Denny's Corporation (DENN) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Denny's Corporation Annual Meeting. [Operator Instructions] Please be advised that today's conference is being recorded. Thank you. I would now like to hand the conference over to Brenda Lauderback. Please go ahead, Ms. Lauderback.

Good morning. I am Brenda Lauderback, Chair of the Board of Directors of Denny's Corporation. It is my pleasure to welcome you to the 2020 Annual Meeting of Stockholders of Denny's Corporation. I will now call the meeting to order. This year's meeting will once again be conducted as a virtual-only Internet and audio webcast. We are pleased to use this technology as a convenient, safe and efficient means to communicate with you, our stockholders. On today's webcast web page, you will see an agenda for today's meeting as well as a link to the rules and procedures for the conduct of the meeting. We intend to conduct the meeting in accordance with this agenda and these rules and procedures. We have allocated 30 minutes of time for this meeting, including 10 minutes for the question and comment session. On your screen is a text box, where you can submit your questions now and throughout the meeting until the end of the question and comment session. If you have previously submitted a question for management in connection with your proxy vote, we have a record of it and you do not need to resubmit your question again today. We will answer all questions that time allows, and we'll do our best to answer every question we receive. Before proceeding to the business portion of the meeting, I would like to make certain introductions. First, I would like to introduce to you those members of Denny's management, who, in addition to me, will be addressing the meeting today: Scott Melton, Assistant General Counsel, Corporate Governance Officer and Secretary of Denny's; and John C. Miller, the company's Chief Executive Officer. Additionally, I would like to introduce to you the members of the Board of Directors of Denny's Corporation, who, in addition to John and me, are standing for reelection and are in attendance virtually today: Bernadette Aulestia, Gregg R. Dedrick, José M. Gutiérrez, Robert E. Marks, Donald C. Robinson, Laysha Ward and F. Mark Wolfinger. Additionally, I would like to introduce other executive officers of Denny's Corporation who are in attendance virtually today: John Dillon, Executive Vice President, Chief Brand Officer; Chris Bode, the company's Senior Vice President, Chief Operating Officer; Steve Dunn, Senior Vice President, Chief Global Development Officer; Michael Furlow, Senior Vice President, Chief Information Officer; Jill Van Pelt, Senior Vice President, Chief People Officer; Robert Verostek, Senior Vice President, Chief Financial Officer. I would now like to take a few moments to offer some brief comments from the Board's perspective. I am pleased to report that in 2019, Denny's continued to successfully execute against our revitalization strategy, while also balancing the task of transitioning to a more asset-light business model. Our ongoing brand revitalization initiatives aimed at improving our food, service and atmosphere continue to be well received, as 2019 marked our ninth consecutive year of positive system-wide same-store sales growth. Between 2010 and 2019, our highly franchised business model generated approximately $417 million of adjusted free cash flow. Our transition to a more highly franchised business through refranchising and development strategy was substantially completed at the end of 2019 and is expected to yield accretive impacts to adjusted net income per share and adjusted free cash flow. Since late 2010, we have allocated approximately $554 million to repurchase approximately 54 million shares, leading to a 44% net reduction in our share count. Going forward, we remain committed to carefully managing cost, making appropriate investments in our brand and company restaurants and returning capital to our shareholders. The successful progress we have made is a testament to the dedication of our hardworking team members and franchisees who proudly deliver the Denny's diner experience each and every day. That spirit of teamwork has never been more important than in this challenging moment. The impact of the COVID-19 pandemic and related government-imposed restrictions on our industry and our business is unprecedented. Yet our seasoned management team and franchisees have met the challenge with tremendous focus and resolve. Through constant communication and collaboration with our franchisees, we have quickly developed new and innovative ways to operate in an environment where our business is significantly constrained. Furthermore, that same spirit of collaboration has quickly yielded the implementation of new, enhanced health and safety protocols to protect our guests and the public at large as dining rooms begin to reopen. Through the actions taken thus far and the ongoing engagement with our system, we have great confidence that our business will not only endure this challenging moment but will also thrive on the other side. On behalf of the Board of Directors, I wish to sincerely thank the company's management team, employees and franchisee partners for their continued hard work and commitment. To our shareholders, we sincerely appreciate your continued support, your investment in Denny's and the opportunity we have to lead the company. I would now like to ask Scott Melton to organize and bring before the meeting its scheduled business.

