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Edited Transcript of DENN earnings conference call or presentation 12-Feb-19 9:30pm GMT

Q4 2018 Denny's Corp Earnings Call

SPARTANBURG Feb 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Denny's Corp earnings conference call or presentation Tuesday, February 12, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Curt Nichols

Denny's Corporation - Senior Director of IR & Financial Analysis

* F. Mark Wolfinger

Denny's Corporation - Executive VP, Chief Administrative Officer, CFO & Director

* John C. Miller

Denny's Corporation - CEO, President & Director

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Conference Call Participants

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* Michael W. Gallo

CL King & Associates, Inc., Research Division - MD & Director of Research

* Nerses Setyan

Wedbush Securities Inc., Research Division - Senior VP of Equity Research & Senior Equity Analyst

* Stephen Anderson

Maxim Group LLC, Research Division - Senior VP & Senior Equity Research Analyst

* William Everett Slabaugh

Stephens Inc., Research Division - MD

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Presentation

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Operator [1]

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Good day, and welcome to the Denny's Corporation Q4 and Fiscal Year 2018 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Curt Nichols, Senior Director, Investor Relations. Please go ahead, sir.

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Curt Nichols, Denny's Corporation - Senior Director of IR & Financial Analysis [2]

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Thank you, Justin. Good afternoon, everyone. Thank you for joining us for Denny's Fourth Quarter 2018 Earnings Conference Call.

With me today from management are John Miller, Denny's President and Chief Executive Officer; and Mark Wolfinger, Denny's Executive Vice President, Chief Administrative Officer and Chief Financial Officer.

Please refer to our website at investor.dennys.com to find our fourth quarter earnings press release along with any reconciliation of non-GAAP financial measures mentioned during this call.

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 his introductory comments. Mark will then provide a recap of our fourth quarter results along with brief commentary on our annual guidance for 2019. After that, we'll 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 risks, 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 27, 2017, and in any subsequent quarterly reports on Form 10-Q.

With that I will now turn the call over to John Miller, Denny's President and Chief Executive Officer.

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John C. Miller, Denny's Corporation - CEO, President & Director [3]

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Thank you, Curt. Good afternoon, everyone. Denny's achieved positive same-store sales growth for the eighth consecutive year and delivered a 4.1% increase in operating income, thanks to our team's unwavering commitment to our brand revitalization strategy. And I'm proud of our team for their continued focus on our vision of becoming the world's largest, most admired and beloved family of local restaurants while consistently executing against our strategic pillars. And this is particularly relevant as we begin our previously announced transition to a more asset-light business model.

These pillars include, first, delivering a differentiated and relevant brand with the goal of perpetuating consistent same-store sales growth; second, operating great restaurants with consistent, reliable service; third, expanding Denny's footprint throughout the U.S. and international markets; and fourth, driving profitable growth with a disciplined focus on cost and capital allocation for the benefit of our franchisees, employees and shareholders. These pillars are supported by our continued investments in technology and training along with close collaboration with our franchisees.

We continue to evolve our menu to meet guest expectations for higher quality and more craveable products. And our latest LTO menu features an array of new omelettes starting at $6.99 as well as our new Blueberry Pancake Puppies. Most recently, we have improved our core menu with new dinner options, including a USDA choice cut sirloin steak with garlic peppercorn butter and an improved slow-cooked pot roast. And our expanding off-premise strategy enables us to reach younger guests and increase our brand awareness. These off-premise sales represented approximately 11% of total sales at company and franchised restaurants during the fourth quarter, which is up from approximately 7% at the launch of Denny's on Demand in mid-2017.

Delivery continues to drive the expansion in our off-premise business, and we have observed a steady progression of company and franchised restaurants, adding delivery channels over the last few quarters. Approximately 71% of domestic system is now actively engaged with at least one delivery partner, and that is compared to 77% of the system that is eligible. This means that we have an opportunity to further grow our off-premise business as more restaurants expand their delivery channels. These transactions continue to be highly incremental and delivery total margin rates from the low teens to upper 20s percent inclusive of the delivery fee.

