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Denny's (NASDAQ:DENN)
Q4 2019 Earnings Call
Feb 11, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, everyone, and welcome to the Denny's Corporation fourth-quarter and fiscal-year 2019 earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Curt Nichols, vice president, investor relations, and financial planning and analysis. Please go ahead, sir.

Curt Nichols -- Vice President, Investor relations, and Financial Planning and Analysis

Thank you, Sarah, and good afternoon, everyone. Thank you for joining us for Denny's fourth-quarter 2019 earnings conference call. With me today from management are John Miller, Denny's chief executive officer; Mark Wolfinger, Denny's president; and Robert Verostek, Denny's senior vice president 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 on 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 some comments on recently announced leadership changes. Then Robert will provide a recap of our fourth-quarter results, along with brief commentary on our annual guidance for 2020.

After that, we'll open it up for some 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 on 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 26, 2018, and in any subsequent quarterly reports on Form 10-Q. With that, I will now turn the call over to John Miller, Denny's chief executive officer.

John Miller -- Chief Executive Officer

Thank you, Curt, and good afternoon, everyone. Denny's achieved positive same-store sales growth for the ninth consecutive year despite a choppy yet dynamic industry environment. As we progressively transition to a more highly franchised brand during 2019, I'm especially proud of our team for balancing our refranchising effort with a steadfast commitment to our vision of becoming the world's largest, most admired and beloved family of local restaurants. This vision is driven by our consistent execution of our four strategic pillars: first, delivering a differentiated and relevant brand around our diner positioning with the goal of perpetuating consistent same-store sales growth; second, operating great restaurants with consistent and reliable service; third, expanding Denny's geographic reach 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. And these pillars are supported by our continued investments in technology and training along with close collaboration with our franchisees. We also continue to evolve our menu to meet guest expectations for higher quality and more craveable products. Our newest LTO menu features Sizzlin' Skillet in feel-good flavors including our Hearty 9-Grain Pancake Breakfast and our new Beyond Burger.

We also have been featuring the new Super Duper Slam with All-You-Can-Eat Buttermilk Pancakes starting at $6.99 as part of our everyday value offering to drive traffic. While dine-in transactions continue to represent the overwhelming majority of our sales, the steady growth in delivery has contributed to a 67% growth in our off-premise business from nearly 7% of sales prior to the launch of Denny's on Demand to approximately 12% of sales in the fourth quarter. Approximately 89% of our domestic system is now actively engaged with at least one delivery partner. These transactions continue to be highly incremental, skewed toward a younger guest and over indexed to the late-night and dinner dayparts.

We anticipate continued long-term growth and off-premise sales from the Denny's on Demand platform as more restaurants expand their delivery channels. Our Heritage remodel program continues to perform well, consistently receiving favorable guest feedback and generating mid-single-digit range sales lift. At the end of 2019, approximately 89% of the system had the Heritage image. After extensive testing with our franchisees, we have started rolling out the next remodel prototype, which we're calling Heritage 2.0.

This new prototype was developed based on consumer research and features, more attention-grabbing exterior elements, relaxing neutral colors with vibrant accents, modernized booths and community tables, just to name a few. And the latest image is now in 34 restaurants and similar to the original Heritage remodel program, ranges in costs from approximately $150,000 to $300,000. Also similar to the original Heritage package, the Heritage 2.0 prototype is yielding mid-single-digit sales lifts, driven by guest traffic improvements across all dayparts, while most pronounced at the dinner daypart. Remodels, including the new Heritage 2.0 prototype, will continue to provide a tailwind for our brand revitalization strategy for years to come.

Our learning and development team continues to create and deploy progressive curriculum in the Denny's system through our Ignite e-learning platform, which is currently focused on our Delight and Make It Right service initiatives and our franchisees' Pride scores do continue to rise. Moving on to development, our growth initiatives have led to approximately 380 new restaurant openings since the beginning of our revitalization efforts in 2011, representing over 20% of the current system. Franchisees opened nine restaurants in the fourth quarter, including four international openings in Canada, Puerto Rico, and the United Arab Emirates. With 14 international openings, 2019 was equal to our strongest year of international expansion to date.

