Q2 2022 Denny's Corp Earnings Call
Initial peak in mid March but in mid May the industry <unk> experienced softer guest traffic has multiple inflationary pressures converge and weighed on both consumer confidence and consumer sentiment once again, the resiliency of the Denny's brand persisted and our sales relative to 2019 outpaced the black box family dining index during the quarter by 40.
Basis points, even more encouraging our stores operating 27 outperformed the BVI family index by over 700 basis points I want to reiterate we are at 24 hour brand and this remains a significant tailwind as demand for the late night dining occasion is ever present in 27 restaurants are consistently outperforming limited our restaurants by mid teens.
Digit sales comps relative relative to 2019.
Notably during the quarter, we continued making steady progress on this initiative and we are actively working with our Danish franchise Association on new approaches to accelerate our return to 24 hour operations over the coming quarters.
<unk> still remains a primary barrier to accelerating this progress however, both turnover and wage rate growth have begun moderating recently within the industry and at Denny's. This is definitely encouraging. We also recently launched a unique and differentiated hiring campaign called bring your best day to work, there's clearly resonated and is working as evidenced by gained meaty.
Impressions increased applications and most importantly improved staffing in both company and franchise restaurants.
Turning to our menu and advertising we are committed to a clear barbell strategy of offering high quality products and a re energized focus on relative value offers offerings, which has been and will continue to be a competitive advantage for denny's during the second quarter. Our media messaging was balanced between the limited time hollow back Burger and our new analyst breakfast promotion. This can.
<unk> offer was not only consumer friendly, but also operationally efficient while appropriately managed commodity inflation with protein upsell opportunities.
And it remains top of mind for our consumers facing inflationary pressures, we're now featuring summer slam patients, including analyst breakfast, along with our popular Super Slam starting at $6 99, and the good news. This is driving encouraging traffic trends as of late.
Turning to off premise sales have remained strong at approximately 21% of total sales compared to the pre pandemic trend of 12%, which far surpasses the family dining index related to this the performance of our virtual brands has also remained very consistent and highly incremental representing 3% of weekly sales.
This compelling.
Excuse me this.
We're also excited to announce that we are expanding the reach of the meltdown, formerly a door dash exclusive to multiple delivery partners. During the back half of the year. This expansion provides greater upside potential for sales from our already strong virtual business I'd also like to touch on two of our strategic initiatives kitchen modernization and cloud based restaurant technology, the new kits.
Equipment has been installed at approximately 50% of our domestic units and we expect to be substantially complete with this role by the end of the year and our new cloud based restaurant technology platform is currently in the beta testing phase we are receiving great feedback from test stores around ease of use and excitement around feature enhancements. This implementation is on schedule to be substantially rolled out to all.
Domestic locations by the end of 2023.
Both the kitchen and technology platform initiatives are expected to enhance the guest experience and drive operational efficiencies with the former also providing the ability to further enhance our menu offerings across all day parts.
Turning turning to our recently closed acquisition, we are delighted delighted to welcome <unk> team members franchisees and suppliers to the Denny's family. This is an exciting opportunity to participate in the fast growing am eatery segment through a complementary brands. We believe our experienced team and track record as a model franchise or can develop <unk> across multiple states with the <unk>.
<unk>, becoming the AAM eatery franchise or a choice.
In closing I want to reiterate how excited I am to be a part of this iconic brand Denny's has a solid foundation significant competitive advantage and many opportunities on the horizon, most notably we have an exceptionally talented and tenured management team, we have a dedicated and tenacious group of franchisees, we have sales upside as we migrate back to 'twenty four operations.
We have a sound investment strategies, providing compelling shareholder returns both today through our share repurchase program and in the future with our strategic investments and lastly, we now have a momentous opportunity to expand our business into the fast growing AAM eatery segment I truly believe our best days are yet to come and I'm thrilled to be a part of this great brand with that I will turn the <unk>.
All over to Robert for optics, Denny's Chief Financial Officer.
Thank you Kelly and good afternoon, everyone.
I will begin by providing a development update and a review of our second quarter results before sharing additional details around the <unk> acquisition and guidance comments.
Starting with our development highlights.
Franchisees completed seven heritage two <unk> Remodels and we completed four company Remodels during the second quarter.
Additionally, franchisees opened four new restaurants during the quarter, including one international location in Canada.
Moving to our second quarter results as Kelly mentioned, our same store sales growth in Q2 was two 5%.
This growth came from a 10% increasing guest check average, which was comprised of approximately three 5% carryover pricing from the prior year.
Over 3% pricing taken in the current year and approximately 3% of product mix benefits.
As highlighted in our Q2 earnings the earnings Investor presentation domestic average weekly sales for Q2 were approximately $36000 compared to $34000 in the pre pandemic second quarter of 2019.
This represents a 5% increase in average weekly sales compared to 2019, whereas the same store sales only increased one 8% relative to 2019.