Our Heritage remodel program continues to perform well, consistently receiving favorable guest feedback and generating mid-single-digit ranges of sales lift. 81% of the system has been remodeled at the end of the quarter, and we expect approximately 90% of the system to feature the updated image by the end of 2019. This continues to provide a significant tailwind for our brand revitalization strategy over the next several years, and we also remain focused on our franchisee collaboration as we work together to enhance our field training and coaching initiatives to better enable our operations teams to achieve their goals.

These are primarily focused on delivering higher-quality products with a more consistent service experience. The progress we have made so far has been substantial, and we are focused on closing the gaps to our expectations even further over the coming year. We acknowledge opportunities do remain to reach our full potential.

Moving to development. We faced some challenges in 2018, driven in part by some landlords choosing not to renew leases in an environment of increasing real estate values. This has all the more reason why our refranchising and development strategy will provide better long-term domestic growth opportunities for our brand. This, along with our recently announced enhanced international development agreements, is expected to increase our global development pipeline by over 100 restaurants.

With regards to our refranchising strategy, we closed on the sale of 8 units in Q4 and have closed on an additional 2 units so far in Q1. We are very pleased with the interest from the franchisee community and excited by the shareholder value this strategy will create. We will continue to provide more information on the details of these additional transactions in the coming quarters.

And as we look ahead to a year of exciting strategic change, we remain committed to long-term profitable system sales growth, market share gains, generating compelling returns on invested capital and maintaining our shareholder-friendly allocation of adjusted free cash flow towards share repurchases.

Speaking of which, since beginning our share repurchase program in late 2010, we've allocated approximately $424 million towards share repurchases.

In closing, as we transition to a more asset-light model, we will remain committed to our revitalization initiatives while continuing to drive same-store sales growth and profitable returns for our shareholders. Our brand-enhancing strategies like Denny's on Demand and Heritage remodel program, our menu evolution and Everyday Value focus and our refranchising and development strategy are expected to yield incremental shareholder value for years to come.

With that, I'll turn the call over to Mark Wolfinger, Denny's Chief Financial Officer and Chief Administrative Officer.

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F. Mark Wolfinger, Denny's Corporation - Executive VP, Chief Administrative Officer, CFO & Director [4]

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Thank you, John, and good afternoon, everyone. Our fourth quarter highlights included growing domestic system-wide same-store sales by 1.4%, operating revenue by 17.7% to $159.5 million and adjusted free cash flow by 15% to $17.7 million.

Adjusted EBITDA was $28.4 million, and adjusted net income per share was $0.18. We ended the quarter with 1,709 total restaurants as Denny's franchisees opened 5 restaurants. These openings were offset by 11 franchised restaurant closings. Additionally, 8 company restaurant in Texas were acquired by franchisees.

As a reminder, our 2018 financial results include the impact of adopting new revenue recognition standards in accordance with Topic 606, which clarifies the principles used to recognize revenue. A more detailed explanation of these revenue recognition changes can be found on our fourth quarter 2018 earnings release and in our annual report on Form 10-K, which will be filed shortly. Because we adopted these new standards on a modified retrospective basis, prior year quarterly results were not adjusted and continue to be reported in accordance with our historical accounting.

Denny's total operating revenue, which includes company restaurant sales and franchise and license revenue, grew 17.7% to $159.5 million, primarily due to recognizing franchise advertising revenue on a gross basis in accordance with Topic 606 and an increase in company restaurant sales. Franchise and license revenue grew 56.7% to $55.2 million, primarily due to recognizing $19.9 million of advertising revenue on a gross basis and a rise in initial fees, both of which were impacted by Topic 606, partially offset by lower occupancy revenue due to scheduled lease terminations.

