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

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 2021 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: Gail Sharps Meyers, Executive Vice President, Chief Legal Officer, Chief People 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 Denny's Board, who, in addition to John and me, are standing for reelection and are in attendance virtually today: Bernadette S. Aulestia; Gregg R. Dedrick; José M. Gutiérrez; Donald C. Robinson; Laysha Ward; and F. Mark Wolfinger, Denny's President. We would also like to take this time and recognize Rob Marks, who is not standing for reelection to the Denny's Board. Rob has diligently served as a Denny's Board member for the past 23 years, 2 of those years as the interim chair of the Denny's Board of Directors and a total of 16 years as the Chair of Denny's Audit and Finance Committee. We truly thank Rob for all of his hard work, his untiring commitment to the brand and for his many contributions to Denny's and our Board. Replacing Rob on our Board, we welcome, Olu Beck, as the Director Nominee, also standing for election today to the Board of Directors of Denny's Corporation. Olu is the Founder and Chief Executive Officer of the boutique management consulting firm, The Beck Group NJ LLC. Olu has more than 25 years of experience in portfolio business and general management, including direct experience driving transformational and strategic growth, bringing a diversified experience base in finance, sales and marketing, with global expertise from senior leadership roles, managing teams in Europe, the Americas and Asia Pacific. Again, welcome, Olu. Additionally, I would like to introduce the executive officers of Denny's Corporation who are in attendance virtually today: Chris Bode, the company's Executive Vice President, Chief Operating Officer; John Dillon, Executive Vice President, Chief Brand Officer; Steve Dunn, Executive Vice President, Chief Global Development Officer; Michael Furlow, Executive Vice President, Chief Information Officer; Robert Verostek, Executive Vice President, Chief Financial Officer; and Jay Gilmore, Senior Vice President, Chief Accounting Officer and Corporate Controller. I would now ask Gail Sharps Meyers 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 the 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 matters to be considered at this meeting. Additionally present virtually this morning are: Ty Granger, Lester Lippincott and Joe Paradise of KPMG LLP, the independent registered public accounting firm that has been selected to audit the company's 2021 financial statements. If questions arise during the question and comment segment of the meeting that KPMG should aptly address, they will be glad to respond. For the record of this meeting, I'm submitting an affidavit of the April 9, 2021, mailing of the notice of Internet availability of proxy materials to stockholders of record at the close of business on March 23, 2021, 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 reading the minutes of the May 20, 2020 stockholders meeting. A complete list of stockholders certified by the Continental Stock Transfer & 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 in aggregate of 64,144,845 shares of common stock. Common stockholders will have 1 vote per share on each matter presented to the meeting. The inspector of election reports that the holders of over 90% 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: one, the election of the Board of Directors of 9 Director nominees; two, the ratification of the selection of KPMG LLP as the independent registered public accounting firm of the company for 2021; three, a nonbinding advisory resolution to approve the compensation of the company's named executive officers; and four, a resolution to approve the Denny's Corporation 2021 Omnibus Incentive Plan. 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. Stockholders eligible to vote will have received 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 30, 2020, and in the company's subsequent current reports on Form 8-K and quarterly reports on Form 10-Q. We will now hear business presentations, first from Brenda Lauderback, Denny's Board Chair, and then from John Miller, Denny's Chief Executive Officer.

Thank you, Gail. I would like to take a few moments to offer some brief comments from the Board's perspective. By all accounts, 2020 was a year of unprecedented challenges for our industry and the Denny's brand. The impact of the COVID-19 pandemic and related government-imposed restrictions tested the resolve of our system like never before. Yet, our seasoned management team, franchisees and restaurant asset operators consistently responded with focus, ingenuity and a passionate commitment to ensure this brand, which is 67 years young and has weathered many storms, would prove its endurance once again. Communication and collaboration with our franchisees have been great strength for Denny's, and that has never been more important than this past year. Through enhanced communication practices, we developed and implemented new safety protocols to protect the well-being of our guests, restaurant teams and suppliers. We introduced streamlined menu while adding innovative products, reduced operating cost, rapidly developed alternative of service delivery models, refined our capital structure and developed 2 new virtual concepts. We provided direct financial assistance to our franchisees, invested in benefit programs for all active and furloughed employees and enabled remote work protocols. Finally, we adjusted compensation programs to align interest, preserve a strong linkage between pay and performance, and retained the leadership talent that has consistently delivered strong results for our stockholders for many years. These important initiatives and investments mitigated restaurant closings to a net total of only 53 locations, contributed adjusted EBITDA in 2020 well above our expectations and kept our seasoned leadership team intact. Going forward, we remain committed to carefully managing costs, making appropriate investments in brand and company restaurants, and returning capital to our shareholders. The successful progress we have made in the context of a massively disruptive pandemic is a testament to the dedication of our hard-working team members and franchisees, who proudly deliver the Denny's diner experience each and every day. Through the actions taken thus far and the ongoing engagement with our system, we have great confidence that our business will not only survive 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 franchisees 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 will now turn the meeting over to John Miller.

