Denny's Corporation

Greetings and welcome to the Denny's Corporation First Quarter 2023 Earnings Conference 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, Mr. Kurt Nichols. Vice President, Investor Relations and Finance. Thank you, Mr. Nichols. You may begin.

Good afternoon. Thank you for joining us for Denny's first quarter 2023 earnings conference call. With me today for management are Kelly Vallade, Denny's Chief Executive Officer, and Robert Verostik, Denny's Executive Vice President and Chief Financial Officer. Please refer to our website at investor.denny's.com to fund our first 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 first 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 risks and factors are set forth in the company's most recent annual report on Form 10-K for the year ended December 28, 2022, and in any subsequent Forms 8-K and quarterly reports on Form 10-Q. With that, I will now turn the call over to Kelly Vallee, Denny's Chief Executive Officer.

Thank you, Curt, and good afternoon, everyone. We're pleased to see 2023 off to a great start with system same restaurant sales growth of 8.4%, consistently strong off-premise sales and improving restaurant margins despite a persistently challenging operating environment. Our leadership team and our operators remain focused on the long-term revitalization of the Denny's brand and on expanding the reach of the Kiki's brand through our five strategic priorities. As a reminder, these are developing best-in-class people and teams, driving profitable traffic growth, maximizing restaurant margins, leading with technology and growing restaurants as a franchisor of choice. I'll cover each of these as a framework to illustrate our progress and our results this quarter. Because it always starts with people, our first strategy is to develop best-in-class people and teams. We experienced continued improvement in our rolling 12-month management turnover through the first quarter, once again leading the family dining segment, this time by over 650 basis points. This means our teams are again positioned to take great care of the guests. But knowing there's nothing more critical than taking care of our operators, we're now doubling down on our offerings related to education, total rewards, and even mental health. First, set to launch in less than 30 days is our new GAIN program, which is about helping our operators gain skills, education, and opportunity. We'll launch a new program where operators can gain a coach to assist them in the process of attaining a GED. And we're also leaning into mental health as a key benefit that can help our operators overall be whole and happy. We believe the business case is clear. Investing in the development of our people just makes sense. Further highlighting our commitment of developing people through our culture, we are pleased to have been recognized again by Newsweek, this time as one of America's greatest workplaces for women. Our second strategic priority is to drive profitable traffic through a relevant and improved guest experience. And our operators here and franchisees around the country have done an amazing job continuing to break internal records and beat the industry in guest satisfaction. Our overall net sentiment and guest service scores have doubled over the last year, reaching 42% and 47% respectively. Our overall net sentiment scores also outperformed the Black Box Intelligence Family Dining Index by over 900 basis points in the first quarter, and we continue to see year-over-year improvements across all major metrics. And finally, our Google rating is improving as well, currently up to 4.2 compared to 3.8% one year ago. Yes, I said Denny's has a 4.2 Google rating. Continuing to delight the guests also comes with a need to deliver a more personalized guest experience that drives a sense of loyalty and a connection with our brand. And we're especially excited to announce a new partnership with SparkFly and Olo to forge a next-generation intelligent customer engagement ecosystem designed to surprise and delight our guests with personalized offers and experiences. In the notoriously competitive industry, the forthcoming relaunch of the Denny's Rewards Program next month will position Denny's as a leader in customer-centric innovation, demonstrating the brand's commitment to using data and technology to drive growth and loyalty. This last quarter, Denny's also delighted our guests with the launch of our new It's Diner Time campaign, squarely leaning into what we've uniquely offered our guests for over 70 years, the reliable comfort of a diner. and we chose to launch the It's Diner Time campaign through an innovative and unexpected way, hijacking the cultural conversation around daylight savings time. We were encouraged by the initial results of this campaign, amounting to over 75 million earned media impressions. The activation also paved the way for a viral moment where Denny's social media mentions doubled, leading to the growth in overall Denny's Rewards members. And finally, with this new campaign, we also launched a new menu, which features new craveable products like our Mac and Brisket Sizzling Skillets, oven baked mac and cheese, oven baked lasagna, and a new apple crisp dessert. These new products are selling incredibly well and above forecasted level. All these delicious offerings are now prepared using our newly installed kitchen equipment that