Thank you, Brenda. Also in attendance by way of the webcast is Sean Curley, CFA, of Carideo Group, Inc., who has been appointed and has taken an oath as inspector of election to determine the presence of a quorum and to conduct the vote on the matters to be considered at this meeting. Additionally, present virtually this morning are Ty Granger, Lester Lippincott and Terry Grayson-Caprio of KPMG LLP, the independent registered public accounting firm that has been selected to audit the company's 2020 financial statements. If questions arise during the question-and-comment segment of the meeting that KPMG should appropriately address, they will be glad to respond. For the record of this meeting, I am submitting an affidavit of the April 9, 2020 mailing of the notice of Internet availability of proxy materials to stockholders of record at the close of business on March 24, 2020, the record date for determining stockholders entitled to notice of and to vote at this meeting. These documents will be filed with the minutes of the meeting. In the interest of time, we will dispense with the reading of the minutes of the May 8, 2019 stockholders meeting. A complete list of stockholders certified by Continental Stock & Trust Company, our transfer agent, shows that at the close of business on the record date, there were issued and outstanding and entitled to be voted at this meeting an aggregate of 55,666,612 shares of common stock. Common stockholders will have one vote per share on each matter presented to the meeting. The inspector of election reports that holders of over 92% of the shares that are issued and outstanding and entitled to be voted at this meeting are present in person or represented by proxy. Accordingly, there is a quorum present. Due notice of the meeting having been given and a quorum being present, the meeting is qualified to transact business. The following matters have been properly set forth to come before this meeting. They include the election of the Board of Directors of 9 director nominees, the ratification of selection of KPMG LLP as the independent registered public accounting firm of the company for 2020, and a nonbinding advisory resolution to approve the compensation of the company's named executive officers. The polls are now open. If you have already submitted a proxy, you need not vote at this time. If you elect to vote virtually during this live webcast of the annual meeting, please follow the instructions for voting posted on the virtual meeting website. You will need the 16-digit control number included in the notice sent to you by mail or on your proxy card that accompanied the proxy materials. All votes must be received by the inspector of election before the polls close. If you have previously submitted a proxy and now vote virtually during this live webcast, the online vote will constitute a revocation of your prior proxy. Any stockholders who wish to vote now should proceed now to record their votes, as should the proxies. Later in this meeting, we will give you the final results of the stockholder vote. At this time, I ask that you please give your attention to the following. Certain matters discussed by representatives of the company during this meeting may constitute forward-looking statements. Caution should be used when considering the company's current trends and any outlook on company performance provided during this meeting. Such statements are subject to certain risks, uncertainties and other factors that may cause the actual performance of Denny's Corporation, its subsidiaries and underlying concepts to be materially different from the performance indicated or implied by such statements. Such risks and factors are set forth in the company's annual report on Form 10-K for the year ended December 25, 2019, and in the company's subsequent current reports on Form 8-K and quarterly reports on Form 10-Q. We will now hear from John Miller, Denny's Chief Executive Officer. John?