Thank you, Brenda. Good morning, and thank you for joining us today and for your support of Denny's. I would like to take a few moments this morning to briefly discuss how Denny's responded to the COVID-19 pandemic during 2020. Gail earlier reviewed our standard cautionary language for forward-looking statements. 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. Despite a solid start to 2020, 2020 quickly turned into a historic year of challenges. And fortunately, the ongoing revitalization of our brand provided a firm foundation as we navigated through the COVID-19 pandemic. Entering the year with more than 80% of our core menu entrees changed or improved since 2011 and nearly 90% of our system on the upgraded heritage image, we were able to focus our attention around 4 guest-centric themes; reassurance, value, comfort and convenience. Reassuring our guest of a safe dining experience was the utmost importance as we consistently upheld our commitment to enhanced cleanliness and sanitation procedures at all customer touch points. Our second area of focus was value. While Denny's is known for its everyday value, we understand that value comes in different forms for our guests such as our price-driven value like our well-known $2 $4 $6 $8 Value Menu, convenience-based value, our free delivery, our bundled value like our Super Slam, and our new line of bundled value Shareable Family Meal Packs. Our third area of focus was providing a comfortable dining experience by ensuring that Denny's is a place where our guests feel welcomed and valued, and continued enhancements of our differentiated and cravable products yielded a new line of comfort food, including bowls and melts, even while pivoting to streamline menus. And additionally, our Heritage remodel program has consistently received positive guest feedback, largely due to its welcoming and relaxed feel. Despite the COVID-19 pandemic, our system completed 22 remodels in 2020, including 2 company restaurants. Our fourth area of focus was convenience. And our well-established Denny's on Demand platform was essential to providing guests with options as dining rooms were closed. We also quickly implemented curbside pickup, contactless delivery, drive-up ordering, outdoor dining and Apple Pay for our Denny's on Demand iOS mobile app. These collective options led to off-premise sales more than doubling from beginning of the pandemic, and our off-premise sales have maintained elevated levels even as dining rooms have been reopening in 2021. As Brenda mentioned earlier, the success of our brand initiatives is supported by an environment of strong collaboration with our franchise partners. That spirit of ingenuity and collaboration during the pandemic brought ideas to market at a rapid pace and was paramount in navigating throughout the year. In partnership with our franchise system, we recently developed and have started rolling out 2 new virtual concepts. The first concept called the Burger Den, which is up and running in over 1,100 locations, allows us to extend our great burger platform with new varieties using ingredients already in our pantry. And the second concept called The Melt Down features handcrafted melts with fresh ingredients and will be rolled out to over half of the domestic restaurants during the second quarter of this year. We have been focused on the financial health of our franchisees during this past year. In addition to the $15 million of direct financial relief we provided, we also secured relief from key vendors and primary third-party lenders, deferred scheduled remodels and extended new store development commitments. Although we provided franchisees with additional time to complete these commitments, we fully expect those restaurants to open in the due course as economic conditions continue to improve. And finally, we encouraged our franchisees to secure critical stimulus support through the Paycheck Protection Program, and 99% of all domestic franchise restaurants were successful in the initial round of funding. Franchisees representing approximately 98% of all domestic franchise locations have applied for a second round of PPP stimulus, and many have started to receive funding once again. During our earnings call earlier this month, we noted our same-store sales performance in April close to within 2 percentage points of 2019 pre-pandemic levels. That is an environment in which nearly all of Denny's restaurants are now operating with open dining rooms under various restrictions, but only 1/3 of domestic restaurants are operating at 24 hours a day, 7 days a week. We are encouraged by this recent performance and the opportunity that's in front of us. Our management team remains focused on controlling business costs to support Denny's recovery and return to strong cash flow generation. As a reminder, over the last 9 years, we have generated over $418 million in adjusted free cash flow after capital expenditures, cash interest and cash taxes, and we generated positive adjusted free cash flow each of the last 3 quarters during the pandemic. Since launching our share repurchase program in late 2010, we paid an average of $10.26 per share to repurchase approximately 550 million -- 554 million of our stock, reducing our total share count by approximately 44%. While recent amendments to our credit facility secured covenant waivers in favorable terms as we navigate the recovery, we look forward to resuming our long-standing practice of returning capital to shareholders once we emerge from certain restrictions in the fourth quarter of this year. So let me close by reminding you that our brand was founded on the simple premise, we love to feed people. And that passion for feeding people runs deep in our franchise system and drives our collective resolve to quickly adapt to the greatest of challenges, while doing everything we can to continue to safely serving our guests and the communities in which we live for many years to come. We'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 Gail.