The variance between these two metrics demonstrates that while our system portfolio is smaller than it was three years ago. It is also generating higher average weekly sales as lower volume restaurants exit the system.
Franchise and license revenue increased $7 3 million or 12, 4% to $65 9 million.
Royalties and advertising revenue increased by $1, seven $1 $6 million and $900000, respectively. Due to a two 4% increase in domestic franchise same store sales for the quarter.
The $5 $7 million increase in initial and other franchise fees, primarily resulted from the recognition of revenue from the sale and installation of kitchen equipment. However, the revenue recorded related to the sale of equipment has an equal and offsetting expense recorded in other direct costs.
The $1 million decrease in occupancy revenue primarily resulted from lease terminations.
Franchise operating margin was $36 million or <unk> 46, 4% of franchise and license revenue compared to $29 9 million or 51% in the prior year quarter.
This margin increase was primarily due to the improvement in sales performance at franchised restaurants.
I would like to note that while franchise margin dollars were not impacted by the kitchen equipment rollout the franchise margin rate was reduced by approximately 450 basis points.
This was due to revenue recognition accounting related to the kitchen equipment rollout during the quarter.
More information can be found in our 10-Q. However, we expect this margin rate impact to persist throughout the remaining rollout of kitchen equipment, while still having no impact to franchise margin dollars.
Company restaurant sales of $49 $2 million were up three 4% primarily due to the improvement in transactions from limited operating hours in the prior year quarter and an increase in guest check average.
Company restaurant operating margin was $4 3 million or eight 8% compared to $9 $8 million or 25% in the prior year.
This was primarily impacted by approximately $2 3 million of unfavorable legal reserve adjustments or over 450 basis points.
We consider this a highly infrequent occurrence.
Excluding this item, we would have achieved between 13% and 14% company restaurant operating margins.
Additionally, we experienced commodity inflation of approximately 18% and labor inflation of approximately 8% during the second quarter.
We continue to monitor this inflationary environment in collaboration with our franchisees, while remaining thoughtful with regard to pricing strategies and decisions.
The roughly 7% of pricing that I mentioned earlier included 1% of pricing the system took in late June .
We will have an opportunity to make additional adjustments as needed with our fall core menu.
We have taken sufficient pricing to cover the inflationary pressures within our margins on a pennies basis per guest and we are keenly focused on driving traffic through our well established an industry recognized value positioning.
Total general General and administrative expenses were $16 6 million compared to $17 5 million in the prior year quarter.
This was primarily due to a benefit from deferred compensation valuation adjustments and a decrease in corporate incentive compensation, partially offset by an increase in corporate administrative expenses.
The change in corporate administrative expenses was primarily due to compensation increases in the current year, coupled with temporary cost reductions related to the COVID-19 pandemic and tax credits related to the cares Act both in the prior year.
As a reminder share based compensation expense and market valuation changes are noncash items and do not impact adjusted EBITDA.
These results collectively contributed to adjusted EBITDA of $17 $2 million.
The provision for income taxes was $7 8 million, reflecting an effective income tax rate of 25, 3%.
Adjusted net income per share was <unk> 11, compared to <unk> 18 in the prior year quarter.
During the second quarter, we generated adjusted free cash flow of $6 $6 million.
Our quarter end total debt to adjusted EBITDA leverage ratio was two four times and we had approximately $199 million of debt total debt outstanding including $187 million borrowed under our credit facility.
During the quarter, we took advantage of a dislocation in our share price and allocated 37 $4 million to share repurchases.
On a year to date basis, we have allocated $49 $2 million to repurchase approximately $4 7 million shares.
As a result at the end of the quarter, we had approximately $168 million remaining under our existing repurchase authorization.
Now I'd like to provide some additional comments around Kiki's breakfast cafe, which we acquired in July for $82 $5 million.
The transaction was settled in cash and financed through additional borrowings under our revolving credit facility.
With the closing and as previously communicated we are adjusting our target target leverage range to be between two five times and three five times of our adjusted EBITDA.
Which resulted in our current debt leverage ratio being near the midpoint of our range post transaction.
Let me now take a few minutes to expand on the business outlook section of our earnings release.
Given the ongoing market and global volatility we are providing the following estimates for our fiscal third quarter ending September 28 2022.
We anticipate denny's third quarter domestic system wide same store sales to be between zero percent and 2% compared to 2021, which represents a similar improvement compared to 2019 and takes into account denny's seasonal patterns.
Yes.
Our expectations for consolidated total general and administrative expenses are between 17, five and $18 $5 million, including approximately $2 million related to share based compensation expense, which does not impact adjusted EBITDA.
We anticipate consolidated adjusted EBITDA of between 19 and $21 million.
With regards to inflation, we are seeing early signs that commodities may have peaked and we expect commodities will begin to ease during the third quarter.