Turning to our refranchising and development strategy, we completed the sale of nine restaurants in the fourth quarter, resulting in a total of 113 restaurants sold since the announcement of our strategy in the fourth quarter of 2018. At year-end, we had four restaurants marked as held for sale, and we have a high degree of confidence the sale of those will occur in the near term, which effectively will conclude the refranchising effort. We have been extremely pleased not only with the franchise community's interest and the pace of transactions, but also with the number of development commitments secured through this effort. The refranchising strategy has yielded commitments to develop 78 new domestic restaurants, successfully achieving one of our primary objectives to stimulate domestic restaurant growth.

We anticipate these new development stores will begin opening in 2021. These domestic commitments, along with our recently announced enhanced international development agreements, have expanded our global development pipeline by nearly 130 restaurants. While the refranchising effort is ramping up, we anticipate our strategy to upgrade the quality of our real estate portfolio will be completed by the end of 2020. We continually assess our capital allocation strategy with the goal of balancing shareholder-friendly returns with an optimal leverage profile that supports Denny's broader strategic initiatives.

In addition to investing in our brand, our long-standing internal review process continues to actively consider multiple alternative uses of cash. This practice is thorough and comprehensive with a full array of considerations from evaluating the acquisition of another concept to acquisitions for conversion, like our Flying J transaction earlier in the decade, considering a dividend to our ongoing share repurchase program, each with new consideration to accretion and risk. We balance these various considerations with our leverage philosophy and more recently, proceeds from the refranchising transactions. We have remaining capacity in our revolving credit facility and intend to moderately increase leverage beyond the approximately three times EBITDA level from when we began our refranchising effort.

Near-term leverage decreased temporarily in 2019 from the notable inflow of refranchising proceeds. We remain steadfast, however, in our commitment to increase our leverage moderately and generate the most accretive risk-adjusted shareholder returns through the timing and prudent assessment of these alternatives. In closing, as we complete our transition to a more asset-light business model, we remain committed to our revitalization initiatives including quality enhancements to our menu and everyday value focus, the convenience of binge on demand, investing in training to elevate the guest experience and our successful remodel program. These initiatives will continue to support our commitment to profitable sales growth, market share gains, the generation of compelling returns on invested capital and highly accretive and shareholder friendly allocations of adjusted free cash flow.

To better equip us for continued success, we announced the realignment of some leadership positions last week, including the promotion of Mark Wolfinger to president of Denny's, the promotion of John Dillon to executive vice president and chief brand officer; and the promotion of Robert Verostek to senior vice president and chief financial officer. I'll now turn the call over to Mark to briefly discuss these changes.

Mark Wolfinger -- President

Thank you, John. The changes announced last week are the culmination of a multiyear planning process led by our board of directors. Leadership roles were deliberately kept intact during the refranchising effort to ensure a successful transition to a more highly franchised business. Now that we are substantially complete with our refranchising strategy, it is the appropriate time to realign responsibilities for the continued long-term success of our business here at Denny's.

Going forward, John Miller will continue to serve as CEO and a member of our board of directors. Freeing John from a number of administrative responsibilities will enable him to focus on extending our brand revitalization strategies through his ongoing visionary leadership. As president, I will be more involved in broader aspects of our business, including greater oversight of the day-to-day administration of our evolving support center and greater influence in the function of our leadership committee. I will also continue to serve as a member of our board of directors.

John Dillon is promoted to executive vice president, extending his leadership as chief brand officer. With increasing responsibility for franchisee relationships, he will advance the alignment among marketing, operations and development functions as we realize brand synergies. Robert Verostek is being promoted to chief financial officer in recognition of his increasing financial leadership where he will be responsible for our accounting, finance and purchasing functions. Now, before I hand the discussion over to Robert Verostek, Denny's new CFO, I wanted to express my appreciation for the support I received during my nearly 14.5 years as the Denny's CFO.

It's been a challenging but extremely rewarding experience to represent this great brand as chief financial officer. I am very confident that the board has chosen an excellent leader in Robert Verostek, who has spent over 20 years with Denny's in a multitude of financial leadership positions. I remain, as always, very excited about the future opportunities for the Denny's brand, and I look forward to contributing to the continued growth of the brand in my new role. And now, it is indeed my pleasure to turn the call over to Robert Verostek, Denny's senior vice president and chief financial officer, to further discuss our 2019 results.

Robert?

