment benefits and then September.
Turning to development franchisees opened 3 restaurants during the quarter, including 1 international location in Canada.
Additionally, franchisees closed 7 restaurants during the quarter, yielding a net decline of 4 restaurants during the quarter and 5 net closures year to date.
This does represent the lowest year to date closures, we've had we've seen in over a decade.
And now I'd like to take a few moments to update you on the health of our franchise system.
With off premise sales remained strong even as our dining rooms have reopened we are very pleased to see franchisee profitability in July continued to improve as nearly 90% of our franchise restaurants exceeded the 70% of 2019 sales threshold required to cover both fixed and variable costs.
Additionally, franchisees, representing approximately 98% of the domestic franchise restaurants have applied for the second round of PPP and approximately 90% of those restaurants have received funding to date.
Improving sales additional federal stimulus available on our franchisees and the net decline of only 5 restaurants through June gives us confidence in our franchise system 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 unfold and returning to net restaurant growth in the future backed by our existing domestic and international development commitments, including approximately 75 remaining commitments from our recently completed our Refranchising strategy.
Additionally, we believe it will be market share opportunities as the industry recovers however, with multiple rounds of federal stimulus that have assisted our franchisees and remaining open. We believe these programs have also allow other competitors to remain open.
Therefore, the opportunities may not be as robust as once thought at the beginning of the pandemic.
Nevertheless, our development team is focused on has a proven record of converting existing spaces, both inside and outside the restaurant industry into successful denny's locations.
In fact in the last 10 years, approximately 60% of our openings have been conversions.
These less capital intensive opportunities provide enhanced rois for franchisees and our experienced development team is already assessing the landscape for future Denny's locations.
I will now turn the call over to Robert <unk>, Denny's, Chief Financial Officer to discuss the quarterly performance Robert.
Thank you Mark and good afternoon, everyone.
I would now like to share a brief review of our second quarter results and current trends as well as our expectations for the third quarter.
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 second quarter declined 1.2% compared to 2019.
Sales results benefited primarily from reduced dine in restrictions related to the COVID-19 pandemic.
While closed dining rooms, and capacity restrictions are no longer the leading factors weighing on our business industry wide staffing challenges remain.
As John mentioned, the availability of Labor continues to challenge our full return to 24 hour operations with approximately 40% of our domestic restaurants currently open 24.7.
Domestic restaurants, which were opened 24 hours in the second quarter delivered a same store sales increase of approximately 12% versus 2019 compared to a decrease of approximately 10% at domestic restaurants operating with limited hours.
We believe this performance differential presents an ongoing opportunity as a growing portion of our system extends its operating hours.
With that being said we are encouraged that preliminary domestic system same system wide same store sales results for July increased 2.7% with approximately 60% of our domestic restaurants still operating with limited hours.
Now I want to spend a few moments providing more detail on our virtual brands.
As John mentioned, we believe these transactions are highly incremental and leverage underutilized labor to maximize kitchen efficiency.
In fact, approximately 70% of transactions from the Burger them and approximately 60% of the transactions from the meltdown occurred during the dinner and late night day parts compared to approximately 35% of transactions for the Denny's based brand.
Not only are we leveraging underutilized day parts, but both virtual brands over index during the week days compared to the Denny's based brand, providing additional opportunities to leverage underutilized labor.
Approximately 75% of transactions from our virtual branch occurred during the weekdays compared to approximately 65% for the Denny's based brand.
The Burger debt is live at over 100 locations with an average check similar to a denny's off premise transaction.
As dining rooms have reopened and initial priority given to new brands on third party platforms has moderated. These locations are generating average weekly sales per restaurants of approximately $600.
Nearly 700 locations are live with the meltdown and are generating approximately $200 in average weekly sales per restaurant with an average check similar to denny's off premise transaction.
This action is being highly incremental and over indexing at dinner and late night compared to Denny's base brand off premise sales.
Margins range from the mid <unk> to the low 30% after considering product cost delivery fees and labor efficiencies.
Turning to our second quarter results franchise and license revenue increased 134, 1% to $58.6 million.
Primarily due to improving sales from reduced dine in restrictions.
Franchise operating margin was $29.9 million or 51.0% of franchise and license revenue compared to $9.8 million or <unk> 39, 1% in the prior year quarter.
This margin increase was primarily due to the improvement in sales performance at franchise restaurants, partially offset by fewer equivalent units.
Company restaurant sales of $47.6 million were up 214, 5%, primarily due to the improvement in sales from reduced dine in restrictions.
Company restaurant operating margin was $9.8 million or 25% compared to a loss of $4.5 million or negative <unk> 29, 6% in the prior year quarter.