Additionally, we believe we will continue to see wage rate inflation moderate.
To be clear. These estimates include a limited benefit related to Kiki's breakfast cafe due to a partial quarter of adjusted EBITDA contribution being offset by upfront transaction costs.
In closing, while there is certainly a level of volatility within the macroeconomic environment.
We are excited about our bright future with opportunities to unlock additional shareholder value through.
Extending our operating hours with improved staffing.
Leveraging value messaging to drive transactions.
<unk> the guest experience through heritage two <unk> remodels.
Growing the collective geographic reach of Denny's and Kiki's locations.
Enhancing efficiency with an upgraded products through updated kitchen equipment.
And creating a more seamless digital experience through restaurant technology upgrades.
Our model generates a considerable amount of adjusted free cash flow, which will be enhanced by the acquisition of <unk> and I want to reiterate our commitment to return capital to shareholders through our successful share repurchase program.
I also want to thank our dedicated Denny's family inclusive of both Dennis and Kiki's Breakfast Cafe franchisees and team members, who have continuously remain focused on serving our guests while managing the business needs.
Finally, I want to express my sincere appreciation for John service and how just excited I am to support Kelly and her efforts to drive our business forward.
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, ladies and gentlemen, if you would like to ask a question. Please signal by pressing star one on your telephone keypad, if youre using a speakerphone. Please make sure. Your mute function is to know too low youll see to reach our equipment.
Again star one to ask a question, we pause just for a moment to assemble the queue.
We take out with crush it from Michael Tung.
We opened with Oppenheimer. Your line is open. Please go ahead.
Hi, Thanks, first Jonathan Great working with you and hope you enjoy some some more free time going forward and Kelly welcome and look forward to working with you as well.
The first question is really just on the third quarter sales guidance and I was hoping you can sort of unpack that a little bit you mentioned that theres more normal seasonal patterns in your guidance. This year and I think the industry sort of seeing it this year for the first time in the last couple of years. So can you maybe talk about what your average weekly sales looked like normally in the third quarter.
Relative to say the second quarter, so we can sort of understand that.
And then secondly tied to that can you just talk about the consumer environment any changes in frequency or spending habits that youre seeing so we can kind of understand.
Sales guidance, a little bit more thanks.
Yes, let me let me take the first part of that Michael Great. Great hearing from you so relative to Q2 to Q3.
Sales do trend down is that back to school timeframe.
They're off probably.
Looking at the chart that we posted in the investor presentation less than a percent, but it is on a seasonal basis. Adjusted it is down Q2 to Q3 I think the important part with regard to Q3 and we're starting to see this.
We've talked about it in the script, but we are moving back against value.
It's deeply embedded in our DNA is something we are really good at you can see it within some of the <unk> patient that we launched early in July we are seeing the result of that beneficial result of that they are not going to talk about that specifically, but we are seeing the benefits of that so we look forward to going more deeply into that.
In Q3 and think it will go a long way, we will also leverage <unk>.
Michael in Q3, we really believe and we can talk and unpack this a little bit more about $24 seven we're going to work with our friendship Franchisee Association.
Figure out how to really accelerate getting our franchisees back to $24 seven as quickly as possible. There clearly are benefits in doing so and both of those beyond all of the other things we've mentioned in our scripts should pay dividends in Q3 and beyond.
A very significant tailwind.
With regard to the consumer Kelly sure, Yes, and thank you Michael.
I appreciate the question I think as it relates to the consumer and the guidance. We gave it's really about we've seen that for a while the consumer really was even in this inflationary environment has been pretty resilient, however to date and as of late.
Also can see broad industry data that points to the consumers kind of depleted their savings and their surplus and so.
That's what's kind of baked into there we've seen large retailers talk about increased discounts with excess inventory and in our industry to see more value offers and more of those coming so what we are doing really does play to that sweet spot as we've mentioned a couple of times and Robert just did we think youll see more of that we know it works for US. We know this is this.
A place where we play and we know our guest count on us for that so we are.
We are focused and have our heads down really on what's most important in front of us and again, we mentioned seeing some traction but there is still so much volatility out there in the consumer mindset.
Thanks.
Great overview, and Robert kind of mentioned as part of my next question.
We're going to try some new approaches to increase store hours and I think it was either last year or the prior year.
Tried to use a royalty abatements to entice franchisees.
Be open for longer hours. So what other options you think around the table are what you would explore with your franchisees to try to push them towards doing 24 seven.
Yes.
That's an excellent question Michael It was it was in Q4 of 2020. It was in hindsight being 2020, it was probably a little soon given the resurgence of the pandemic at that point in time.
It really is going to be a combination of pushing pool right, we're going to partner with our DSA Board, our Denny's Franchisee Association Board.
We meet with them on a very routine basis.
And they are.
Really walking lockstep with us they are they acknowledge the benefits of 24, 7% with US there is no pushback with regard to that so you may see a combination of.