Robert Verostek -- Senior Vice President and Chief Financial Officer

Thank you, Mark, and good afternoon, everyone. Our fourth-quarter highlights include growing domestic systemwide same-store sales by 1.7% and generating adjusted EBITDA of $24.9 million. Adjusted free cash flow was $12.1 million and adjusted net income per share increased 27.6% to $0.23, up from $0.18 in the prior-year quarter. We ended the quarter with 1,703 total restaurants as Denny's franchisees opened nine restaurants.

These openings were offset by 12 franchised restaurant closings. Franchise and license revenue increased 17.9% to $65 million primarily due to the impact of our refranchising and development strategy and a 1.8% increase in domestic same-store sales. Franchise operating margin was 48.9%, compared to 48.3% in the prior-year quarter. This margin rate expansion was primarily driven by the company's refranchising and development strategy, which yielded an increase in royalty revenue and an improved occupancy margin.

Moving to our company restaurants, sales were impacted by our refranchising and development strategy, which resulted in a lower number of equivalent company restaurants. This was partially offset by a 0.5% increase in same-store sales. Accordingly, sales were $48.4 million for the quarter or down approximately 53.2%. Company restaurant operating margin was 17.7%, compared to 16.2% in the prior-year quarter.

This margin rate change was primarily due to decreases in payroll and benefit cost and other operating costs from the leveraging benefit of refranchising restaurants. Offsetting these cost improvements was an increase in occupancy-related expenses, including higher property insurance costs and the mix of owned versus leased properties related to the refranchising of restaurants. Total general and administrative expenses of $15.4 million were impacted by a decrease in share-based compensation expense, in addition to a reduction in personnel costs, partially offset by market valuation changes in our deferred compensation plan liabilities and an increase in performance-based incentive compensation. These results contributed to adjusted EBITDA of $24.9 million.

Depreciation and amortization expense was approximately $2.8 million lower at $4.2 million, primarily resulting from a lower number of equivalent company restaurants due to our refranchising and development strategy and classifying restaurants as held for sale. Interest expense was approximately $3.6 million, compared to $5.4 million in the prior-year quarter primarily due to a decrease in the balance of our credit facility. The provision for income taxes was $5.1 million, reflecting an effective income tax rate of 21.5%. Adjusted net income per share was $0.23, compared to $0.18 in the prior-year quarter.

Adjusted free cash flow after cash interest, cash taxes, and cash capital expenditures was $12.1 million, compared to $17.7 million in the prior-year quarter primarily due to increases in cash taxes related to the gains on the sale of company restaurants, partially offset by a decrease in cash interest and cash capital expenditures. Cash capital expenditures included real estate acquisitions and facilities maintenance of $3.2 million, compared to $4.7 million in the prior-year quarter. Our quarter-end debt-to-adjusted EBITDA leverage ratio was 2.7 times, and we had approximately $256 million of total debt outstanding, including $240 million under our revolving credit facility. We allocated $45.4 million and $96.2 million toward share repurchases during the quarter and full-year 2019, respectively.

These open-market repurchases represent a reduction of 4.9 million shares in 2019 at an average price of $19.72 per share. Between the end of the quarter and February 10, we allocated an additional $22.2 million to share repurchases. As of February 10, we had approximately $260 million remaining in authorized share repurchases. Since beginning our share repurchase program in late 2010, we have allocated approximately $542 million to repurchase approximately 54 million shares at an average price of $10.15 per share, leading to a net reduction in our share count of approximately 44%.

Now, I would like to update everyone on the status of our previously announced refranchising and development strategy. We have been migrating from a 90% franchise business model to one that is between 96% and 97% franchised, and we are substantially complete that effort as of the end of 2019. As a reminder, we anticipate selling between 115 and 125 total company restaurants with between 70 and 80 attached development commitments. During the fourth quarter, we sold nine restaurants to franchisees, bringing the strategy to date total to 113 restaurants sold.

Additionally, as of the end of 2019, we have four company restaurants classified as held for sale. With these transactions, we have secured 78 development commitments that will continue to enhance our domestic development for years to come. We expect it to receive multiples in the range of 4.5 times to 5.5 times restaurant-level EBITDA on these transactions yielding total pre-tax refranchising proceeds of between $125 million and $135 million. Strategy to date, we have received approximately $128 million in pre-tax proceeds, front end fees and other transaction fees and an EBITDA multiple of approximately 4.8 times.