This margin increase was primarily due to improving sales performance at company restaurants. In addition to lower payroll and benefit costs due to staffing challenges.
Additionally, we recorded approximately $600000 in favorable reserve adjustments and tax credits related to the cares Act, which benefited the company restaurant operating margin by approximately 1.3 percentage points.
Total general and administrative expenses were $17.5 million compared to $13.2 million in the prior year quarter.
This change was primarily due to increases in both performance based incentive compensation and share based compensation expense. In addition to temporary cost reductions during the prior year quarter as well as approximately $500000 in tax credits related to the cares Act.
These increases were partially offset by market valuation changes in our deferred compensation plan liabilities.
As a reminder share based compensation expense and market valuation changes are non cash items and do not impact adjusted EBITDA.
These results collectively contribute to adjusted EBITDA of $25.3 million.
The benefit from income taxes was $1.2 million with an ultimate effective income tax rate of 59, 3%.
Adjusted net income per share was <unk> 18.
Compared to adjusted net loss per share of <unk> 25 in the prior year quarter.
During the second quarter, we generated adjusted free cash flow was $17.8 million after cash capital expenditures, which included maintenance capital of $1.5 million compared to $1.7 million in the prior year quarter.
We ended the quarter with approximately $195 million of total debt outstanding.
Including $180 million borrowed under our credit facility.
After considering cash on hand, the remaining capacity under our credit facility and current liquidity covenants, we had approximately $120 million of total available liquidity at the end on the second quarter.
And we have continued to make progress progress.
Subsequent to the ended the second quarter, we paid down an additional $5 million on our revolving credit facility, bringing our current outstanding balance to $175 million.
The pandemic affirmed for us the value of our conservative leverage philosophy.
As such we are currently more comfortable with the range of between 2 times and 3 times adjusted EBITDA, whereas prior to the pandemic, we would have targeted longer term leverage somewhere between 3 times and for times.
Our quarter end total debt to adjusted EBITDA leverage ratio was 2.1 times.
This ratio was calculated using annualized adjusted EBITDA as defined in our prior year debt Amendment.
Our traditional LTM total debt to adjusted EBITDA ratio is 3.7 times, which is actually in compliance with our unamended credit facility, we had in place prior to the pandemic.
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 in addition.
Additional step down to $350 million took place on the first day of the FERC third quarter of 2021.
Financial maintenance covenants were 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 $6 million through the second quarter, leaving an additional $6 million available.
Additionally, we are prohibited from paying dividends, making stock repurchases and other general investments until we deliver our third quarter results.
However, we look forward to emerging from these constraints and continuing our long standing practice of returning capital to shareholders. While also investing in the day.
Turning to our business outlook for fall.
Knowing expectations for our fiscal third quarter, ending September 29, 2021 reflect management's expectations that the current economic environment will not materially change.
We anticipate anticipate domestic system wide same store sales will be between 2% and 4% compared to the equivalent period in 2019.
We are encouraged by the lower number of net unit closings year to date, however, due to labor availability challenges that are impacting the pace of openings as well as the requirement for franchisees to remain open for a certain period of time to recognize the full benefit of PPP forgiveness. We believe it is a touch early to prepare.
<unk> guidance on net unit expectations at this time.
Additionally, while our franchise margin is relatively stable due to the efficiency of our highly franchise model and the exact timing and pace of re staffing and training new team members at company restaurants yields of less precise view into near term company margin changes.
However, pre pandemic, we guided to 18% to 19% company margins and we believe that target is still appropriate in a more stable environment.
Our expectations for total general and administrative expenses are between 17 and $18 million, including approximately $3.5 million related to share based compensation, which does not impact adjusted EBITDA.
Based on the guidance I. Just described we are expecting adjusted EBITDA of between 22 and $24 million.
In closing as we work to overcome staffing challenges and move from our COVID-19 effective operating hours to our historic 24, 7 operations, we remain optimistic about our ongoing sales trends.
Finally, and most importantly, I want to mention how proud I am of our franchisees and the entire Denny's team who have remained focused on serving our guests while continuously managing the business needs through this post pandemic recovery.
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.
Thank you if you would like to ask a question on today's call and thank you for by pressing star 1 on your telephone keypad. Please make sure distribute function is turned off to about 6 months for each of our equipment on again that it's terrible on to ask a question.
We will now accounts for a moment stood on every 1 of our communities taking questions.
Okay. So we will now take our first question for <unk>.
<unk> Securities.
Please go ahead.
Thank you on congrats on some incredible numbers.
I guess restock for.