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 2021, for the executive compensation of the company, and for the proposal to approve the Denny's Corporation 2021 Omnibus Incentive Plan. 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 2021 has been approved. The results of the advisory votes on the company's executive compensation have been duly noted. And the proposal to adopt the 2021 company Omnibus Incentive Plan has been approved. I will now turn the meeting back over to John Miller, who will conduct the question and comment session.

All right. Thank you, Gail. 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 asked during this Q&A session. So I'm going to ask you, Gail, to read the questions, and then I will respond.

Okay. John. First question. Outside dining provided critical revenue during the pandemic, please discuss your plans and thoughts regarding the future of outside dining at Denny's given the following questions. As indoor dining returns to pre-pandemic revenue and occupancy levels, do you expect outdoor dining could be retained as additional new business in much the same way as the increased off-premise sales are being retained?

Thank you. That's a great question. Well, we certainly applaud the ingenuity that's been displayed by our franchisees and our operations team at our franchising company restaurants all throughout the pandemic. And we have discussed how our highly collaborative relationships with our franchisees did make contributions to many ideas that we were able to bring to market very quickly, including streamlined menus, contactless delivery, I think I mentioned family meal packs. And to your question, we also had some very innovative outdoor dining. So as the diners were closed, restaurant teams converted sidewalks and parking spaces, and these were mostly makeshift or temporary outdoor dining areas, and some had tents, tables, chairs. And this allowed us to serve our guests outdoor during warmer months across a pretty broad geography. Then as the seasons change and outdoor dining was frankly, most successful in the more temperate parts of the country that this was bound to pull back to some degree if it got too hot or too windy, depending on the location. But with the increasing vaccinations and the declining COVID-19 cases, the national, state and local health officials then started relaxing the restrictions for dine-in. And so as that happened, our preference then was to safely serve as many guests as possible inside the dining room with our ongoing enhanced safety protocols and the like. And this ensures the guests have access to an adequate number of parking spaces. And knowing from experience, whether it's inside or outside dining, there's only so much capacity on the parking lot one way or another. Gail, back to you.

Okay. John, our next question. Is the availability of outdoor dining at locations that are permitting full indoor occupancy enabling Denny's to see more guest at one-time and thereby increase sales during busy weekends and other peak periods?

In theory, outdoor dining could allow for additional seating during peak periods in stores with open dining room. Unfortunately, as these were built with a certain capacity in mind, we need to balance how many parking spaces are needed for outdoor and indoor, and there is a total capacity of the property challenge. So this would not -- we would not be able to do this as a nationwide strategy, said in other way. The safety of our guests in the parking lot is also a key factor for certain operating hours as well as staffing to adequately care for the peak demand. So at the moment, the restaurant industry is continuing with staffing challenges, as everybody knows, against growing customer demand as the restrictions ease. So the near-term focus is on rebuilding inside dining sales, but there will be a few locations. And now and in the future, they are going to keep -- we will be keeping and/or expanding or adding patios.

Okay. John, next question. Are you finding that outdoor dining is attracting new guests who prefer outdoor dining over indoor dining?

I believe outdoor dining has provided a solution for guests who may have felt more comfortable with open air options during the pandemic. So we also believe outdoor dining, it met this need for guests who were just eager to get out after being sort of the cabin fever effect from being closed up for quite a few months. So as mentioned, there could be a segment that prefers an outdoor option longer term. And our development team and our operations team will be mindful of those preferences at viable locations to keep that as part of our ongoing strategy.

Next question. Did installing outdoor dining this past year require any onetime pandemic-only permission from landlords or governmental authorities? And if so, will that be a problem keeping permanent outdoor dining going forward?

That is a great question. We do place a premium on collaboration and relationships in our brand. That has been true in the relationships we have with our franchise partners, our vendors, our landlords, and that's just to name a few. That collaboration was critical throughout pandemic and yielded new ideas, rapid deployment, helpful accommodations, and I think also meaningful financial relief. So to that end, we did encounter issues in providing outdoor dining options. We actually did -- we did not encounter issues generally. However, in some jurisdictions, outdoor dining was, in fact, prohibited by state and local authorities for a period of time, which, of course, generally left us without -- with only takeout options and no dining whatsoever.