Various.
Incentives that potentially could come back into the the framework to move people along and also holding people accountable to what their franchise agreements require them to do.
And with regard to that the other approach that we will need to focus upon and Kelly mentioned it within whole script is getting these restaurants staffed.
This concept of bring your best do the work that that has resonated it was quite simple.
Aviation, but quite effective so far in bringing additional employees.
Our restaurant staffing is starting to improve.
We have seen that in our staffing levels and that has been the key talking points from our franchisees again. It has not been a reticence to move to 24 seven it's just getting staffed for that day part that is improving we will continue to work to improve that.
And I do believe I am confident that we will move that forward you can see it Michael with with regards to the performance of our 2047 units Kelly called it out there is just a a double digit difference with regards to the performance of those units in fact, one other key statistics are the only positive day part versus.
2019 is the late night day part to isolate it to the $24 seven units. So there is there is a lot to really unlock here.
Perfect. Thanks, so much.
Thanks, Michael.
And in Q, we take over next question from Wedbush.
Bush Securities Your line is open.
Thank you.
And Kelly I look forward to working with you as well.
I just wanted to kind of unpack the margin trajectory.
Hey.
First it sounds like just doubling down on the value a little bit of starting in July .
You mentioned that it's working a little bit.
Is that mean mix is going to be negative in Q3, and Pos transactions potentially less less units.
Nick Thats spot on good to hear your voice.
That's the way that works right you got to overcome the transactions have to overcome the decline in mix right. The value of mix is higher that would suggest the overall GTA I E will go a little bit lower but what we've seen so far in July is that.
Just with one item with the <unk> of being on air with it we took our value instance, up 3% and we're seeing the traffic benefit from that that would more than offset the cost we will.
As you know getting those sales higher Nick will it will leverage those fixed costs.
And drive margins higher we don't view that that a value strategy is a negative to margins. In fact, we believe that it will drive margins higher our goal in the.
Maybe a slight repositioning here from from what we would expect would have said three years ago coming out of our last refranchising, but we do believe that mid to higher teens is the place that we can ultimately get these company operating margins back towards.
And we do believe that it'll be through driving traffic.
And we are if this is in our sweet spot. Nick. This is what we do right. We are we have been known for value. We did this historically with regard to the 2468 value menu coming out of the great recession.
A little history that drove over six points of traffic back at that point in time in a profitable way. So we this is right and again in our sweet spot to do this and we believe that this is what the consumer needs right now.
In.
And we have better tools and equipped to do this in other brands.
Sure.
Great to see the traffic trajectory get better.
And is it fair to assume that menu pricing stays.
At around 7% in Q3.
I think that's probably fair, Nick I'd say not necessarily because we're going to take more pricing. It's just already in the system that way. So I think that's the right range to think about.
Got it.
Potentially commodities have peak labor.
The wage rate may have gotten a little bit better.
Can we go into that a little bit more where are you seeing labor inflation in the second half and then potentially what inflation commodity inflation looks like in Q3 and Q4.
The second half in general.
Yes.
Very fair question, what we've seen so far with our wage rate growth, but let's take that one first on pack that we have seen sequential decline in that 10% up in Q1, 8% up in Q2 really not guiding to Q3, but we do believe that there the bias in the environment right now from all the benchmarks that we are hearing.
Would be for that to trend in that similar fashion.
Other piece with commodities.
We are 15% in Q1 that was 18% in Q2.
Meet you probably would suggest that's unprecedented we probably heard that were quite a bit here throughout that earning season, but we suspect that in Q3 that we will see that start to abate with regard to beef pork and dairy first and then Q4 with eggs poultry and cooking oils kind of following.
So I think youll see a sequential improvement from Q2 down to Q3 into Q4.
Do.
Our suggestion is beef may be temporary given that thats, a herd stock reduction, but the avian flu is thankfully did not persist for a long period of time, we're rebuilding flocks, which will benefit our multiple categories within some of the higher categories within our product mix.
Environment, So I think that trending will be down again, we haven't.
Guided specifically to those numbers, but the direction clearly we will we.
We will have a downside bias as we move through the balance of the year.
Got it.
How do you think about <unk> as we started.
Start hitting that into our models.
First what kind of unit growth additions.
You have to think about it in the second half.
Keith.
Both company owned and franchise check industry minus what.
<unk>.
Although margins looked like Keith in terms of the company owned stores.
Yes.
Yes, very fair, so let's talk about.
<unk>. So the <unk> are approximately $1 9 million thats in that limited <unk> timeframe. So very robust I believe going back to what we were saying with the Q1 earnings call that our margins were 20% ish or so right in that ballpark. So these are very.
Very robust margins.
Upper teens to 20%.
I would say there.
With regard to the unit openings, we haven't really guided longer term I do believe we said with the Q3 of <unk>.