Just given given the comparability versus 2019, a little difficult.
The Refranchising that took place in 2019 would you mind, just telling us what they are.
Chris on comp.
On July on the company on mine translates to in terms of average weekly sales.
Hey, Dave Hey, Nick we're happy to get to that.
If you look at the volume, it's probably in the range of.
For $8.18000 on the year or sorry, 180 on the year, but let that let us work on that and we'll get back to you on that we don't want to give you the wrong number on that.
Okay sure.
And then in terms of the 18 and 19% unit level margin commentary is that applicable to the second half of this year are we talking like longer term 2022.
I think it's fair.
To say, it's probably a little longer term if you look into the back half of the year, we still have some volatility.
With regard to that if you look we're really looking to get staffed up frankly and that will come both with additional labor expense as training comes back online, but as we staff up we'll also have the benefits of more of these.
Units coming online 24, 7 so there is some some volatility that debt will likely occur in the back half margins, but again.
Once we get into a little bit more stable environment, I think those 18% to 19% should hold pretty pretty well.
And just last question just to follow up on on that on the labor line.
I guess, maybe just give us some context in terms of.
How fast you are on the company on side relative to where you need to be.
And then just inflation expectations for the second half in terms of food costs versus let's say Q2.
So Nick it's John on the staffing side just to follow up on that on that tour. We did get about 13000 applications from debt hiring tour.
We're seeking to hire about 20000 people and so well you won't hire everybody out of all of those applicants. It was it was a very promising tour.
We were able to sort of put a single website out their careers that data is dot com that really helped our franchisee so spirit for lifting up the.
For staffing challenges that we can close the GAAP on that.
Not materially change so far in terms of the number of 24 hour locations, but we are on our way we expect it as we worked throughout August if that continues to improve and in September we expect in October we expect to fully close the gap.
As far as.
So the other parts of your question Robert just those down.
John So AE, we're talking in the room here, where it Nick we're working on that AAV that 6% what that looks like so hopefully prior to this call being over we'll get it to you here shortly.
Then with regard to the commodities.
On the back half of the year. So what we had seen with regard to commodities.
<unk> is typically where.
On that 1% to 3% range, Nick I will tell you that we were slightly above that range in Q2, and frankly, we expect to be in that that kind of above that range for the balance back half of the year, but the reality is is we're not overly concerned with that overall.
We think it's temporary frankly, and we do believe that we'll have another pricing opportunity as we head into Q4, So that's <unk>.
Not our biggest area of concern right now.
Great. Thank you very much.
Thank you now take our next question for Mike on Tomo Oppenheimer <unk> Company. Please go ahead.
Okay. Thanks, so for everyone's doing well.
And to the business back above 2019 levels.
Obviously continuing to build in July.
So the question is really on the sales guidance I mean, you're on.
Already 3% above I think.
In July on the guidance is for 2 to 4 for the third quarter, but I think you have some additional catalysts coming through particularly as you continue to rollout I believe the Burger Dan is going to finish rolling out in this quarter. So I'm just wondering.
How are you thinking about this third quarter on the rest of the quarter here and you factor in any of the California stimulus payments into that guidance as well.
Hey, Michael This is Robert so yeah with regard to that I think what youll see within that 2% to 4% number is a somewhat of a continuation of what we know today.
Again, 1 of the things that we've learned over the course of this pandemic is things can change pretty rapidly.
But the reality is it will.
Kind of a point today, where we see the $2.7 and frankly.
We have seen that remain fairly strong.
And given the current environment and given some of the talk about the volatility.
So within that I think you would you would see US include everything that we've talked about frankly, you would see that.
700, <unk> melt down USD 1100 Burger than units.
Contained within there.
Then that gradual build back towards the 24, 7% if you notice what we've seen when we since we spoke to the gain loss from Q1 to Q2 is we've made some progress with regard to the additional operating hours and we have a very developed plan with our franchisees how to how to continue to move.
That forward, but I don't think it's going to be a step function for we're going to work through that very deliberately and build those sales and we just don't want to get ahead of ourselves.
That makes sense. Thanks, and then just on those $24.7 units can you just first maybe clarify when youre comparing with the table on the press release against the pre Covid levels and those units were only down 7%. That's that's like for like meaning those units had $24.7 service before.
If you could just clarify that.
That's the case.
It doesn't seem that bad all things considered and so what I'm wondering is is there a chunk of franchisees debt that either don't have to or would you be open to the option to them not going back to $24.7 service using these virtual brands and having sales volume that are very similar today to where they were pre COVID-19 when they were running with those 27 units.
And then.