While this transition to a lower risk, more asset-light business model will initially have a dilutive impact on adjusted EBITDA, we anticipate an accretive impact on adjusted earnings per share and enhanced adjusted free cash flow. These accretive actions, combined with refranchising proceeds, are expected to enable us to generate more compelling returns for our shareholders. The EBITDA contribution of restaurants sold are partially offset by royalty revenue, rental income, and cost rationalization. We are in the process of rationalizing approximately $11 million to $13 million of business costs, with approximately 40% of the savings coming from reductions in field support functions currently captured in our company and franchise operating margins.

Approximately 35% of the savings will come from adjustments in our corporate G&A support structure, and the remaining 25% will come from gradually migrating certain support costs from Dennys G&A to shared costs with franchisees over the next couple of years. We expect to yield an adjusted EBITDA level that is similar to the results we delivered in 2018 following the conclusion of our refranchising efforts and the trailing rationalization of business costs, excluding inflationary pressures. While we continue operating a portfolio of company restaurants in our highest volume 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 cost by between $9 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.

The second part of our strategy includes upgrading 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 approximately 95 properties that we owned at the start of the strategy. Proceeds from the sale of real estate under lower volume units will be redeployed to acquire higher quality real estate. During the fourth quarter, we acquired one property for approximately $1.9 million, bringing the strategy to date total to six properties for approximately $11 million.

With these proceeds, we have acquired five properties through a series of like-kind exchanges. Let me now take a few minutes to expand on the business outlook section. For fiscal year 2020, we anticipate the following annual guidance ranges. It is important to note that fiscal year 2020 includes 53 weeks of activity.

We expect domestic systemwide same-store sales growth of between 0% and 2%. We anticipate 30 to 40 new restaurant openings with a net system change of between a decline of five restaurants and the growth of five restaurants. We expect total operating revenue of between $453 million and $459 million, including franchise and license revenue of between $260 million and $263 million. We expect franchise operating margin of between 48% and 49% and company restaurant operating margin to be between 18% and 19%.

Total general and administrative expenses are expected to be between $66 million and $69 million. This is inclusive of approximately $10 million of share-based compensation expense. As a reminder, total general and administrative expenses will be impacted by approximately $1 million due to an additional operating week. As a result, we anticipate adjusted EBITDA of between $97 million and $100 million.

We expect net interest expense to be between $17 million and $19 million. Our effective income tax rate is expected to be between 22% and 25%, with cash taxes of between $9 million and $12 million. We continue to optimize the value of our real estate portfolio by selling property under some lower-volume stores in order to acquire higher quality real estate through a series of like-kind exchanges. Accordingly, cash capital expenditures are expected to range from $28 million to $33 million, including between $13 million and $18 million of anticipated real estate acquisitions.

Excluding these anticipated real estate transactions, we otherwise would expect cash capital expenditures to be approximately $15 million. As a reminder, cash proceeds from the sale of real estate will be reported in cash flows from investing activities in our consolidated statement 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.

In addition, as John mentioned, we are very encouraged by the success of our Heritage 2.0 test and therefore, we'll be accelerating some of the initial Heritage company remodels, which is also included in our guidance range. Finally, our guidance for adjusted free cash flow is anticipated to be between $39 million and $42 million. If the anticipated real estate transactions were excluded, our expectations for adjusted free cash flow would be between approximately $55 million and $58 million. That wraps up our prepared remarks.

I will now turn the call over to the operator to begin the question-and-answer portion of our call.

Questions & Answers:


Operator

[Operator instructions] And our first question will come from Nick Setyan with Wedbush Securities.

Nick Setyan -- Wedbush Securities -- Analyst

Thank you. Just first, congratulations, Mark, Robert, and Curt on the well-deserved promotions. I think we find very few detractors with the comment regarding John's visionary leadership, and it's maybe an appropriate time to ask given two quarters in a row. Now, you've talked about alternatives of cash and an increased focus on the strategic opportunity ahead of us.

Is there an opportunity to maybe think outside of just share repurchases going forward?

