Denny's Corporation

Greetings and welcome to the Denny's Corporation fourth quarter 2022 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kurt Nichols, Vice President, Investor Relations and Financial Planning. Thank you, Kurt. You may begin.

Good afternoon. Thank you for joining us for Denny's fourth quarter 2022 earnings conference call. With me today for management are Kelly Vallade, Denny's chief executive officer, and Robert Verosteck, Denny's executive vice president and chief financial officer. Please refer to our website at investor.denny's.com to find our fourth quarter earnings press release, along with the reconciliation of any non-GAAP financial measures mentioned on the call today. This call is being webcast and an archive of the webcast will be available on our website later today. Kelly will begin today's call with a business update, then Robert will provide a development update and recap of our fourth quarter financial results before commenting on guidance. After that, we will open it up for questions. Before we begin, 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 risk and factors are set forth in the company's most recent annual report on Form 10-K for the year ended December 29, 2021, and in any subsequent Forms 8K and quarterly reports on Form 10Q. With that, I will now turn the call over to Kelly Vallee, Denny's Chief Executive Officer.

Thank you, Kurt, and good afternoon, everyone. 2022 marked a year of many positive changes in our business, and I'm excited to reflect on that today before turning to this quarter's results. For starters, our Board of Directors oversaw a very thoughtful and significant leadership transition. We thanked both John Miller and Mark Wolfinger for their many years of service and impact, congratulated them on their retirements, and we now benefit from their experience and wisdom as continuing board members. I was thrilled to join as CEO, and I could not be more energized by the opportunity to build upon the great foundation already in place. We also completed the acquisition of Kiki's Breakfast Cafe, which transformed our business into a portfolio company operating two complementary concepts now. To ensure each brand maintains its unique identity and differentiated position in the market, we evolved our organizational structure with the appointments of John Dillon to serve as president of Denny's and David Schmidt to serve as president of Kiki's. Denny's and Kiki's now operate with independent leadership teams, each driving their own strategies, products, marketing, operations, and development initiatives with support from our shared services teams. Importantly, we'll maintain our ongoing collaboration and best practices on all major initiatives with our franchise partners in both brands to ensure we're set up for success. And finally, our seasoned and talented senior leadership team leveraged the perspectives of our franchise partners, operators, and leaders from both brands, along with insightful data about our guests and teams, to refine and refocus our strategic priorities. I'll now spend a moment on each of these. Our first strategic priority is to develop best-in-class people and teams through culture, tools, and systems. I believe a positive, enduring culture characterized by shared values leads to winning teams. A restaurant general manager is clearly the most critical position for any restaurant. We want to ensure we have the best programs in place to attract, retain, and develop these important leaders. In a broad sense, this involves offering transformative experiences and benefits that foster a sense of inclusion, wellness, and belonging. And we've been recognized for our efforts here. Most recently, being recognized by Newsweek as one of America's greatest workplaces for diversity in 2023. We also understand our guests and our employees increasingly expect businesses to deliver quality goods and services while also serving a higher calling. We are a company grounded in strong values at our core, and we're a purpose-driven culture as well. We're proud of the $12.5 million we've donated to No Kid Hungry over the last 12 years, the over $1 million donated to St. Jude Children's Research Hospital since 2020, and the over $1.3 million awarded in scholarships through our Hungry for Education program, including awards to students attending historically black colleges and universities. Giving is clearly a part of our heritage and fuels us every day. Finally, we continue to evaluate, develop, and offer programs to assist our employees' mental and financial health so they can be their best selves at work and at home. Our second strategic priority is to drive profitable traffic through relevant and outstanding guest experiences. Our net sentiment scores have been trending up over the last year, and most recently we experienced a dramatic 600 basis point net sentiment increase just this last month with improvements noted across all major metrics. We're thrilled our franchisees continue to take such great care of our guests and that the guests are giving us credit. To make further gains, we're learning more about our core guests to ensure we provide that outstanding experience they seek every day. In fact, you may be surprised to learn that Denny's is skewing towards younger generations, with Millennials and Gen Z currently representing about 45% of our customer base. Over half of our total guest base is also ethnically diverse, and our breakfast and late-night day parts skew younger and more diverse all the time. So Denny's is a place that is enjoyed by different generations and different backgrounds for a variety of dining occasions across all day parts. We are diverse in every sense, in our guest base, in our supplier network, in our franchise network, and in our workforce. We truly are America's diner for today's America. And that diner positioning has been and will continue to be a unique competitive advantage for us. And Denny's is 70 years young this year and will soon launch an exciting campaign highlighting our diner equity in a way that only we can. With our kitchen modernization initiative also currently nearing completion, we have less than 25 to go. We're at 98%. We'll feature some amazing new craveable products prepared with the new equipment, starting with our upcoming core menu rollout just next month. And while some have noted