How does how does that compare from a cash flow side of things I would imagine its almost better from a cash flow perspective, if they were to just go on the virtual side of things and not be opened $24.7 million potentially have a better margin on board Michael.
On a profit excuse me.
Yes, Mike for 7%, so just any thoughts there.
Yes, let me let me start there and then I'll turn it over to John I'll tell I'll take more technical piece of that yes with regard to the debt.
Calculation with regard to the cut those comps those are like for likes so youre looking at units that would have been 24, 7% previously and now knocked and Thats really the catalyst for them being down, but correspondingly and the thing that debt really bolsters us with regard to that day parties.
It is a $24.7 to $24.7 in comparison to the ones that are up 15% also so that's the biggest moving in in late night upward in the last decade, we were looking into that at least we can find a larger catalyst for late night, but with regard to the second part I'll pass that over to John Miller.
Just simply to say that margins can be calculated on a different different ways percent margin you could be right Im not sure you are debt.
As a higher margin the highest margin would be if youre just open Saturday from 10 to 1, but but but the point of it is these these overnight sales we're talking about 8 ish percent acre 10% difference in with the brand will be Comping. If all stores were open 24 hours versus not and there is a fairly significant flow through of those dollars being <unk>.
And those hours the remember we're an all day menu place America's diner always open that's been sort of our market positioning for many years and then finally, if youre going to be opened for 5 o'clock for breakfast debt you are wrapping up around midnight.
Before.
The the benefit to closing is not as powerful as you might think so it's really a staffing challenge will more fully staffed our franchisees in our system is committed to being a 24.7 brands.
I would also say that we're getting high trial, among gen Z and a little bit more of that late night dinner and late night day, part and more reluctant to get trial during the traditional breakfast and lunch day part.
For the historical usage of family dining so we don't want to Miss the opportunity to have a high capture rate of these younger consumers through to late night day part.
Perfect. Thank you.
Thanks, Michael.
Thank you for when they would take our next question from Jake Bartlett That's true Securities. Please go ahead.
Hey, guys, it's actually check on for Jade, Thanks for taking the questions.
First I wanted to ask about your trend in off premise sales. It seems like the absolute level of all from a sales is coming down here in <unk>.
June and July.
I guess, how much of that do you attribute to changing consumer habits as restrictions are easing.
Seasonality, maybe July usually a lower.
<unk> months.
Okay.
I guess, where do you see the all from a sales leveling out long term or do you have a goals, where you want it to level out.
Well of course, we'd like to continue to build business at all.
For day parts breakfast lunch dinner late night dine in.
And take out we don't have a limit for say, we'd like to grow profitable transactions wherever the consumer is going and we think that.
It is not as mysterious as it used to be there are there is a summer softness is usually expected, particularly you might have noted burgard and softened up a little bit.
We are told by our third party delivery experts debt that was to be expected to some degree there. They are used to seeing that seasonality where people were out about more they are dining out a little bit more but.
The third party delivery.
Livery burgers softens, a little bit so they do expect some recovery of that little later.
And then part of this is I think just people getting out and more and more restaurants opening in dining in a little bit more. So there is some softening, but remember we've gone from 12% over 20.
In our takeout business for 2019 to 2021, it is very sticky we expect.
Portion of that is incremental with different younger audiences coming during the week versus the weekend.
And we expect that a considerable amount of debt continues to persist as sort of part of the new normal of how people trade their meals from takeout delivery in dine out away from home.
So the summer softness does not we expected some of this is people.
Dine in a little bit more but we do expect it to be really sticky and then it's a great question and I think time will tell with a more precise answer is for.
We're ahead of where we expected and pleased to be retaining this amount to go business.
Okay, Great that's helpful and then.
I guess.
Is there any.
On.
Sales trends youre seeing differently geographically still.
Is California is still trailing the rest of your system or debt come back very strong that's reopened.
But california sort of trailed in dining for a while but remember we were pretty.
During the pandemic it was tough, but remember leading up to the pandemic, California.
We had 9 consecutive years 2011 through 2019 as a positive.
Positive comps above the system in 'twenty I believe 2012 through 17 positive traffic out there still up for them in the system and California's back to being our number 1 state in performance over these past few weeks.
And then other strong states for us again in Nevada, Colorado.
Colorado, Texas, Florida.
<unk> those are some of our stronger performing states right now, but but we've had I think for reported in the script that over half were positive during.
The quarter.
So it does it does vary regionally, but but California has certainly been a benefit not a burden to the overall comp performance for the brand.
Okay, great. Thank you.
Thank you we will now take our next question from John Taylor at Wells Fargo. Please go ahead.
Great. Thanks, hopefully you can hear me.