Franchise operating margin was 48.3% compared to 72.1% in the prior year quarter, primarily due to recording advertising revenue and related costs on a gross basis, in addition to an increase in initial fees and an improving occupancy margin. Absent revenue recognition changes, franchise operating margin would have been 77.8%, which represents an improvement of approximately 570 basis points over the prior year quarter.

Moving to our company restaurant. Sales grew by 4.1% to $104.4 million due to an increase in the number of equivalent company restaurants over the past 12 months and a 2.1% growth in same-store sales. Company restaurant operating margin of 16.2% was impacted by labor inflation and third-party delivery costs, partially offset by higher sales.

Total general and administrative expenses of $15.7 million improved by 1.2% or approximately $200,000, primarily due to market valuation changes in our deferred compensation plan liabilities. These results contributed to adjusted EBITDA of $28.4 million.

Depreciation and amortization expense was approximately $800,000 higher at $7.1 million, primarily due to the acquisition of franchised restaurants during the past year. Interest expense rose by $1.1 million to $5.4 million, primarily due to increases in the balance of our credit facility and the related interest costs.

The provision for income taxes was $1.3 million, reflecting an effective income tax rate of 10.4%, driven by the new 21% federal statutory income tax rate and benefits associated with the settlement of share-based compensation. Adjusted net income per share was $0.18 in both the current and prior year quarters.

Adjusted free cash flow, after cash interest, cash taxes and cash capital expenditures, was $17.7 million compared to $15.4 million in the prior year quarter, primarily due to increases in cash tax -- sorry, primarily due to decreases in cash taxes and cash capital expenditures, partially offset by an increase in cash interest. Cash capital expenditures of $4.7 million included facilities maintenance, new construction and remodel costs. This compares to $7.6 million in the prior year quarter that was used to acquire 3 franchised restaurants and remodel 2 company restaurants. Cash capital expenditures were lower than our guidance because we did not close on an anticipated real estate acquisition during the quarter. That transaction is now expected to close during Q1 2019 and is included in our 2019 guidance, which I will cover here in a moment.

Our core and debt-to-adjusted EBITDA leverage ratio was 3.02x. At the end of the quarter, we had approximately $317 million of total debt outstanding, including $286.5 million under our revolving credit facility. During the quarter, we allocated $30.5 million towards share repurchases, including a $25 million accelerated share repurchase agreement entered into in November 2018. As part of this agreement, approximately 1.1 million shares were repurchased during the fourth quarter, with the remaining shares to be delivered during the first quarter of 2019.

At the end of the quarter, basic shares outstanding totaled 61.5 million shares, which represents a reduction of 3.1 million shares or approximately 5% from 1 year ago. And since the beginning of our share repurchase program in late 2010, we've allocated approximately $424 million to repurchase approximately 47 million shares at an average price of $9 per share, leading to a net reduction in our share count of approximately 38%. We ended the quarter with approximately $128 million remaining in our share repurchase authorization.

Let me now take a few minutes to expand on the business outlook section. For fiscal year 2019, we anticipate the following annual guidance ranges. It is a very important to note that some of these ranges are wider due to the timing of refranchising and real estate transactions.

We expect same-store sales growth at company restaurants of between 0% and 2%. Similarly, for domestic franchised restaurants, we expect same-store sales growth of between 0% and 2%. We anticipate 35 to 45 restaurant openings, with approximately flat net restaurant growth. We expect company restaurant operating margin to be between 15.0% and 16.5% and franchise operating margin of between 46.5% and 48.0%.

Total general and administrative expenses are expected to be between $66 million and $69 million. We anticipate adjusted EBITDA of between $95 million and $100 million and net interest expense of between $21 million to $23 million. We are guiding to an effective income tax rate of between 20% and 23%, with cash taxes of between $13 million and $16 million. Included in this estimate is between $9 million and $12 million related to taxes on anticipated gains from refranchising transactions.