allows us to continue to innovate in new and different ways. Our third strategic priority is to optimize the business model to maximize restaurant margins. Our teams remain focused on identifying margin improvement opportunities with our no stone unturned approach. Our margin improvement task force has identified restaurant savings through several initiatives which we are sharing with our franchise partners. Two specific examples that are focused on inventory management and waste savings include some updated kitchen prep steps as well as portioning simplification methods which also facilitate more consistent execution. The team is focused and the work continues to identify and deliver additional margin improvement opportunities. Our fourth strategic priority is to lead with technology and innovation. Our kitchen equipment installations are now complete, and we're already seeing the impact given the launch of the new items I just mentioned. But we're also seeing operational efficiencies as well. Batch cooking breakfast proteins like bacon and sausage is yielding greater product consistency compared to cooking it at the time of order. This approach is already saving at least one hour per day of a cook's time during peak periods. Additionally, the consistency and quality of those core products is significantly improved, which will only add to the gains we're seeing in our overall food quality scores. In fact, Denny's net sentiment scores related to our food are up over 800 basis points from a year ago, while the family dining category saw a slight decline during that same period. We also recently completed our conversion to a common network service provider, laying the foundation needed to ensure we have the speed, coverage, and reliability to fully enable restaurants to optimize wireless capabilities and improve restaurant application connectivity. With this foundation now in place, we can begin moving faster towards the deployment of our new cloud-based POS system beginning in the third quarter. This will enable improved kitchen verification systems, server tablets, and QR pay, each focused on consistent operational execution, labor efficiencies, and enhanced guest experiences. I personally witnessed the enthusiastic adoption of the server tablets recently during a restaurant visit to a test location. I walked away more excited about our technology transformation and the opportunity on the horizon. Our fifth strategic priority is to grow new restaurants as a franchisor of choice. With over 200 global commitments, our current Denny's development pipeline remains strong, and we believe successful execution against these other strategies will yield greater franchisee interest going forward. In addition, we continue to take a close look at our restaurant image and remodel elements to ensure we are delivering an environment that meets guests' expectations for the modern American diner at a compelling ROI for our franchise partners. We expect to have new remodel elements and tests later this year. Finally, we remain focused on our big three near-term initiatives, staffing, 24-7 operations, and value. We're seeing steady progress with staffing and reduced turnover rates at Denny's, as I mentioned earlier, and we continue to support our franchisees and assist with creating a culture built to support retention. Second, we continue pushing forward on increasing the number of domestic restaurants operating 24 hours, which is currently at approximately 71% of the domestic system and continuing to grow. And third, as we stated before, our all-day diner deals value platform allows us to continuously evolve the menu to ensure we deliver on our promise of everyday value for our guests. We refreshed our all-day diner deals menu in March, including the addition of our ever-popular Super Slam. And total value mix in the first quarter was approximately 15% up, up slightly from the 14% mix we saw in the fourth quarter of last year. We will continue to lean into our barbell strategy, where guests looking for a deal at Denny's can find it on our all-day diner deals menu, while others have the option to choose from our more premium LTO and core menu products. Now turning to Kiki's Breakfast Cafe, we recently concluded our brand ethos work to better understand what makes Kiki's so special to the many that enjoy it every day. This work has helped us to determine our unique position in the segment, and it's informing decisions on interior decor elements, overall design for new builds, and opportunities to enhance product offerings and overall menu designs. In fact, we're currently testing alcohol and a new menu design as we speak, which will better highlight what Kiki's customers love, our made from scratch, fresh ingredients, and abundant portions. We'll leverage all these new learnings and test results to support accelerated long-term growth within and outside of the state of Florida. And we now have key training and operations leaders in place to ensure we're set up for future openings. Finally, we're excited to recently open another franchise Kiki's restaurant in April. We look forward to many more in the future. In closing, I'm confident we have the right leadership teams in place at both Denny's and Kiki's. With our experience and dedicated franchisees, operators, and shared service teams, we are poised for continued success for many years to come. With that, I'll turn the call over to Robert.