I am curious just.
Could hear your response on I believe California.
In particular might be imposing some some new rules around animal welfare.
Particularly that may impact pork based products in that market and I'm curious.
Get your perspective on on how you think this might impact your business.
Do you actually see this proposition.
As being something that might get passed or sorry in force in the state.
Or do you think it's something that the federal government might step in.
Prevent that from happening anytime soon.
Sure I'll give a point of view Robert you might want to jump in here I know, we've had conversations with our supply chain team.
About this.
Question.
I don't know that I can say with certainty what the outcome will be long term I would say that near term based on how we process.
Source pork it's not.
It's not a challenge for US short term like you might think.
And that could be explained in some final points.
Detailed perhaps later.
I'm not sure exactly all of the specifics that set us apart on on being less concerned about that impact near term. So I don't want to speak out of turn here. Robert is there any other anything else to add to that.
Hey, John just in general.
Not specifically related to the product I think you answered that but I think.
Hi.
The reality is we paid very close attention to all of those and we moving in concert with the what the market can.
Can actually can.
Bear with for instance, with the.
With the.
Okay issue and our commitment to get into the cage free eggs by 2026.
<unk> 12 is for the raw product all of our product is cooked.
So it won't impact debt unless they change for law. So that's with regard to the going back to the pork specifically, but we do pay very close attention to all of that.
Got it I appreciate that distinction that the on the raw versus the Cook products. So thank you.
Going into the real estate opportunity Robert I think you mentioned on the call the idea that.
You Werent seeing the real estate opportunity you had expected I think even just a few months ago opening up.
And would you say that's more restaurants specific sites or are you seeing that's across retail.
Central locations that you thought.
Might come up as conversions for franchisees down the line.
Given that level of closures haven't necessarily shown up the way that you had once anticipated.
So it's Marc I'll try to address your question on maybe Robert John May want to jump on here, but so in my script on when I talked about that I was I was primarily referring to the restaurants sector. I'm glad you asked this question for the broader question about retail.
I would tell you on and we've talked about this on the past is that from our standpoint, if a trade area works on demand point worse, what we convert doesn't necessarily have to be a pre existing restaurants, we've done retail conversions that.
That have been very successful for our brands. So we're primarily focused on the demand point.
And again to answer your question.
It was primarily talking about the restaurant closures teams, but clearly retail is also been heavily impacted as a result of the pandemic. So that does continue to create an opportunity for our brand.
Great.
Just 2 more for me on the 24 hour stores 24, 7%.
The Q2, I believe they ran plus 12% versus 2019 and stores that didnt have it we're down pretty nicely. Aside from these stores being opened 24, 7% is there anything else to call out about these stores in terms of.
Their ability to staff, maybe theres geographies that are better than others, perhaps lease.
Stores have both of the virtual brands.
Anything you can comment about those stores just outperforming or is it solely just the fact that for 'twenty for Simon.
I think the lenses.
Some great questions with anything circumstances, and the timing of those play a role in where people are today and the trajectory of staffing hiring.
On the.
The averages.
True 100 years ago 100 years from now those stores that have really top quality general managers do a really good job taking care of their crew.
And where they were newer Orient transition then those stores.
On a tougher time right they werent they.
Werent as deeply established with the crew where there was continuity of leadership there for a long period of time for the stores that had stable management and stronger more 10 year tentative outperformed I'd say there is.
Correlation there there is some correlation to this.
Franchisees that sort of read into the pandemic, a little bit more trouble werent certain of PPP loans early on and we're more aggressive in furloughs or laying off.
Net centre cultural signaling their ranks and so they struggled a little bit more of a notice that took the bet for all will define and protective management in key positions in their restaurants for on their rosters and so there is some correlation there not just with our brand denny's, but across the industry.
Depending on some of the staffing challenges I think the strongest quarter low correlation though is just the neighborhood store happens.
So some areas are richer with staffing opportunities and others are tougher and and that would be I think the strongest correlated.
We do again believe these are temporary and they're all sell through time.
Got it and then just last 1 for me can you remind us how.
You're marketing the 2 virtual brand on it.
Any plans on the horizon to alter it say today Youre only doing digital channels, if perhaps you start tagging on to.
Any specific commercials.
All of those things are in discussion all the time sort of testing and weighing the pros and cons. We do believe there is benefit and having some of the product lines that have been especially popular on the core base brands in due time.
Did update some of the melt sandwiches on our core menu.
Last quarter as a result, they performed really well for us.
And so we're studying those things all the time more to come on that.
The advertising channel is it really mostly through social media and or the.
Social pages associated with third party delivery.