John Miller -- Chief Executive Officer

Thanks for the question, Nick. And for the kind words toward the leadership team here. I think we're entering in an era with these changes so that Mark and Robert and team can focus on the execution of the brand and John Dillon, and I and Steve Dunn will focus a little bit more on sort of the positioning the brand to make Denny's the best proposition Denny's can be in the market. We think there is a lot of growth to unlock in this business at breakfast, lunch, dinner, and late night.

We think the diner positioning can be very powerful. We think there's a lot of domestic momentum we can gain after having been a little bit soft the past couple of years. And we think that the global growth for this brand is can be pretty powerful, so that will, of course, be our primary objective. And then as to strategic alternatives, I think what we've been trying to characterize for those that asked the question persistently, have you thought about this or that, is simply to convey we do think about these things and give them due consideration and have done that for years and come back to betting on our brand and share repurchases for the time at hand.

I appreciate the question.

Nick Setyan -- Wedbush Securities -- Analyst

Fair enough. In terms of the remodels on the company-owned side, approximately how many remodels in the company-owned side do we expect in 2020?

Robert Verostek -- Senior Vice President and Chief Financial Officer

Nick, this is Robert. So if you recall, back when we launched into the last remodel cycle with Heritage, 1.0 we accelerated. And I think that was back in 2014, and we ended up accelerating and functionally finishing the remodel update in approximately three years. So, fast forward, we're beginning the next cycle again.

And as John pointed out, when you look at the returns, they're very similar to what we experienced during the Heritage 1.0 rollout, so we're very encouraged by that and what that could deliver for the company portfolio. So, going forward, although we haven't guided specifically to the number of remodels, again, if you look back at history and the returns that we had, we are bullish about this, and we'll go further into the remodels than otherwise would have been suggested by the normal pattern.

Nick Setyan -- Wedbush Securities -- Analyst

OK. And then last question, and I'll let others take over. In terms of the franchise margin, 48% to 49%. Is there an opportunity to maybe get that to move a little bit higher as some of the rationalization takes place over the next few years beyond 2020?

Robert Verostek -- Senior Vice President and Chief Financial Officer

So, Nick, this is Robert again. With regard to that margin, as you would expect in the current year, the volatility with regard to that has been impacted by the FDP transaction, particularly with regard to the occupancy margin. So when you look at that, yes, the occupancy margin there is the benefactor. And really, the complement of the leased versus owned model, so you have that within that 48% to 49%.

It is a leveraging impact, as you would expect, when you grow units, the normal complement of oversight on the franchise side is that 40% to 45%, what we call franchise business consultants to one restaurant. So, there is a leveraging effect with each as we grow those units compared to what would have been on the company side, which was more in the 1% to 7% to 8% range. So, as we continue to grow franchise units, particularly, as John mentioned, through these development commitments, which 78 commitments were captured through the FDP process, that would potentially be an opportunity. And as John noted, that looks to really begin in earnest in 2021.

Nick Setyan -- Wedbush Securities -- Analyst

Thank you very much.

Operator

And our next question will come from Michael Tamas with Oppenheimer & Company.

Michael Tamas -- Oppenheimer and Company -- Analyst

Thanks. First, on same-store sales, can you just maybe talk about how you're thinking about sales in 2020, what kind of gets you most excited? What do you see as the biggest drivers?

John Miller -- Chief Executive Officer

Yes, I think that the Denny's On Demand and the off-premise will continue to grow moderately, and so a lot of people have sort of stopped pressing on the gas for that. We'll do some promotional effort there. But it is a little bit lower margin, and so rather than run headlong into the wind on that, we're looking for cost optimization. There's been some benefits out there among the third-party providers.

And I think that's helped us focus on how to think about the business long term. So while some people are just getting in the game, I'd say that we're going to watch that carefully. The bigger driver for us would be our promotional calendar, just from improvements in food servicing environment and getting more and more credit for that with every passing quarter, whether it be Pride scores, Yext Yelp scores, online scores, reductions, complaints, better management of ticket times through Delight, Make It Right, service recovery initiatives, when we get it wrong, we to recover a guest. All those things have sort of gone from the dark ages a few years ago to sort of in the game, and now we're sort of working toward best-in-class and how we roll out and get these initiatives to be stickier and how they impact one shift after another in the restaurant.