Thank you, Scott. Good morning, and thank you for joining us today and for your continued support of Denny's. I will take a few moments this morning to briefly discuss our 2019 results and then provide an update on our response to the COVID-19 pandemic. Scott earlier reviewed our standard cautionary language for forward-looking statements, so allow me to remind you as well, we will be making forward-looking statements and discussing non-GAAP financial measures. So please refer to our SEC filings for a discussion of risk factors and our quarterly financial releases for an explanation of non-GAAP reconciliations. With that, let's get started. As Brenda mentioned, ongoing enhancements to our food, service and atmosphere continued to deliver an improved and differentiated guest experience in 2019. At the end of the year, we had changed or improved more than 80% of our core menu entrees since beginning our revitalization efforts. We had also remodeled approximately 90% of the system, and our learning and development team was efficiently developing and deploying training curriculum to promote continual improvements in guest service. At the same time, our seasoned management team successfully completed our transition from a 90% franchise brand to one that is 96% franchised by completing the sale of 113 company restaurants to franchisees. Our team's focus on our revitalization initiatives while also transitioning to a more highly franchised brand led to our ninth consecutive year of positive same-store sales growth. And while we started 2020 with solid results in our fiscal January and February periods, things changed quickly in the latter weeks of the quarter as stay-at-home directives were implemented along with mandates requiring dining room closures in response to the COVID-19 pandemic. We were required to make equally swift adjustments in our business, and I'm proud of how well our team and our system of franchisees worked so well together to implement these changes in a matter of days. As our business was abruptly limited to off-premise sales channels only, we were fortunate to already have an established off-premise business through our Denny's on Demand platform. We developed streamlined menus featuring popular products while allowing for greater kitchen speed and efficiency. We also implemented contactless delivery, offered free delivery, developed a Dine-Thru, Curbside program and introduced Shareable Family Meal Packs and Denny's Market, which allows guests to purchase certain grocery items from Denny's in certain stores. Communication and collaboration have been critical elements in our progress. We developed and shared training materials with all franchisees and restaurant managers in preparation for the impact of the pandemic. We have conducted nearly 30 calls with our system, sharing key information and best practices in this challenging time in addition to daily system e-mail communications. In advance of jurisdictions starting to ease dine-in restrictions, our training team did a terrific job developing additional materials focused on our newly implemented health and safety measures. These measures are designed to protect the wellbeing of our guests and the public at large and include best-in-class practices for operations, customer service, cleaning and sanitation and new social distancing measures. With these measures in place, we're confident that we can deliver the same high-quality food and great guest experience that Denny's is known for and in a very safe manner. We will be sharing these enhanced health and safety measures with consumers to provide them with confidence to enjoy a great Denny's meal in one of our dining rooms where permitted. And as of last week, a total of 521 Denny's restaurants were operating with dining room capacity limitations across 21 states, and the number continues to expand. We are encouraged by the steady improvements in dining room sales in these restaurants, while those same locations have maintained over 100% growth in their off-premises business. We've also been focused on the financial health of our franchisees. Direct financial relief has included the deferral of remodels, a deferral of royalty and advertising fees for a week in March in addition to the abatement of such fees for the final 2 weeks of our fiscal first quarter 2020. We've also advocated on behalf of our franchisees to secure additional financial relief from vendors, third-party lenders and landlords. In an effort to reduce our use of cash, we implemented several cost-saving measures, including suspended travel, canceled in-person field meetings, placed holds on all open corporate and field positions, significantly reduced restaurant-level staffing across the company portfolio, meaningfully reduced compensation for the Board of Directors and multiple levels of management and furloughed over 25% of the corporate office. In these challenging times, our management team is focused on controlling business cost, while supporting Denny's' recovery as dining rooms reopen. Let me close by reminding you that our brand was founded on a simple premise. We love feeding people, and that is why even in these challenging times, our restaurant teams have donated over 15,000 free meals to first responders and medical teams. That passion for feeding people runs deep in our franchise system and drives our collective resolve to quickly adapt to these current challenges, while doing everything we can to continue safely serving our guests and the communities in which we live for many years to come. I'd like to thank each of you for your interest and continued support of the Denny's brand. With that, I will turn the meeting back over to Scott Melton.

Thank you, John. Madam Chair, I've just received the inspector of election's report and, therefore, do hereby announce that the polls are now closed. According to this report, the holders of a substantial majority of the outstanding shares present at this meeting have voted for each of the nominees to the Board of Directors, for the proposal to approve the ratification of KPMG as the independent registered public accounting firm for 2020 and for the executive compensation of the company. That being the case, each of the nominees to the Board of Directors has been elected, the proposal to ratify the appointment of KPMG LLP as the company's independent registered public accounting firm for 2020 has been approved and the results of the advisory votes on the company's executive compensation have been duly noted. I will now turn the meeting back over to John Miller, who will conduct the question-and-comment session.

Thanks, Scott. We are now at the question-and-comment portion of the annual meeting, and we have received questions in advance of the meeting along with questions which may be taken or asked during this Q&A session. So I'll ask Scott to read the questions and then I will respond. Scott?

Thanks, John. We received a series of questions from stockholder, [ Dennis Wilden ] from Chicago, Illinois. His first question, California is an important state for Denny's. Can you provide updated restaurant reopening guidelines for that state and discuss how soon we can expect Denny's to give dining room service up and running? Also, does Los Angeles have separate guidelines?

Thank you. Those are great questions. California is indeed an important state for our brand, and the situation there is very fluid. We are closely monitoring the reopening time lines in real time, as you can imagine. Generally speaking, Governor Newsom has indicated that restaurant dining rooms can be open in counties that have been certified as meeting state benchmarks for addressing the pandemic. Last Tuesday, the California Department of Public Health issued a set of reopening guidelines. We have studied those guidelines. We've shared it with our restaurants in the state, and we are prepared to comply. So at the time of our earnings call last Thursday, Denny's restaurants across 7 counties in California had been allowed to reopen with occupancy limits determined by those local jurisdictions. And then earlier this week, Governor Newsom eased the rules for when counties can reopen restaurants and stores, clearing the way for an additional 53 counties to qualify under these new standards. That said, reopening decisions and the related social distancing requirements on -- for dining rooms and how they -- their capacity is still going to be decided at the local level due -- with due consideration to how COVID is interpreted there. So at the time, Governor Newsom was quoted as saying, "Just because we're creating the capacity and availability to move into Phase 2 doesn't mean that every county is ready." In L.A. County, as an example, there will be a greater level of caution there. So when L.A. County is ultimately certified to reopen, we will be ready to serve guests in a safe environment, and our teams are being prepared as we speak. Scott?