Awesome. Thank you very much.
Thank you for.
Your next question James Rutherford of.
Steven Please go ahead.
Hey, thanks, very much and congrats on the improvement here.
I just wanted to narrow down on those units opened $24.7 that are comping up 15% for 2019 models.
Can you give some detail about the components of debt, 15% growth, perhaps even directionally, if you could speak to traffic versus check for new customers versus existing or day parts or days or do we just trying to get as much detail as possible on the components of net growth in the goal is to try to understand maybe how sustainable that mid teens lift might be over.
Thank you sure sure James Thats, a great question.
On the sustainability, it's a bit early to comment on that we are highly confident these are brands that will endure awhile and they're not just a flash the sales burgers and mills.
For the short period of time.
They are quite popular we get high marks from our third party deliver vendors, saying. This is the kind of product line. They are looking for and we've even heard discussion about how they're dialing back the number of automatic takers. If they just put on their platforms without evidenced the product will stand up over time. So we're pleased with how they've been launched and confident of that.
Our enduring value into in terms of the.
The rest of the answers I wish I could give you some specifics I think basically the $24.7 stores with both Burger and meltdown outperform everybody. So there's a strong correlation to the number of hours open and being fully staffed and having quality management on staff and having the capacity to take on these.
These new these new effort, so theyre going to do a little bit better on check on.
Obviously discounting is out of favor and full service right now until brands are fully staffed.
Said another way, we can't handle all of the transactions. We aren't we don't have the dining room is fully open we're not 24.7 so there is no particular reason.
To move transaction building.
To note that we don't have the servers.
To cover more shifts at the moment, but but but all the way around weekday breakfast lunch dinner and late night I'd say the good news is especially strong mid week.
For.
The meltdown and burgers in.
In terms of just outperforming normal dine in business and being both younger and a different time of the week and then late night has been very very strong.
As a result of being open.
With fewer options open out there in the marketplace and then also having these virtual branch so.
On just about every metric.
Across the board as sort of run on the board the 24 hour stores or.
Just categorically better.
Thank you for necessarily located not located better necessarily but just performing better.
Okay perfect.
1 more on the question.
We're starting to get probably hard to answer but just as the cases have started to rise in certain parts of the country have you seen much impact yet.
It's a situation where consumers have learned to live with it and are kind of working around the.
The isolated restrictions on mask mandates and that type of thing.
Well I think true to form we carpet harp and you hear the people talking about the way they wish the world was or the way the world ought to be but it is right now it's a challenging time for people.
I think people are trying to sort out what will come next introduces a certain level of uncertainty and so it's the conversation of pretty much every business every day to masking all day math I think what youre seeing so far because we are talking about it a lot and watching it very closely as we're not really seeing any change whatsoever.
Or if any certainly immaterial in any consumer behavior at this point, that's not to say they are concerned or thinking about it but rather I think they are optimistic that they may go through some social distancing some flex glass put up between cash ratios for consumers to more tape on the Florida keep people far enough away masked mandates and like.
So I think people are generally not expecting there to be shutdowns per se and so we're going about our business I think people have more and more confidence that wherever these rises in spikes came from that came from large events and on.
1000 people gathering or beach parties, and the like and not likely coming from responsible socially distance restaurants for servers and that so.
Think my sense of it is whether it be discussion on concern and people will be watching carefully what happens over the next several weeks that the consumer behavior. So far.
In particular in areas like California, and other areas that maybe have a higher vaccination rate the consumer confidence remains high to go out to eat in.
And the support for Denny's continues to be strong in spite of the.
Delta version in mass mandate.
Thank you always appreciate your perspective.
Thank you.
I think we will now take our next question from Eric on Hana.
Capital markets. Please go ahead.
Okay, Hey, thanks, and congrats on the return to you.
Prepayment trends just regarding the 27 units.
Inability of those costs that we just discussed I would imagine a lot of those businesses, particularly the independents that are in the same area might have more difficulty staffing enlargement denny's. So the possible as these units that perhaps over on a bit by virtue backed debt.
We're the only game in town at those hours I'm, just trying to understand how those 24 hour units might perform as additional competition opens up in those trade areas.
Yes, we're certainly not the only game in town.
We are we went on a very few full service games in town for there are quite a number of.
Options available, including third party delivery. These days that did not exist before so we think instead, what's happening is theres been a considerable reintroduction of the brand people in trade areas, where they ordered through third party delivery and gave us a good it will drive for.
Our burger anomalous or what have you.
It's likely to be a dine out customer at the breakfast day part unless they might be working at home on teams or on June and but at dinner and late night Theyre going on the highlights let's order out and so I think we have been.
