Denny's Corporation

Good day, ladies and gentlemen. Welcome to the Denny's Corporation Q3 2021 Earnings Call. Today's conference is being recorded. At this time, I turn the conference over to Kurt Nichols, Vice President of Investor Relations and Financial Planning and Analysis. Please go ahead.

Thank you, Keith, and good afternoon, everyone. We appreciate you joining us today for Denny's third quarter 2021 Earnings Conference Call. With me for management are John Miller, Denny's Chief Executive Officer, Mark Wolfinger, Denny's President, and Robert Barostek, Denny's Executive Vice President and Chief Financial Officer. Please refer to our website at investor.denny.com to find our third quarter earnings press release, along with the reconciliation of any non-GAAP financial measures that are mentioned on the call today. This call is being webcast, and an archive of the webcast will be available on our website later today. John will begin today's call with a business update. Mark will then provide some comments around restaurant capacities, our franchisees, and development. Then Robert will provide a recap of our third quarter financial results and current trends. After that, we will open it up for questions. Before we begin today, let me remind you that in accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, The company knows that certain matters to be discussed by members of management during this call may constitute forward-looking statements. Management urges caution in considering its current trends and any outlook on earnings provided during this call. Such statements are subject to risk, uncertainties, and other factors that may cause the actual performance of Denny's to be materially different from the performance indicated or implied by such statements. Such risks and factors are set forth in the company's most recent annual report on Form 10-K for the year end of December 30, 2020, and in any subsequent Forms 8-K and quarterly reports on Form 10-Q. With that, I will now turn the call over to John Miller, Denny's Chief Executive Officer.

Thank you, Curt. Good afternoon, everyone. Our third quarter domestic system-wide same-store sales started out very strong as consumer confidence was on the rise. and families were enjoying summer vacations, some for the first time in two years. However, average daily COVID-19 case counts across the country accelerated throughout the quarter, and case counts remained elevated with average daily cases at their highest level since January. The result was pressure on consumer confidence as well as dine-in transactions throughout the industry in August and September. Thankfully, the improvement in case counts in October yielded a return in dine-in transactions to their highest levels since the pandemic began, with same-store sales once again surpassing the 2019 levels. Furthermore, approximately half of the domestic system generated positive sales in the month of October. Approximately half of the domestic system generated positive sales in the month of October, and each of our top four states were positive as well. And I am even more encouraged by the stickiness of our Denny's-based brand off-premise business, which has remained strong at approximately 20% of sales compared to its pre-pandemic trend of 12%. Additionally, during the third quarter, we substantially completed the rollout of our second virtual brand, the Meltdown, to approximately half of our domestic system. Virtual brand sales for both the Burger Den and the Meltdown remain highly incremental at approximately 3% of sales. These brands provide opportunities not only at dinner and late night to leverage underutilized labor, but we continue to see a meaningful number of transactions during the week versus the weekend. Our teams have accomplished this while navigating persistent industry-wide staffing challenges that have impacted our ability to execute at our highest potential. Despite the expiration of enhanced unemployment benefits, personal saving rates remain above pre-pandemic levels. Therefore, we have not experienced a significant increase in staffing levels, which impacts our effective operating hours. We still view this as a near-term challenge that we are combating with extensive hiring efforts. However, we expect it will take a few more quarters to return to pre-pandemic static levels and effective operating hours. I will now touch briefly on our four key guest-centric themes and some of the new and exciting investments we are making in these areas. The first area's focus is reassurance. We do remain committed to reassuring our guests that Denny's provides a safe dining experience by consistently executing our enhanced cleanliness and sanitation procedures at all customer touch points. Our second area of focus is value. We understand that value comes in different forms and has a different meaning for each type of guest. We consider our value approach to be a comprehensive balance between price, abundance, convenience, and bundled value. Our third area of focus is convenience. We believe guests will continue to expect technology to enhance their dining experience, whether in our restaurants or throughout Primbus options. like our well-established Denny's on-demand platform or our two new virtual brands. We are committed to optimizing the digital experience for our guests, as evidenced by our recent launch of the next phase of our technology transformation. This phase included a revamped Denny's.com website, a new easy-to-use digital app with frictionless ordering and checkout, smart upsell and cross-sell capabilities, as well as personalized profiles and digital wallets for rewards. In fact, since our digital relaunch, there have been approximately 40,000 net new app downloads and approximately 100,000 net new rewards members. Additionally, our updated mobile app receives very high star ratings on both Apple and Android devices. Further enhancing our focus on convenience, we're excited about the next phase of our technology transformation. We will begin the rollout of a new cloud-based restaurant technology platform during the first half of 2022 that will include enhancements such as wait lists and table management, as well as lay the groundwork for future enhancements as we continue to build towards next-generation customer experiences with even more innovation and functionality. This rollout is expected to be substantially completed by the end of 2023. And our final focus area is comfort. We have already established a history of providing a comfortable dining experience to our successful heritage remodel program and look forward to relaunching our heritage 2.0 program next year. Furthermore, we are very excited to announce our latest investment in the brand and our revitalization strategy, which is the rollout of our kitchen modernization project. The majority of our company restaurants, along with a group of franchise restaurants, have been testing the equipment package throughout 2021. Based on the positive guest feedback, we're expanding this initiative to the entire domestic system. The new equipment allows us to accomplish three main goals. First, the new equipment package will reduce complexity in the kitchen, both improving efficiency and reducing waste. This simplifies execution for our cooks and results in more consistency for our guests. Second, the oven delivers improvements to our current core items, impacting over 4.5 million plates every week and allows for improved quality and consistency for our breakfast proteins. Our bacon is crispier and sausage is more evenly browned. And third, investing in this new equipment provides the ability to enhance our menu offerings across all day parts, but especially further elevating the dinner day part with new comforting entrees, sides, and baked desserts. The rollout is expected to begin during the first quarter of 2022 and be substantially completed by the end of 2022. The total domestic franchise system investment for the new cloud-based technology platform and kitchen equipment package is approximately $65 million. To assist franchisees, we will be allocating approximately $10 million toward the cost and installation, and have also negotiated favorable financing terms on their behalf for the remaining cost. In closing, we have a lot of energy in this iconic brand. We are very encouraged to see our October sales results once again surpass 2019 levels. We're also excited to be kick-starting our revitalization strategies again. our new technology transformation, including our revamped website and mobile app, the new restaurant technology package that will greatly enhance our operations and guest experience, the new kitchen equipment package, which will propel menu innovation, and the impending relaunch of our Heritage 2.0 remodel program. And all of this together should ultimately drive incremental traffic. This enthusiasm is bolstered by our extraordinary group of dedicated franchisees and their confidence in the long-term vision of the brand. Their excitement around these initiatives and the investments we are making gives me great confidence about the future of this brand. With that, I'll turn the call over to Mark Wolfinger, Denny's president, to discuss more about our franchisees and development.