Q1 earnings call that we had four to five total openings in the pipeline for the year. So a few more but I think we have two open to date.
We are really focused upon now and what will make <unk> a huge success for us is making sure that we are getting ramped up so that the 23 and 'twenty four openings trajectory.
Celebrate.
Through that so and you can see that the the volumes the margins would point to.
The fact that we pair that with our ability to train and bring in our new franchisee developers whether that would be us.
Additional franchisees outside of the <unk> system, or even though the kiki's franchisees, it's setup and this will be a again a huge win for us in the current franchisees are very very excited Steve Dunn, Our Chief development Officer has been talking to many of them. They are very excited to develop this brand further and see.
This as an unlock for us they don't see this as a big corporate entity kind of trying to gobble them up they see this as an unlocked to future development for them. Ultimately we said in the Q2 in the Q1 release that it would be six 5% to $7 million of EBITDA that was what we base that purchase price upon.
And we will just grow it from there with the incremental units.
I would add and I appreciate the question Nick I look forward to working with you as well I would add to spend some time in those restaurants I'll spend some time with those franchisees we've talked development. They are excited as <unk>.
As you just heard from Robert and hopefully you can hear from us.
The plan now really lucky is be Kiki's learn about it we're learning about this brand with the keep the brand unique its got a cult like following its really exciting. The <unk>. These are exciting and a strong business model. So we've got something really special and the goal will be to continue to really maintain and enhance what is special about them, but there's a lot of excitement and we've got a great.
Plan in place to go forward.
Thank you very much.
Thanks, Nick.
Thank you once again, ladies and gentlemen, please press star one to ask the question Tal one to ask a question. We take our next question from Jake Bartlett with Suntrust. Your.
Your line is open.
Great. Thanks for taking my questions.
I wanted to circle back again on the 24 seven operations in the last quarter. You disclosed you mentioned that it was about 50% of the stores what has grown too in the second quarter.
My math suggests about 53%, but if you could just kind of confirm that.
Where you are in that so we can see the trajectory.
And then you mentioned kind of one of the.
The obstacles there is staffing and on the last call you said that limited our tours were about 80% staff.
Versus pre COVID-19 levels.
And so if you could just give an update on whether that 80% stake or.
Or has that that'd be helpful.
Hey, Hey, Jake Yes, the 24, seven and we're really excited about that being a tailwind for us.
Think at the end of the quarter.
We're in the $53 54 range.
Looking at Curt and Kayla to help me with that with.
With regard to the staffing of the limited our units we're looking in our detail.
We're I think at that 80%.
Area now.
She is up.
Up a little so we're probably in that 80% to 85% range, but what we're seeing.
It really we have seen the green shoots of things that are working for us right.
It was a placemat it was a simple bring your best workplace in that that really started to drive people into the unit and it really is.
That.
Simple Brian is not a grand idea, but you got to execute it right you got to be you got to be.
<unk> and dedicated to do it but there is a way to get this done and we're hearing that throughout the leadership and the franchise community now.
They are beginning to see the unlock so we will partner with them and help move them along with with regard to that.
Great.
Helpful. And then the next question is on value and nice to see the Super Slam come back and it seems like it's doing the trick in terms of driving some incremental traffic.
My question is about the 2468 menu and promoting that nationally I think over the last couple of quarters, you've you've expressed a little hesitancy to get too aggressive.
Till staffing was.
Healthier spot.
So the question is what is the appetite and the ability to kind of get even more aggressive.
I've got 2468 menu switched.
We're successful.
Fishing.
Yeah, Jake so with 2468.
It was it's somewhat we think probably getting towards the end of its useful life.
But it doesn't mean that we won't be going much more deeply into value again, I mentioned that we think that's where our what our consumer needs from us.
We are really good at delivering that in a.
For them in a profitable way for us and I think that the idea of value may be changing.
Right.
What you pay for what you get and so a $2 price point may have served a purpose a decade ago im not saying that that value is now a $15 place this will be price oriented.
But I think we may have moved beyond that doesn't mean that we don't have a significant pipeline of ways to offer value into our system right now, yes, I think the only thing I'd add take and thank you for the question in My limited time I think this is about what it right today and that is as Robert said It may have run its course and it's not that we are doing both.
In lieu of a more aggressive or more sort of offer. We think this is a great offer with high quality products.
In products, we know our guests love and we have seen you have seen value proposition has changed over the last few years.
Most definitely so this is the right thing right longtime for the Denny's brand and our guests.
Great great.
In the season.
Next question.
A history lesson and before my time.
Focusing on the company, but the great recession kind of a big pullback.
Pullback Denny's same store sales did.
Sure.
Meaningfully negative so the question is.
This change now I guess I would've thought maybe one thing Thats true 2468 menu, but in terms of your value proposition and how you might be better positioned now than you were.