All right. Question number two, is there any way for Denny's to provide outdoor seating such as patios or decks to accommodate diners? Again, my understanding is that Texas and some other states do not include outdoor seating in the 25% or 50% indoor seating limit restrictions.

That is correct, that most states have different restrictions for outdoor seating. In many cases, outdoor requirements are based on social distancing standards rather than some percentage but it does vary across the country. And we've learned over recent weeks to be agile and scrappy and prepared for any number of dynamic changing business conditions, and we have seen a number of our restaurants creatively adapt to some outdoor seating on their parking lots, in shaded areas and to test their viability. And we've had some promising results associated with that. So basically, we're in this position now to carefully monitor how these have gone and how many of those things survive and live to be part of our strategies going forward, some in some areas more than others, depending on the heat and the makeup of that particular location. But those are very good suggestions that we will take a very close and hard look at. Scott?

Third question from [ Dennis ], the company's most recent update mentioned a big increase in off-premise sales. Is most of that increase from new customers? And do you believe that Denny's can keep most of that increase when business normalizes?

Well, we certainly hope so. Prior to COVID-19, off-premise sales have grown to about 12% of our total business. And the introduction of these new initiatives like Curbside service, promoting free delivery, more direct engagement with our rewards members collectively and need a lot more exterior-branding signage flags, sometimes exterior-hosted stands, some stores put cone throughout the parking lot to create some visible, obvious accommodations for people to drive through without getting out of their car. So there are a number of things that we sort of tested throughout the process to accommodate, make things easy for our guests. We believe that growth in off-premise transactions, particularly through online orders, is reaching new guests, direct answer to your question here, and younger guests that are using us more frequently. 40% of these online users are aged 18 to 34, which is much higher than dine-in guests, which tends to skew 45 to 65. So clearly, either a new audience or a higher frequency of an audience we had. So while it's still early, we have reason to be confident that the growth in our off-premise will continue to carry forward as we rebuild momentums in our dining rooms.

Question number four, the race to develop a vaccine and a cure for the COVID-19 virus is intense. In your opinion, in the event of an effective vaccine is approved by the FDA, what impact would that have on the return of Denny's to business at 2019 levels?

Well, certainly, prevention is a cure. If people know that they can prevent and not contract the disease, it returns a lot of confidence to the marketplace. It is a very good question. There was very encouraging news earlier in the week that a vaccine trial shows promising early results in Phase I. We're hopeful that, that continues through the required phases for a rollout, and we're excited to see the energy put into this from enterprise and the experts across the globe that are good at developing these cures. Sticking to what we do best is serving the public. We're hopeful that there's a positive result of that and that -- and the confidence returns to the marketplace. I think the normalcy and how that's defined coming out of this, some are predicting a little slower placed to confidence, others more rapid. But in either case, we are prepared to keep the public safe to manage through these protocols for safety and very excited about seeing these lifts -- slowly lifted under the guidance of the good leadership state-by-state across the country. We are ready to welcome our guests back in.

We have -- John, we have one final question that was submitted during the -- during our webcast. With COVID, have you had any major issues getting products from vendors, any major concerns?

No, not at this point. We have not experienced any supply chain disruptions to date. There have been concerns about workers testing positive with COVID-19 at different processing plants and the concern that might create in short-term supply disruption, but we have not -- the concern has been primarily in proteins -- animal proteins, beef and pork. But we have not -- there's not -- those are just bottleneck challenges that we think can be sorted out pretty quickly. And therefore, we do not expect any challenges to our supply chain, which is actually better than having some other kind of shortness in supply or reduced herd stocks that can create longer-term market challenges. So at present, we're confident that we will be just fine.

Well, John, that concludes the questions that we've received today.

All right. If that is the last of our questions, that concludes our question-and-comment session. So I will now turn the meeting back over to Brenda.

If there are no further questions or business, the meeting is now adjourned. Thank you.

This concludes today's call. You may now disconnect.