Our efforts to continually optimize the value of our real estate portfolio have yielded an opportunity to sell property under some lower-volume stores in order to acquire higher-quality real estate through a series of like-kind exchanges. Cash proceeds from the sale of real estate will be reported in cash flows from investing activities and our consolidated statements of cash flows, but these real estate proceeds are not captured in the cash CapEx or adjusted free cash flow guidance metrics we provide. However, the cash outflow to purchase real estate is included.

Accordingly, our guidance for cash capital expenditures is $35 million to $40 million, including between $20 million and $25 million related to real estate purchases through like-kind exchanges. Excluding these anticipated real estate transactions, we otherwise would expect cash capital expenditures to be approximately $15 million.

Finally, our guidance for adjusted free cash flow is between $23 million and $26 million, with actual cash flows improved by the proceeds from real estate sales. If the anticipated real estate transactions were excluded along with the incremental cash taxes from anticipated gains on refranchising transactions, our expectations for adjusted free cash flow would be between $56 million and $59 million.

Now I'd like to spend a few more minutes reminding everyone about our refranchising and development strategy announced with our third quarter results and explained in further detail during our webcast and presentation at the ICR conference in January, which can be found on our Investor Relations website.

Over the next 12 to 15 months, we intend to sell between 90 and 125 total company-operated restaurants with future development commitments as we migrate toward a business model that is between 95% and 97% franchised. While this transition to a lower-risk business model will initially have a dilutive impact on adjusted EBITDA, we anticipate accretive impacts on adjusted earnings per share and enhanced free cash flow. These accretive actions combined with refranchising proceeds will enable us to generate more compelling returns for our shareholders.

As noted in the investor presentation on our website, we expect the refranchising process to take the next 12 to 15 months to complete, with transactions accelerating in and extending into the early part of 2020. John mentioned in his comments that we've sold a total of 10 restaurants under the strategy, including 2 restaurants that were sold during the first quarter of 2019. The pace of transactions is on schedule with our expectations, and we are encouraged by the interest from the franchise community.

Our lower adjusted EBITDA guidance of $95 million to $100 million versus just over $105 million in 2018 contemplates our anticipated volume and pace of transactions during the year. The EBITDA contribution of the restaurants we expect to sell, which will be partially offset by royalty revenue and some rental income, is also incorporated in our guidance.

Further, we expect to rationalize approximately $10 million to $12 million of business costs, ultimately yielding an adjusted EBITDA level that is similar to the results we delivered in 2018. Our investor presentation also indicates we expect to achieve multiples in the range of 4 to 5x of EBITDA, leading to total pretax refranchising proceeds in excess of $100 million over the full refranchising process. We are just getting started, but the initial refranchising transactions support our multiple expectations.

While we will continue to operate a portfolio of company restaurants in our highest volume and trade areas such as the Las Vegas Strip, our transition to a more asset-light business model is expected to reduce annual cash capital expenditures associated with maintenance and remodel costs by between $7 million and $10 million. The reduction in ongoing maintenance and remodel capital coupled with refranchising proceeds and future royalty revenue on the associated development commitments will further support our commitment to shareholder-friendly investments and returns, including the return of capital to our shareholders. We also anticipate moderately increasing our leverage from the current level of 3.02x.

We are very excited to use this refranchising strategy to stimulate additional growth for our franchise partners and to attract new franchisees to the Denny's brand. We will also upgrade the quality of our real estate portfolio through a series of like-kind exchanges. We anticipate generating approximately $30 million in proceeds from the sale of between 25% and 30% of the 95 properties we currently own. Proceeds from the sale of real estate under lower-volume restaurants will be redeployed to acquire higher-quality real estate.

The 2019 cash capital expenditures guidance includes between $20 million and $25 million related to real estate acquisitions. The good news that our team has successfully led our transition from a 60% franchised business to a 90% franchised business is still in place and accordingly provides us with a high degree of confidence in our ability to execute this refranchising and development strategy as we move to a more asset-light model. And again, as a reminder, at the conclusion of our refranchising efforts, we expect to generate similar adjusted EBITDA to 2018 through a rationalization of business costs, while also enjoying the ongoing benefits given this new capital-light model.