So, what I'm most excited about is that you're starting to feel much better, much more consistent, much more reliable service standards throughout the brand. And my confidence that that will drive profitable sales and transaction growth is the highest. Our food is better. It's more craveable, and we're building equities beyond just value propositions.

Michael Tamas -- Oppenheimer and Company -- Analyst

Got you. And then can you maybe talk about the company-owned margin guidance of 18% to 19% relative to like the post-refranchising commentary? I think that was 19% to 21% previously. When would we get there? Or if it's not the case anymore, what are some of the differences now?

Robert Verostek -- Senior Vice President and Chief Financial Officer

Yes, Michael, one of the key differences, here you're correct when you look at the investor presentation that we put out when we first began talking about this FDP, this development strategy, you are correct in that range that you quoted. One of the things that that -- what that represented was the four-wall margin, the four-wall company operating margin. What that means is it excluded the district managers, and I believe we began calling that out as we got back on the road, so that really is the key component between that 19% to 21%range and the 18% to 19% range that we put out today. As you have seen, as we've migrated throughout 2019, that rate has continued to improve, and we do have confidence that we will be with inside that range as we move throughout 2020.

Michael Tamas -- Oppenheimer and Company -- Analyst

Thanks very much.

Robert Verostek -- Senior Vice President and Chief Financial Officer

Thank you, Michael.

Operator

Our next question will come from Jake Bartlett with SunTrust.

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

Great. Thanks for taking the question. My first question is just about -- I know you have the ability to kind of toggle media weights to either end of your barbell menu strategy as you see the promotional environment evolve. But how do you expect 2020 to look.

Do you expect to be able -- or you have to kind of wait more on the value side or the premium side, or do you expect a more balanced approach? And that's also in the context of kind of the "breakfast wars" that are about to break out here in QSR.

John Miller -- Chief Executive Officer

Great question. I do believe you're going to see a general theme of mostly the same throughout 2020 versus 2019, driven by all the same issues. There is an all-out battle for share with a battle for transactions throughout the entire industry. And so there is a sensitivity among some undefined 15% to 25% of guests may be driven a little bit more for their frequency around the value proposition.

At the same time, there's an earnest desire among highly franchise systems to focus a little bit more on profitable transactions and quality transactions in light of high wage inflation. And so pricing was a little bit more aggressive than a longer history of the industry. And the consequences of that are usually a willingness to give up a little bit of transactions at some level for a respectable margin. And toward four-wall economics to support a continued growth of seat count in a good or well-run a wealth of a franchise brand with interest and continue to grow 30 to 50 restaurants a year like Denny's.

So the tension between those two creates a calendar that requires some of both, so inside any quarter. And then for our planning throughout 2020, we will have value propositions that we can toggle the rates up and down as required and toward premium and or value propositions. And then part of the Delight and Make It Right service model does prepare our servers to do a better job of highlighting new menu items that are on the premium side and/or to upsell when there's nice upsell opportunities. And rather than taking too much airtime, I could go back inside or maybe have Curt to follow up, share some of the examples last year how that worked really well in our credit promotion and a couple of others.

One last thing I'll add is that our overall $2 $4 $6 $8 Value Menu in the fourth quarter mixed barely in the double-digit range, around 11%. That's down from where we ended '18, which is just a little north of 12% on the year. And then when you add the Super Slam to that, call it another 5%, so middle teens, where a few years ago, that would have been in the high teens or low 20s. So, we have deemphasized that side of the menu, and we'll continue to do that through 2020.

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

Got it. Is that a reflection of just consumers' willingness, or are you doing that reaction to consumers' willingness to spend more? Or you're doing that you try to help protect margins for the system?

John Miller -- Chief Executive Officer

Well, it's a way of saying that all things are true at the same time. It's not one or the other are true. So what's true is the consumer wants more craveable products. There's better culinary standards throughout the eat-out industry and so dining out is becoming more competitive, and so the expectations with Denny's to have premium offers that meet the test of a good culinary standard is true.

It's also true that there's a good economy and a willingness to try those items. It's also true that there are smart consumers in the face of lots of deals have lots of deals to shop. So if today is a deal day in their mind or a visit they might have spent at home, but they will go out if there is a deal, tomorrow might be, I just got paid. And I feel prosperous.

I don't feel like a deal. I feel like an experience. And so all are true. We have smart consumers with lots of dealing going on, so we have to be in that business to hold on to share as our competitors do to some degree.