Why we can feel a little more confident that you will withstand whatever is coming down the pike here better.
Describe that intrusive.
How you're better positioned now than you were back in 2007 2008.
Yes.
The history lesson for sure.
I think I'll draw tried drawn my 23 years here, so so what's different.
In 2007 2008.
We were heading into that great recession.
The 2468 value menu didn't exist.
Didn't so and we knew we needed something like that and it was really developed during that timeframe and with on the tail end of that it was 2010 April 2010, when that was launched so one thing that has specifically changed.
As we know we know how to.
Do value. These days is a deeply embedded equity and we're not behind the curve were not searching for that platform like we were during the great recession.
<unk> already developed you could see it coming through the <unk> you can see it.
The other platforms that we have utilized here over the last four to six weeks.
So we're ready and willing to move into it we were in a very similar place to many brands coming through the pandemic, we were dealing with closed dining rooms.
We're dealing with inflation, we were dealing with consumer that really wasn't overly price sensitive for a period of time that is clearly not where we are moving into Q3 of 2022, but where we are now is a value oriented consumer for us and we have that did that institutional knowledge already in place we do.
Do not have to develop that some of the other things that are different. These days as we have methodologies to deliver to the to the consumer in ways that we did not have available a decade plus ago, we have.
The 21% off premise business that Kelly mentioned that that was 12% prior to the pandemic and even less than that in 2007. So we have different vehicles in ways to deliver to our consumers. So we are far more tools to work.
Whatever downturn may come this way and we are clearly on the forefront of trying to limit any impact that that might bring.
Great.
Sure.
My last question.
If you can give a little more on <unk> and how we should be modeling modeling that.
If you could maybe give us what's.
I do the math and I have trouble getting to the EBITDA contribution given the A&P in the restaurant margin that was given I'm wondering whether the <unk> of the eight company owned stores are significantly higher than that $1 9 million.
Million.
That helps in terms of maybe royalty rate, we're going to have to build this in and.
Especially with the company said it really is going to swing around.
Any kind of greater detail there would be really helpful.
Yeah.
Let me Peel back that onion, a little bit further with that we do have some higher volume units within that eight unit company portfolio and those higher volumes even.
Go with higher margins right.
<unk> volume that does help margin rates. So I would suggest that they are a little bit higher volume a little bit higher margin.
Other side of that Jake with regard to the to the royalty and I'm not sure. If we shared this but this would be in the FTB the royalty rate with regard to the existing units that are in place.
44 franchise units is a 6% royalty rate. So it's a higher royalty rate than what you would get from a four 5% Dennis So I'm not sure. If you knew that or has that already within your modeling, but that is the math that we're working with so a 6% royalty rate maybe bridge. The gap may not you may have already.
We have that.
No that is helpful.
I appreciate maybe lastly.
The third quarter you mentioned.
Minimal impact from <unk>, but I would think the transaction costs would be really considered one time.
Just.
Any other detail there and how we should kind of build in the contribution of <unk> into EBITDA.
So.
Think where I would point you back with regard to that.
If you go back to our Q1 release, when we announced this transaction, we talked about six 5% to $7 million contribution. So that would lead you to a $1 five to $1 $75 million contribution per quarter from Kiki's. Once you get beyond the transaction cost, which will impact Q3, and we will.
Clearly grow it from there the success of this is really keeping kiki's kiki's not in any way Denny icing it keeping it what it is making sure that we onboard them learn from them.
He helped build an infrastructure to grow them, so that as we move into 'twenty, three and 24, we accelerate that unit growth, but right now.
The transaction was predicated upon one five to $1 $75 million in EBITDA per quarter.
Thank you very much I really appreciate it.
Thank you Jake.
Thank you we take our next question from Todd Brooks.
<unk> Company your line is open.
Okay. Thank you John I want to wish you the best of luck and Kelly I certainly want to welcome you aboard as well.
Okay.
Congrats.
Robert two more questions for you here you are ready please.
Please yes, absolutely far away on.
On the <unk> side, if you look back historically, what's the most units that you guys have talked about keeping the operations relatively separate so I want to understand what they are geared towards.
For for kind of a peak openings in the past.
Yes.
That infrastructure Todd right.
It was and it's what we really kind of bring to the table.
Our expertise lies.
That their infrastructure as it probably was in the four to six unit range.
Add Max through that but again, when we talk to them right. When we talk to their franchisees when Kelly actually she was actually down there visiting with the franchisees.
It was hey, we are looking forward to this we wanted to expand we know we need training, we need help with site selection.
And so forth.
And so we're going to bring that to the table they have doubled.
The number of units since 2016.
So they've gone from 26% to 52 over that timeframe. So it does imply four to six year, but that rate. If we don't accelerate that rate into the future. Todd. This is not going to work for us we have to get significantly beyond that we are going to utilize their franchisees who are excited to grow.