That wraps up our prepared remarks. I'll now turn the call over to the operator to begin the Q&A portion of our call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Will Slabaugh with Stephens Inc.

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William Everett Slabaugh, Stephens Inc., Research Division - MD [2]

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Wondering if you could just touch a little bit more about the refranchising process and any sort of update you may have on what the early franchisee feedback has been? I know you said you were encouraged by it, but curious if there are any numbers you may give us around people that are interested or geographies or if it's been fairly broad-based so far.

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John C. Miller, Denny's Corporation - CEO, President & Director [3]

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Yes -- no. I think it's all of the above, Will. It's broad-based. There's a lot of calls coming in saying when will we see the packages. Remember, we got kind of a standing start. We didn't want to launch this thing until we had -- we were -- had all of our ducks in a row. So third quarter's when we went out. So we didn't do really any work prior to that. Then we already have a couple of closing. And as I said in my call script, I think throughout the year, we can give a lot more detail about it as the transactions come together. But you can tell by the enthusiasm, just from the interest, we think we're in a good spot and have guided accordingly for the year. We...

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F. Mark Wolfinger, Denny's Corporation - Executive VP, Chief Administrative Officer, CFO & Director [4]

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It's Mark. I think the other thing I'd add to John's comments is what wasn't in my script, and that is the fact that after having gone through franchise growth initiative, or FGI, those big years were sort of '07, '08 and '09 time frame. And in total, we sold a little bit less than 400 stores. That same team is together. So having gone through that learning process and all the metrics and mechanics of the process, the same team has evolved and has that learning experience from FGI and those early years to apply to the current franchise initiative.

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William Everett Slabaugh, Stephens Inc., Research Division - MD [5]

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Got it. That's helpful, and a couple of questions on the guidance, if I could. The 0% to 2% comp guidance for the year, obviously, the midpoint is right around where you've been the last 3 years, right around 1%. So I'm curious if that's just you saying we expect the current environment to continue or if you're implying anything at the low or high end of that and then on the back of that, on the margin guide, you mentioned you had to be fairly wide for reasons around refranchising. But if we could think about the business or ex refranchising for a minute, do you think about company-owned margins ex that piece of the transaction sort of being up, down or flattish for...

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John C. Miller, Denny's Corporation - CEO, President & Director [6]

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Great questions, Will. Let me take the first one, which is sort of the outlook question on comps. We guide flat to 2%. It's early. You remember our commentary over the last couple of calls has been about value where it's persisting. And while the economy is good, it's too early to know if momentum builds towards comp growth. I certainly felt that way in the fourth quarter, but it's just too early in the year to guide any differently. So I think that flat to 2% is a fair place for us to go. I think the second question, I think Mark wants to grab. And if I didn't answer that to your satisfaction, well, I'll just circle back here in a second.

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F. Mark Wolfinger, Denny's Corporation - Executive VP, Chief Administrative Officer, CFO & Director [7]

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So Will, on the margin question, you're right. We did provide a little bit wider range. And so again, we ended 2018 at 15.3%. The guidance for 2019 is 15% to 16.5%. So the midpoint on that would be 15.75%. Obviously, that contemplates these transactions sort of rolling through that time frame over the 12 months of the fiscal year. To answer the second part of your question, which is sort of anticipated margins, after the process is done and all of the restaurants have been sold, there's a chart that we used in the ICR conference that I'm going to refer to, and that's the one we mentioned, the whole documentation and presentations on our website. But basically, what we showed there is that what we're selling is -- the average -- let me step back. The average unit volume of the company stores this past year was $2.3 million with an average margin of around 15%. It was 15.3% on an actual basis. The stores that we're selling, those AUVs are probably more in the $1.9 million to $2.1 million range. So they're slightly below the overall average for the company base, and their margins are, I'd say, low double-digit, 10% to 12% range. So basically, the ones that we are planning to keep, those volumes will be in high 2s. So again, this is post all the refranchisings that will get through, think about it in 2020 and beyond. That portfolio base that we'll keep will be something in the high 2s on an average unit volume, call them $2.8 million, $2.9 million range. And those margins and looking at that are probably going to be something between high teens to low 20% range. Does that help on the margin question, Will?