At the same time, we have to compete for the premium and experience side of the occasion. And so both are true at the same time. And so good brands have strategies to address both needs.

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

Great. Great. And last question on the cost savings that you expect through the refranchising -- related to the refranchising. Trying to kind of level set what the starting point is for G&A.

I believe there's somewhere around $6.5 million to $8 million of savings expected over the next two or three years. But what's the starting point? You've kind of moved around a lot in '19 given the stock comp and some of the incentive compensation that was higher because the stock price and partly. But what's the good starting point? And then how much have you saved so far? Just so we can kind of think about what's more left to go.

John Miller -- Chief Executive Officer

That's a great question. I'll turn that over to Robert in just a second. It can be confusing. There's stock-based comp, there's tax implications, there's this guidance of 10% to 13% based on the number of units sold, which is cost rationalization, not just G&A.

So there a lot of numbers can get jumbled together. So, we'll take a shot at trying to add some clarity.

Robert Verostek -- Senior Vice President and Chief Financial Officer

Yes. So with regard to that, when we look back, the announcement for our -- this strategy, excuse me, was in Q4 of 2018. So the reality is a good leaping-off point for this kind of reconciliation would be 2018. But as John spoke to, there are different points, and to your point, the different points that need to be included.

Over that course, you have in the current year, you have the 53rd week. You also have inflationary pressures that have affected that. You also have the fact that the cost-sharing components of that have not yet been fully realized, so when you take all of that into account, it really kind of gets to the guidance range that we put forth today. Now that range today does contemplate what we have said consistently throughout this program, which is returning to an EBITDA level that we achieved in 2018.

So 2018 was just north of $105 million. So on the far side of this, once all of those rationalization efforts have been baked in, inclusive of the cost-sharing with the franchisees, we will return to that level, so again, there are a number of components they need to be contemplated through that reconciliation. So I can probably leave it with Curt to follow-up if there are more specifics with that.

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

Great. I appreciate it. Yeah. Thank you. 

Operator

[Operator instructions] We'll take our next question from Todd Brooks, CL King & Associates.

Todd Brooks -- C.L. King and Associates -- Analyst

Hey, everybody. Congratulations on the new roles, as a starter.

Robert Verostek -- Senior Vice President and Chief Financial Officer

Thanks, Todd.

Todd Brooks -- C.L. King and Associates -- Analyst

A couple of quick questions here and just following up on the kind of $11 million to $13 million cost savings range. It feels like we do have more color now on the program being substantially complete with the four units now marked as held for sale. And my impression on the cost saves is $11 million was tied more to the 115 units sold, $13 million tied more to if we got 125. Is it not as black and white as that? Is there an amount of kind of the success and cost saves that is performance-based against the business going forward, or should we be thinking about this closer to the $11 million because we'll be just slightly above the 115?

Robert Verostek -- Senior Vice President and Chief Financial Officer

That's an excellent point, Todd. Thank you for bringing that up. In the explanation that I was providing earlier, that is one of the additional components that I left out in -- kind of that reconciliation was that the number of units would impact that. So, your view of that, I couldn't argue with your view of that that the ultimate range there between $11 million and $13 million would be affected by the number of units.

And having completed 113, as you know, with the four assets and held for sale, that would be toward the lower end of that range, so that would be an additional component in addition to the ones I had previously mentioned.

Todd Brooks -- C.L. King and Associates -- Analyst

OK. Great. And then just a follow-up on Heritage 2.0 as well. I know you've voiced the excitement about it and the fact that we'll probably proceed fairly quickly through the remaining corporate stores.

But with the success of Heritage 1.0 and the consistency of the success and the returns that the franchisees saw, when do we expect franchisees to really start to get involved in Heritage 2.0? Will it be kind of as mandated to refresh the restaurants, or do you foresee franchisees maybe getting involved earlier in the process this time?

John Miller -- Chief Executive Officer

Right. So there's two ways to interpret the question and, therefore, to answer it. Franchisee involvement here at Denny's is pretty much a way of life, so our franchisee association board and the development brand advisory council, there's a color change, a spec change, a vendor review, a booth test. They're involved from the onset, cost rationalization, consumer response, panels they get a front row seat to everything we do.