We're going to use the existing denny's franchisees, we talked before we made.
This acquisition under very strict Mbas, we talked to nearly a dozen of them.
Every every one of our franchisees are existing Denny's franchisee said, yes, Im really curious about that most said that they would be interested in opening not one said what are you doing.
<unk> said, we get why you would do that and we don't we're not afraid of that at all and then we have a very talented development team that can go to source additional franchisees who are not in either system.
Not only will we leverage that group, we will have a three pronged approach we will put in place the right training resources were put in the right. The right development resources, and we will move that beyond the 4% to six historical they were able to do that in a very grassroots way the owners.
Actually told us that they really didnt solicit any new franchisees our franchise units. It was people just coming to them, saying, Hey can I open one of these so it's going to be a different approach to this but really keeping the heart of what makes <unk> great in place.
How long does it take to stimulate whether its cross selling into your franchisees or levering. Your site selection capabilities training capabilities. I mean would you I know youre not guiding to 'twenty three unit growth, yet, but would you expect to see a step up from what they've done historically or is there a digestion period that we need to think about when we're modeling.
I think there's a little bit of both Todd frankly, I think there is a little bit of digestion. We're still learning them, we don't want to upset them in any way shape or form they are great. As they are we just want to take that greatness and share it with more people. So we will need to digest and understand what truly how to grow them.
In a way, but I'm not telling you it's going to take two years, either I'd say I think you will see a stepped up rate of growth in 2023, I. Just don't think that that will be the peak growth either I think that will continue to accelerate through 'twenty four and beyond also.
Fair enough.
Next question I have if you look at it.
Kind of value incidents as far as menu mix I know part of it is having more offerings now.
That can that can address a need for value.
Maybe entering the quarter versus exiting the quarter how much into.
Turning to increase did you see in value as a percent of mix.
Yeah. So let me point, you and directions as opposed to giving you a specific numbers.
Would have been low double digits.
Kind of entering the quarter and with the link with the one plate alone the summer Slam occasion.
<unk>, we moved it by about three percentage points in a very short period of time, we actually don't feel like Thats enough, we want to drive it beyond there drive transactions in a profitable way. So we will look to to go beyond that I would tell you at the peak of our value. It was in the 20% rate.
<unk>.
That would be you could go all the way back to the when we launched into 2468, a decade ago and that would be somewhat of a peak as we utilize that over the course of that decade also not guiding that that's where we're going to get but again, just kind of pointing you to a low double digit number that we've moved 3% in July .
And we will look to leverage further into Q3.
That's great and then Kelly a quick one for you if I can.
On the discussion about returning to the operating standards of the $24 seven model.
It seems like it may be a little less carrot and a little bit more kind of enforcement and holding franchise, who used to the responsibility of operating in that model I, just I'm trying to get a sense of the slope for what.
If we increase 3% of those basic Opex 24 seven.
Yes.
Just kind of a slow pace to get back towards that 80%, 90% level. So how do you see shifting maybe the slope of that curve of returning to 24 seven.
It's a huge priority as you can probably take away from the all the conversations we've had and I will tell you it's pushing Paul it's both right, it's a balance and it is not.
Just the stake if the care then there is the incentives part of it and we are.
I have been a part of the limited time here, but actively engaged in that with the head of our DSA board with other franchisees in having this conversation I do think.
The conversations are shifting in terms of.
I think if there is an inflection point here around this staffing right. So we've distilled it down to what else can we do what other tools resources and expertise that we have we've got company restaurants that we can stand up literally standup on this and say this is the difference in sales. This is the difference in their staffing numbers and therefore, we got we got to get there. So.
They absolutely agree and again the plan that we will put in place. There is an urgent plan, we've even got it down to the kinds of numbers will want to see per week per month. This is not over several quarters, but yet a lot of urgency and a lot of focus.
Between us and those franchisees.
Right now so it's urgent and I think doable I think doable I think they are they are tired of looking has the same situation in the inflationary pressures are they all feel that and they want those solutions that we've now got ones that are proven to work for us.
Okay, Great and one final follow up on that.
I know the limited our stores were kind of in the 80% staffed range. It sounds like maybe some modest.
Improvement in the second quarter, which is below some other full service dining peers, they've gotten back to fully staffed to parts of the question one.
What level of kind of pre pandemic staffing do you need to be to open 24 seven model. Consequently are you trying to get back to 90% of those levels you need to go all the way back to 100%. So I want to understand how far away. Some of these limited our stores are and secondly, just the pace of hiring improvement relative to some peers you've talked about.
Some slowing in the wage inflation pressures.
Does this problem gets solved at all by investing some more in wages to grow stuff.
Thanks.
Mhm.
So hey, Todd it's.
Robert again.
With regard to what we have seen with our $24 seven units compared to pre pandemic.
It would be about we're at 100% right in there versus the pre pandemic level.
To contextualize that a little bit think of about 50.