declines in off-premise, our off-premise business and our virtual brands remain consistently strong at approximately 21% of total sales. We believe this will remain a strength, particularly with our growing mix of younger guests and an overweighting of our transaction from our virtual brands occurring at dinner and late night. Our third strategic priority is to optimize the business model to maximize restaurant margins. Given the persistent, challenging inflationary environment, our teams are focused on identifying margin improvement opportunities, including opportunities to drive profitable traffic growth. As we increasingly focus on our core guests, we will thoughtfully consider ways to reach those guests with key marketing messages, optimize existing pricing strategies, and address key customer pain points. Our fourth strategic priority is to lead with technology and innovation. With kitchen equipment installations functionally complete, We'll begin rolling restaurant technology updates to the system soon, including a new cloud-based POS system. We anticipate this technology deployment will enable an improved overall guest experience, greater operational excellence, anticipated labor efficiencies, and improved payment experience, and serve as a platform for future innovation. Our fifth strategic priority is to grow new restaurants as a franchisor of choice. Based on some recent consumer research, we're taking a close look at our restaurant reimagined and our remodel elements to ensure we are delivering an environment that meets guest expectations for the modern American diner at a compelling return on investment for our franchise partners. Our current Denny's development pipeline remains strong with over 200 global commitments and we believe successful execution against these other strategies will yield greater franchisee interest going forward. We're also excited about the opportunity to support and acceleration in the long-term development opportunity for Kiki's. Turning now to our fourth quarter results, Denny's domestic system-wide same restaurant sales grew 2% in the fourth quarter and 6.3% for full year 2022 compared to 2021. Our 24-7 restaurants continue to outperform the Black Box Intelligence Family Dining Index by approximately 550 basis points during the quarter compared to 2019. We remain focused in the near term on our big three initiatives, staffing, 24-7 operations, and values. The progress we're seeing with staffing and reduced turnover rates at Denny's and across the industry gives us reason to be optimistic going forward. In fact, Denny's rolling 12-month management turnover during the fourth quarter was better than the Family Dining Index by approximately 750 basis points. We continue to support our franchisees with virtual hiring events, and over 1,400 interviews have been conducted through this platform to date. We're also making headway in our return to 24-7 operations. I'm pleased to say the modest incentive we offer to motivate our franchisees to accelerate their path back to 24-7 is indeed working. Currently, approximately 67% of the domestic system is open 24-7, which represents a 14 percentage point improvement since mid-year 2022. This also includes approximately four percentage points, or roughly 12 to 15 restaurants per week, opening at late night in just the last four weeks. Our third area of focus is value. As a reminder, we launched our all-day diner deals platform in the third quarter. We experienced notable improvements in guest sentiment scores around value generally and affordability in particular. Total value mix in the fourth quarter was just over 14%, which was comparable to the mix we saw in the third quarter. We'll continue to evolve this platform, including our upcoming menu refresh next month, reaffirming our everyday value promise for our guests. Our barbell strategy is working as guest check average has remained strong. We believe those looking for a deal at Denny's can find it on our all-day diner deals menu, but most choose our more premium LTO and core menu products. Moving now to an update on Kikis. I'm pleased to report that we have completed technical system integration so far. In doing so, we've uncovered some opportunities for future optimization in areas like technology, supply chain, facility management, and site selection for development opportunities. We look forward to bringing those opportunities to fruition in due course. We anticipate 2023 will be a foundational year at Kikis as we continue to leverage the support of our shared services function, round out a leadership team position for growth, and begin accelerating the development of Kiki's as a franchisor of choice. We remain impressed by the sophistication of the existing 18 Kiki's franchisees and their desire to grow, particularly given the opportunities to expand within Florida. We're also thrilled with the cult-like following this brand enjoys in that state where Kiki's was just voted Florida's best pancake house. We're currently conducting brand ethos work to ensure we appropriately capture the secret sauce that has made Kiki so special as we develop plans to expand into other states. We anticipate the first step out of Florida will be with a small number of company restaurants to demonstrate the brand's potential. With an updated disclosure document in the spring, we'll have the ability to begin signing development agreements in other states for openings that will likely occur in 2024. At the same time, we'll continue to support development within Florida with both Kiki's and Denny's franchisees. In closing, the positive changes we've experienced in 2022, including the acquisition of Kiki's, provide momentum for continued success for many years to come. We have the right leadership structure at Denny's and Kiki's, each supported by our shared services teams. We have focused and refined strategic priorities. We are leveraging an even greater understanding of our evolving customer base and their expectations to better inform our strategic initiatives with a new campaign and new products on the horizon. And finally, we have great franchise partners in both brands who remain steadfast and focused on the future. We're very excited about the opportunities to propel Denny's and Kiki's into 2023 and well beyond. With that, I'll turn our call over to Robert Borostek, Denny's Chief Financial Officer.