Okay. John, next question. In light of recent controversies involving Denny's stated position on the minimum wage and the positions and lobbying actions taken by the National Restaurant Association, how is the company assessing possible misalignment risks related to its corporate, political and lobbying expenditures?

Great question. Of course, we do not see there to be an alignment risk whatsoever. We are affiliated with the National Restaurant Association for the things they do for the industry, namely the education foundation, job growth, career opportunities. We do not have a lobbying budget per se, just a membership. So we don't see a conflict at all. Remember, we're a 96% franchised business, 55% of our franchise ownership is minority owned, and we are focused on building wealth from these communities and giving returns to our shareholders. We are not focused on being involved in being a lightning rod in any way on political controversies or tensions between 2 points of view. We are for our employees and our franchisees, and we work diligently to see their needs are met.

Okay. John, next question. In recovering from COVID, are you having any vendor or supply chain issues?

There have been spot outages for sure. Remember, as restaurants, retail and all industries gear back up again, so do sales and transactions and demands. And so we're mindful of that gearing up process and very grateful for our -- for the effort put forth by our brand advisory councils, our supply chain committees and our vendors to do the job they've done. There have been some spot outages, but long term, we see no issues of any concern.

Okay. Then will Denny's increase payroll at our 65 company-owned units in light of higher traffic as the economy opens up?

Yes, payroll grows every year we think at the market rates. And so I'd say that we're proud of our policies, our low turnover, the level of engagement of our team and the frequent recognition as an employer of choice and/or one of the top employers in South Carolina. And so wages are part of that equation, along with culture and a lot of the other things that we do to make sure that we're relevant, up-to-date and a great place to work.

Okay. Next question. Taking a reactionary response from COVID for the last year out of the equation, what is the capability for growth to have the corporation hit the next milestone for shareholders that believe in the company? Define how this will be reached with a definitive measurable plan and approach?

That is a very good question. I would -- I speak to this regularly, there are a lot of initiatives going on at any given time. And sometimes it is as hard as a shareholder to get your head around all of them. So I won't be able to be exhaustive here. I'd say, certainly refer to our IR deck that we keep up-to-date and online. It's a very good document that outlines our major initiatives. At all times, we are working through our revitalization program. We call it -- we say we're in the middle innings of our revitalization program at the present. We always have food service and environment initiatives going on practically at all times. They each have success measures. They each have milestones and goals. They each have rollout dates, some of which that are not specific or public based on our ability to compete in the marketplace and reveal things when they should be revealed. We do these things in collaboration with our brand advisory councils and our franchisees so inside our system, people are quite aware of what we have scheduled next quarter and up to as many as 6 to 8 quarters out. All of these food service and environment initiatives are enabled by a strong technology platform that's ever-growing and new investments are being made in modernizing our technology platforms at all times as well. So I would just saying, in general, on the 2 areas that unlocks growth for our shareholders. First, let's talk about the pipeline. Through our franchise growth initiatives, we have a stronger pipeline of development agreements than we've had in some time. We're excited about the environment for growth. A lot of seats were eliminated in full-service throughout the pandemic. And so being the conversion machine that Denny's is and good solid unit economics as sales return, we believe that, that will lead to capacity growth for our brand. On the product quality, investments, menu optimization, line modernization, good pricing strategies and good value offerings, we think the combination of that and the positioning of the all-day diner for breakfast, lunch, dinner and late night opportunities is rich for our brand, and we're excited about the possibilities to at least in both traffic and check and daypart stimulation. So we believe, again, we're in the middle innings of our revitalization, and that our story should continue to grow and prosper.

Okay, John. The last question we have is, will the Board consider paying a dividend to shareholders instead of buying back stock?

We look forward to, after the third quarter of this year when we can sort of get back to normal and under new credit facilities, have the full array of permissions afforded before in how we return out of our high free cash flow to shareholders. We think we have demonstrated a strong track record over a long period of time since our share repurchase program started in late 2010. I highlighted the number of shares that were retired in my comments today. We generally include in our agreements, the permissions to move between share repurchase programs and dividend programs. We seek feedback from a broad array of shareholders. We try to keep our ear close to the ground, and we look at what creates the most value. So we do discuss this on a regular basis. And to the extent that, that becomes a viable option and best interest of the broadest, it would come under consideration as it always does and is discussed vigorously by our Board. So far, over the past 10 years, there's been a preference for share repurchase. And so we'll just see where that takes us in the future. But yes, in answer to the question directly, we do give adequate and due time in consideration to the idea.

And that was our last question, John.

All right. Thank you. We are at the end of the meeting time and out of time. So now I'm going to hand the meeting back to Brenda Lauderback, our Chair.

Thank you, John. As there are no further questions or business, the meeting is now adjoined. Thank you.