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William Everett Slabaugh, Stephens Inc., Research Division - MD [8]

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It does. Thank you for all the color. One last quick one, if I could. Just a question on the industry. It seems like your family dining peers, which were a little bit more aggressive in the quarter, obviously wanted [audio gap] market dinner and yet you accelerated. So I'm curious if you actually saw any impact when your peers are making either a value or a product push or if you feel like you're in a position to push through the vast majority of that competitive noise.

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John C. Miller, Denny's Corporation - CEO, President & Director [9]

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Well, we think it's good news overall that dine out looks healthy across a broad array of good competitors, and we've said for a long time we have a very competitive category, the family dining category. We have great competitors out there that are doing a nice job in the marketplace, keeps us on our toes. But the fact that they can do well when we're doing well and vice versa means that there may be a little bit of a reversal of these things that have been stealing some share from the after 5 market eating out. So if that's a tailwind going into the year, that's great news. If it's fourth quarter aberration, then we'll try to build on it. I think it's too early for us to be ecstatic, but I would say it's a good sign overall.

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Operator [10]

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And next will be Michael Gallo with CL King.

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Michael W. Gallo, CL King & Associates, Inc., Research Division - MD & Director of Research [11]

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Mark, just some follow-up questions on the refranchising as well. A couple of things. So I think about the proceeds, obviously, you've got $25 million -- $20 million to $25 million of like-kind exchange spend but you don't have either the proceeds from real estate or the proceeds from refranchising in the numbers. So I know you said over 12 to 15 months and timing might be hard to pin down, but is it fair to assume that most of that $130 million in proceeds will come in, in 2019?

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F. Mark Wolfinger, Denny's Corporation - Executive VP, Chief Administrative Officer, CFO & Director [12]

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So very good question, Mike. So let's -- I'll try to explain a little bit further because I know there were quite a few numbers and comments on my script. So first, the $100 million of pretax proceeds is on the refranchising process that, again, we anticipate will be completed in the next 12 to 15 months. The proceeds on the sale of the real estate basically as we look at it, because of the like-kind exchange, those proceeds will come in and go back out, so that effect will be relatively neutral. So let's focus on the $100 million of pretax proceeds again on the refranchising side. And at the same time, and again, we've not revised anything. But as we've said in the past, and if you recall from the ICR conference that we contemplate a moderate increase in leverage as well. Our current guidance on leverage is 2.5 to 3.5x. And again, we finished in the fourth quarter or the end of the year just slightly above 3x. So, obviously, that's something that we're also looking at as far as leverage in our capital structure. And again, that's our current guidance range of 2.5x to 3.5x on leverage.

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Michael W. Gallo, CL King & Associates, Inc., Research Division - MD & Director of Research [13]

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Yes, and just to delve in again. So you have the like-kind exchange spend coming out of the free cash flow guide. But you don't have the proceeds coming in. So really, net-net, from an actual cash usage standpoint, that's not really going to be money spent, it's going to be money coming in and then money being redeployed. Is that fair?

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F. Mark Wolfinger, Denny's Corporation - Executive VP, Chief Administrative Officer, CFO & Director [14]

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Absolutely correct. That's absolutely correct, yes. Sorry, I misunderstood that part of your question, but that's absolutely correct. And that's why as I walk through my script, we basically said there's the neutral effect. The problem is the proceeds from the real estate. The issue is it's captured somewhere else within our financial statements. But you're actually correct, the overall effect is neutral.