<unk> 50 employees per store is about what it is so when you go across all of our various categories of individuals' because hostesses servers server systems.
Limited our units are in that 80% to 85% range. So youre thinking that they are compared to the full.
<unk> hundred 27 stores, they are probably down somewhere between seven and 10 of employees. So well that 20 points different sounds really large we're looking for like 708 employees to get back to that full staff level and the candidate flow coming from that initiative that I talked from would help bridge that gap pretty quickly.
With regard to that in regards to your comment.
Your question about wages, we look at this we have a very talented.
Compensation group.
Headed up by our VP of comp and Ben and we'd look at literally every market that we're in and this is a company that has limited marketed markets compared to franchisees.
And we benchmark all of those.
Single job code across every DMA and we believe that we are competitive so im not I don't think that were dislocated with regard to what we are paying our employees.
We don't have as much visibility to be very transparent to our franchisee system and frankly, we shy away from that a little bit and look to use third party consultants just due to joint employer rules, we look to use third party consultants to help them with that question, but from the company perspective, I wouldn't say that.
This is a a pay issue for us.
That would net out frankly, Todd with regard to the company portfolio. We have 65 units and I think it's one maybe two units that has not bridge the gap to 24 seven.
That's very helpful. Thank you both.
Thanks Todd.
As a reminder that is star one to ask a question star one to ask a question.
Question from Eric Gonzalez with Keybanc. Your line is open.
Hey, Thanks, and welcome Kelly looking forward to working with you.
You could talk about maybe the comp gap between 24 hours to acquire units into northern area units.
And then just on the off premise business. It seems like the delivery channels really sticky, particularly within the party.
But maybe you have something you would expect just given the high cost. So how do you explain this and we think about the future as we essentially hedged an economic downturn.
What do you know about these customers that are using the green channel the reasons why that might be stickier, and possibly carryout abandoned channels. Thanks.
Yes, I'll take a stab at that and in terms of just what I have seen here and also just kind of looking at the industry and that stickiness question is a great one right because we talk about this being an incremental guests we absolutely believe that to be the case here and I would just point to this is an area of strength for our brand and family dining absolutely an area of strength there arent a lot of other players that have not.
Only invested in the infrastructure the technology infrastructure has helped US it was in play a lot of it was in play before the pandemic that cast strong position. Although we talk about in terms of this model helped to move that quickly where others could not and cannot continue to sustain that and I also think to virtual brands. The virtual brands in their sustained sales weekend week out.
It is also a significant strike there I think look the consumer has learned how to use this channel.
Many of the channel, we all believe they're incremental and I think they will continue to modulate their behavior based on their needs and so now we've got.
Where we know it's proven we know it works and it continues to hold I think youll see that modulate if if things.
Bob flu season, I think people will say, okay, well I can use that channel I've got another way to find my way to Denny and I think this will continue to be an area of strength that stickiness is not held for all brands from research that we see.
But the way we've done it the way we've gone about it the continuum way, we leverage technology and plan for that in the future I think will help us here as well, but I think it's a trend obviously here to stay and just the fact that full service restaurants or steady state in that low twenties.
Versus what it was before the pandemic is promising but us being where we are also I think it's just a.
<unk> strength.
And Eric This is Robert going back to your question with regard to the comp differential between the 24 seven units in the non 24 seven units I'm looking at.
Back at the last five quarters since Q2 of 'twenty, one the differential ranges between 15 and 20 percentage points. So it's massive.
And the profitability follows that directly is a direct correlate as you might expect.
<unk>.
Oddly.
<unk>.
When talking to our franchisees. They go we get it we understand how much we're leaving on the table and now we're going to work with them even more closely to help bridge that gap, whether it be staffing or a little nudge with persuasion against their agreements.
It's there for the taking and it's a huge differential its part in the 'twenty four seven units.
It is positive it's not just a negative the negative thing with the 24 seven units are significantly positive and significantly outpaced the balance of the family dining segment as measured against BVI.
And on those those off premise transactions.
How much of that is coming from that late night day part whether it be commercial brands or just your traditional they're big unlock there as you.
As you do staff up is that really going to come from the off premise business to a certain extent.
Okay.
We're trying to look through our data set here it didn't stick out to us.
As we prepped up for the call I think.
It probably has a disproportionate weighting towards off prem, but not so much so that it would make a meaningful difference.
Uh huh.
Alright, thats it from me thanks.
Thanks, Eric.
And thank you.
There are no further question at this time unless you tend to come back to your presenter for any additional or closing comments.
Thank you Kyle I'd like to thank everyone for joining us on today's call and we look forward to our next earnings conference call in early November during which we will discuss our third quarter 2022 results.
Thank you and have a great evening.
Yes.
And this concludes today's call. Thank you for your participation you may now disconnect.
Okay.
Yeah.
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Yeah.
Yes.