On the market opened up to us in a number of areas. Because we are open to your point, but also not just because we're the only 1 open late but because we've been a little bit rediscovered.
People have.
Remember <unk> went through the roof throughout the pandemic and full services fairly compromised because dining room shutdowns in the number of transactions and so with that comes a little bit more of a.
I don't know of cabin fever, and interest to try.
Full service meals or maybe different than a handheld drug for your type of meal and so with that I think we have some stickiness that remains post pandemic.
Driving this transaction.
Sure that's fair.
On the.
We had another 1 on the third quarter guidance.
You touched on this earlier, but just wondering what are you assuming in terms thats for 7 units versus what you have today for that for the third quarter. Non can then as you think about the fourth quarter do you expect to see a big uptick in 27 units with the supplemental on client rolling off.
We believe it will progressively improve we're not guiding precisely.
On the number of units that will convert just yet.
Alright, that's fair and then lastly for me how much price did you have wanted your franchise, we have in the second quarter on how are you buying into price.
Going forward in the second half of the year I think you mentioned in the fourth quarter Youre going to revisit it but you didn't quantify that.
So with regard to that Hey, this is Robert again.
We had with it within the comps.
The traffic is still kind of breaking out the pieces. The traffic is below 2019 levels.
Haven't quoted a pricing number yet, but the pricing we do have slight pricing within that number.
1 of the material components is the mix change that we benefited from throughout this year with additional lunches and and such so really minimal pricing a lot of mixed traffic below 2019.
And with regard to the <unk>.
The second part of the question.
Maybe.
In fact, just the pricing.
Yes, we got another opportunity for menu pricing here coming up as we head into the Q4 and we're always balance we do take into account the commodity inflation to ensure that we're covering that but we do believe now is the appropriate time to leverage all various aspects of our value 2 to ensure.
That we are capturing traffic that is the opportunity now so we won't we won't under price ourselves, but we know that the opportunities to capture the trend.
And just so we're all on the same page when you say traffic on them.
Our premise order do you count entrees or day talent, 1.1 order versus a non premise transaction that might have.
So multiple guests for.
1 guest launch and for gas.
Yes, that's a really good question to be very specific we count on trades as we as for our measurement of our guest traffic.
Got it thank you.
Thank you.
Thank you. So we will now take our next question for breath of DVA MK and partners. Please go ahead.
Great. Thanks for taking my call.
Net.
You talked about you spent a good amount of time, Jeff on that $20, 7, especially as it related to <unk>.
Labor and your shortfalls.
And you talked about the success you had on your store what are you doing going forward how on.
Boston do you think you need to go out and make these pushes for.
Grand gesture tours or really push the agenda to make sure you get youre getting more than your fair share of labor because you're not the only ones who have gone out and tried to.
Yes.
Karen for snakes on labor and what are you doing from an incentive standpoint, whether it's upfront incentives ongoing.
Yes.
Some kind of service.
Asking people.
There is a great question.
Questions are asked on.
Often about wage incentive environment culture, a good place to work.
<unk>.
Stayed on as hiring bonuses upward mobility education support so just about everything you could imagine scaled organizations.
Like Denny's would have many of those kinds of programs in place I should remind you that the ability 1 of the best places to work in South Carolina on multiple occasions, and so we guard sort of the.
All of those mere check type items all times. This place I would like to work as a starting place as a restart as a career builder as a jumping off place and all the kinds that are important to attract quality workforce.
All of those things are very challenging right now in this environment, which is which is.
Curious place to be again, we think they are overall temporary but it's important that we continue any good company and you could company as we compete with are going to continue to be vigilant about holding and building and developing there.
<unk> and the career opportunities within the organization right now or.
Company historically like many franchise always worry about joint employer challenges and so we've had really hard lines between our HR policy and what a franchisee might do it might be shared services or we point people towards.
And outside counsel, our guide, but we usually don't directly tell them what their employee support programs should look like just what their outcome should be and how they run a store according to denny's policies today.
<unk> blur those lines a little more we are.
More collaborative and our ability to say here's a website, here's a denny's website to help us all recruit.
Where we can we can share of third party services through a link in to assure during work really hard to make things easier and better from a technological standpoint to support our franchisees in the system to share best practices or give them sources to find her mind those best practices. So our franchisee Association Board recently met starting in.
Starting late last year, but all the way throughout this year many of the meeting topics have been focused around.
Market wide hiring bonuses ways in which we can recruit share best practices share resumes. If we if we aren't going to use this particular cook will share with another franchisee day on the block. So a lot of those things are changing and becoming more institutionalized and formal inside our system compared to a little bit more.