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Michael W. Gallo, CL King & Associates, Inc., Research Division - MD & Director of Research [15]

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Right. And then when I think about you noted the interest level being high. That suggests that you should, one, that after where you originally started the program, that perhaps a higher percentage of the stores get sold, and two, interest in more markets would suggest generally you get higher multiples for the stores. As I sort of think about 1 9 on 125 stores at a 10% to 12% margin, I could certainly get the pretax proceeds if I think about the higher end of the multiple range being well in excess of $100 million. Is there anything about that, that I shouldn't think of it that way? Because, again, based on how you're speaking about the process, it would seem there's a fair amount of interest.

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F. Mark Wolfinger, Denny's Corporation - Executive VP, Chief Administrative Officer, CFO & Director [16]

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Well, I guess -- John, I'll probably jump in here too, Mike, but I think to answer the question, obviously, we've given guidance to that $100 million plus pretax. And as we mentioned, we did -- we sold 8 stores in the latter part of the fourth quarter and then 2 in the January time frame. So obviously, that's 10 in total. So we're still pretty early in the process. And again, we put a range on the total stores that we would sell as it went to this 95% to 97%, that we would sell anywhere between 90 and 125. But obviously we're still very early in the process. But we felt we had to give an indication and should give an indication to you all as far as the interest level that we're getting from both existing franchisees and franchisees outside of our existing system. And John, maybe you want to comment?

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John C. Miller, Denny's Corporation - CEO, President & Director [17]

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No, I think you covered it. It's 90 to 125 stores. You did the neck and neck pretty quick there, Mike. That's why we said 100 plus. That's about really all we should say at this stage.

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Michael W. Gallo, CL King & Associates, Inc., Research Division - MD & Director of Research [18]

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Okay, great. That's helpful. And then final question for Mark. When I think about like-kind exchanges, I assume that there's going to be some positive impact on reduction of rent, just the sort of core margin basis. So should I -- what should I think about the kind of an ongoing payback from reduction of rent due to the like-kind exchanges?

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F. Mark Wolfinger, Denny's Corporation - Executive VP, Chief Administrative Officer, CFO & Director [19]

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Yes. We really haven't captured that or basically disclosed that metric from a guiding standpoint, Mike. So we haven't quantified that as of yet. We did quantify, obviously, the rent, the additional rental income that will come from the refranchised restaurants. But we haven't necessarily classified the rental difference on the like-kind exchange at this point. What we're really focused on is, again, looking at the current real estate market, looking at cap rates and again upgrading the quality of the real estate we have, which again is contemplated in that sort of 25% to 30% exchange process of the existing 95 properties.

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Operator [20]

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(Operator Instructions) Next will be Nick Setyan with Wedbush Securities.

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Nerses Setyan, Wedbush Securities Inc., Research Division - Senior VP of Equity Research & Senior Equity Analyst [21]

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A little bit of direction than refranchising. We know that the remodeling is going to be about 90% done now. So by the end of this year, it's really helped the dinner daypart. I know you guys have made comments around dinner and late night being helped by third-party delivery. How are we thinking about the strategy around the different dayparts as we kind of go into 2019 and maybe even longer term? Is it more of the same? Are we going to be having opportunity to focus a little bit more on lunch and dinner now that the remodels are largely complete?

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John C. Miller, Denny's Corporation - CEO, President & Director [22]

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Nick, great question. I think you hear us say that we will get momentum for some time to come from the revitalization efforts of food service and environment. When you think about the environment and the remodel role in that, we completed the year way ahead of where we've been at 80%-plus. We will finish 2019 at 90%-plus reimaged, sort of lays the foundation for future initiatives for all 4 dayparts. It could be a little more robust than the averages of the last 7 or 8 years. But because they're further out than this quarter, we've counted in the guidance our 4 daypart strategies for the year, but we do believe it's a tailwind to continue to work toward more robust all 4 daypart initiatives. The first quarter, however, the focus was on omelettes. So we're still trying to build a culinary credibility across the platform where we've had Grand Slams and value meals and sort of build-your-own creations of eggs and bacon, sausage and potatoes. And we want to have the higher culinary items like omelettes play a bigger role in securing that repeat business for people that are retrying our brand. So we're still working on momentum just on the breakfast and lunch daypart, but all 4 dayparts play a role over time.