On.
Casual in the past there is a great question and I think I think we're doing a pretty good job of assisting our franchisees to make sure David evaluate their program for starting wage to 2.
To the rest of the programs and benefits Theyre offering and I think our franchisees are doing a nice job at retention. Just so you know in 2019 and I'd say most years prior to that when you look at our roster. We had average tenure and turnover rates lower than most full service competitors and so we would have been 1 of the better performers in the.
Industry, when we'd like to be able to maintain that status coming out of the pandemic.
And when you think about those areas that had been early in removing the enhanced unemployment benefits have you seen any change in their ability to hire or is it just more of the the expectation that as they roll off and as we get past September.
That's still improve.
Well I think it's a lot of things some of this is.
The challenges aren't just.
Does there is incentives out there theres also maybe <unk>.
<unk> about.
Being confident about the environment or having an elderly parent debt and home and they are really nervous about being out. So there's any number of things that a day through time, but not all at once and so we're confident things do continue to improve.
Theres quite a number of people displaced an out of work and and working provides a better outcome than staying at home based on their historical personal household experience. So I would expect that those things will return in due time, but as it is today.
On a number of people came through the pandemic cut their expenses.
And found different ways to make it through that environment and so.
They are there.
Maybe not quite as ready to go back towards just yet so again I think all of these things abate in time I don't think this is too different than what you are.
In hearing across restaurants and retail the answer is time will tell we're confident that normalizes, but not as it doesn't happen like snap your fingers, it's not.
Yet, it's still a challenging hiring environment.
And then 1 just 1 last question.
When you think about that.
Talk of different markets.
Out there.
Introducing.
Mandatory vaccinations proof of mandatory that explanation to enter the restaurants, what do you think youll need to do structurally.
Is there is there going to be a dedicated position how are you thinking about that from an operational standpoint.
Yes, I think we have in place the kinds of supervisory controls and head count and remember from the restaurant industry is already full of.
Multiple layers of compliance.
So when it comes to health and sanitation serves say compliance food safety handling.
These are the kinds of things you do on the ride to work first day. These these are of course work. It takes a while it takes a considerable amount of headspace to path.
A lot of really smart people to fail those glasses. So we're good at institutionalizing those kinds of areas.
So it's certainly not that big of a challenge for us to say show me evidence that you've been through a doctor or shall we evidence that youre hepatitis is going on or in this case shall we evidence that you have been vaccinated.
I think we have to treat these things with a great deal of respect and on or whatever the local jurisdictions are requiring they do vary considerably across the country. We have both customers and employee basis that we'll look to different authorities and us as the expert. So we have we're managing that with great sensitivity and I think in our system doing a pretty good job of.
<unk>.
Thank you.
Thank you Angela.
Go ahead please.
As a reminder, if you would like to ask a question. So what I think is favorable.
Yes, and as will waiting to Q additional questions I just wanted to follow up with that question for Nick steady in the earlier in the call with regard to how the 6% same store sales increase for company units in the month of July translated into average unit volume.
In the comparison to 2019 for 2021 in 2019 those set of company units were running approximately $2.9 million dollar annual unit volumes or roughly $57000 per week.
That would translate into our annual run rate of $3.1 million for approximately $60000. A week. So that is the how to convert that 6% comp.
<unk> and <unk> from a re franchise gear to our non re franchise here, but just want to follow up thank you.
Thank you on that as we kind of all the questions. We have for today's call. So net net turn the call back over to John Berger Adil.
Additional or closing remarks.
Thank you all for joining the call today, we are very pleased with the progress. We've made can pandemic and we are starting to navigating the recovery as you can tell the demand for Denny's is strong with same store sales currently trading above prepayment in 2019 levels, even with only 40% of our domestic system operating 24, 7 and we sail safely welcome guests back into our <unk>.
On the rooms are operating this business has remained sticky and is supported by the launch of 2 new virtual brands. So we are actively working to address the temporary staffing challenges, which we believe will abate as I've mentioned before as we move through the balance of the year and we see additional potential for our brand based on the performance of those restaurants already operating 24 hours a day.
<unk> <unk>.
7 days a week, we were encouraged by the level of adjusted EBITDA on adjusted free cash flow generated by our highly franchise business model during the second quarter and we look forward to the opportunity to begin returning capital to shareholders. Later this year, while advancing our long term brand revitalization strategies. So we look forward to our next earnings conference call in early November.
To discuss our third quarter 2021 results. Thank you again for your time today and all have a great evening.
That concludes today's call. Thank you for your participation you may now disconnect.
Yeah.
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