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Nerses Setyan, Wedbush Securities Inc., Research Division - Senior VP of Equity Research & Senior Equity Analyst [23]

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Did you guys mention what food cost inflation and then labor inflation is expected to be for 2019?

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John C. Miller, Denny's Corporation - CEO, President & Director [24]

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It's not in the scripts. It's normal for us to guide. We can certainly follow up with you.

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Nerses Setyan, Wedbush Securities Inc., Research Division - Senior VP of Equity Research & Senior Equity Analyst [25]

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Okay. And what are we expecting for pricing in terms of the company-owned stores for 2019?

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John C. Miller, Denny's Corporation - CEO, President & Director [26]

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Two-ish, I would say.

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Operator [27]

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And moving on to Stephen Anderson with Maxim Group.

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Stephen Anderson, Maxim Group LLC, Research Division - Senior VP & Senior Equity Research Analyst [28]

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I'm looking at your guidance. You're actually looking at SG&A expense actually increasing from where you were in 2018. Now as you unload some of these restaurants, have you seen opportunity to perhaps unload some of the ancillary SG&A expense to the franchisees?

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F. Mark Wolfinger, Denny's Corporation - Executive VP, Chief Administrative Officer, CFO & Director [29]

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Yes. So over the course of this program, we expect a number of benefits to the overall refranchising strategy and cost rationalizations to get us, as we've said, to approximately where we are now in overall EBITDA. A part of that is rationalizing our G&A expenses, somewhere in that $10 million to $12 million, and the cost of support that we have in franchise support cost that goes with store sales and then some cost sharing that'll move from our P&L into share with all franchisees. So the combination of those is beneficial. In the meantime, there are, I'd say, a combination of things going on in the 2019 guidance. One, we want to continue to make sure we're supporting our franchise system as a model franchisor, and investments in training and technology. We think this is not a good time to diminish some of that support so as you're selling assets, those investments that were planned continue. There is the $10 million to $12 million of rationalization I've covered. And then the other is this sort of deferred compensation impact on G&A and how it's accounted for. It's not an EBITDA impact.

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F. Mark Wolfinger, Denny's Corporation - Executive VP, Chief Administrative Officer, CFO & Director [30]

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Yes. So within that, Steve, it's Mark, on the deferred comp piece, it rolls through G&A. And so as the financial markets move up or move down, there's an entry that rolls through there. Well, if you recall, those markets move down during the month of December, so that was actually a benefit through G&A as it relates to the deferred comp. And probably, as it relates to that technical detail, you can always give Curt Nichols a call, and he could explain that a little bit further. Just one other comment back on the rationalization of cost that John mentioned, this $10 million to $12 million number. Just as a reminder, it's coming from 3 different sources, which is field support, corporate support and then cost-sharing, further cost-sharing with our franchise community. But certainly, the corporate support and the cost-sharing piece with our franchise community, there's got to be a lag effect on those cost reductions. So again, as you get out into 2020, the -- latter on, basically, they will trail the refranchising process. So that'll be a cost-reduction process that will basically be slightly behind the sale of the restaurants themselves. There will be field support that gets reduced pretty much in parallel with the sale of the restaurants. But the majority of the cost savings are really corporate support and the sharing of cost with franchisees.

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Operator [31]

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And that does conclude the question-and-answer session. I'll now turn the conference back over to you for any additional or closing remarks.

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Curt Nichols, Denny's Corporation - Senior Director of IR & Financial Analysis [32]

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Thank you, Justin. I'd like to thank everyone again for joining us on today's call. We look forward to our next earnings conference call in late April to discuss our first quarter 2019 results. Thank you, and have a great evening.

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Operator [33]

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Well, thank you. That does conclude today's conference. We do thank you for your participation today.