So, by the time it becomes a program or, therefore, sort of the some brands would say, a brand standard or a brand mandate to the franchisees, it feels like it's time and welcome and they've endorsed it throughout the whole process. When they get involved, we don't really go in big material crunch waves here when it comes to remodels. Our franchisees tend to be reasonably compliant to their due dates, which is a seven-year remodel cycle. And so because of leases and successor and transfer agreements, that sort of dragged into a seven- to eight-year cycle just sort of by practicality.

And so that's why you see this overlay. You've got a seven-year cycle before all of them are finished. We've got to ride at or just short of 90%. Some of the early folks are going where they said, "Gosh, I got to get landlord happy.

I am doing my remodel maybe a little ahead of schedule. So I'm better off negotiating, right, later." So that drags a month or two. But at the end of the day, those that are due or planning, they need to see what's coming next and others are just now getting around to do. But they tend to do them inside their mandate in that cycle.

And right now, we have a big wave of Flying J, remodels coming up, which we're excited about. And so that's what's going on in 2020. And the 34 already under way, the franchisees that are due throughout this year if they weren't already permitted on the 1.0, they'd be moving to the 2.0. The advantage of that is if they have the Sunrise scheme, they would skip right past the scheme in between.

Heritage 2.0 just brings modernizes the colors and some of the finishes inside the building to be a little bit more eclectic a modern version of diner like community tables and seatings and some treatments at the counter. And some color schemes, I think, if you get too primary, they become dated. The colors just become dated every seven or eight, 10 years. But on the exterior, there are more enhancements through 2.0 this time around, so that's where a lot of the enthusiasm and excitement is coming from.

Todd Brooks -- C.L. King and Associates -- Analyst

OK, great. Thanks for the call.

Operator

Thank you. Brett Levy with MKM partners has our next question.

Brett Levy -- MKM Partners -- Analyst

Great. Thank you. Would you care and share a little bit more detail on what you're seeing with the consumer in the competitive landscape, maybe a little bit more granularity on trends maybe since the quarter ended or regionally? And then just when do you think you're going to start to see unit closures shrink so that instead of just 30 to 40 gross, we're actually seeing the net numbers starting to accelerate? And then just finally, you said you've been leveling off some off-premise at about 12%. What's been the rate of growth in the quarter? And how are you thinking about the rate of growth for 2020?

John Miller -- Chief Executive Officer

OK. Sure. Well, let me start and then toss it to Robert to talk about your second question. I'll take one and three of that.

On the consumer, I can't talk about inside the quarter just yet. But what I can say is that we see evidence of a consumer that is drawn. If you look inside our categories, just the kinds of things we sell, our top-selling omelet is prime rib omelet. It's also our most expensive omelet.

It's also more unique and differentiated from what a ham and cheese omelet you might get somewhere else. So these branded elements like a Moons Over My Hammy or something like that that have been around the brand a long, long time, there's more and more interest of trial not necessarily daring or crazy, but a new twist on traditions of culinary standards. You see a lot of experimentation of menu items across our competitive set. To give some kudos to Cracker Barrel, they rolled out this aggressive new chicken program.

Those things are not easy to do, so my congratulations to them. But there are the kinds of things out there, we're saying, let's do some great things in the marketplace with some great food and sort of raise the culinary delivery and expectation to meet that growing expectation of consumer. And so, we see that applied in our business, too. There's a number of people that are sort of right down the middle, where we've been -- but where we've done more interesting things is in our breakfast mix.

Our breakfast mix has grown to a bigger percentage of our all-day menu. We finished the fourth quarter with about a 64% total breakfast mix all-day. 85% of our customers order breakfast items, but all-day, it's grown to 64%, up from about 62% in Q3. So these items where we're a little short of introducing to menu diner dinner items just yet, although it's in our long-term plan, the crepes we've added, the different things we've done to be innovative around the breakfast and lunch daypart have drawn the attention of our guests and given the brand some buoyancy in our ninth year of positive comps.

We see this running across the industry. There are a lot of breakfast initiatives that were mentioned earlier, I think, by Nick. It's very competitive out there with a lot of fast-casual biscuit concepts being launched and tried. Some will scale, some won't make it, but in each of these offerings, it's not just what you can already get in the marketplace but a new twist on some traditional items that have been plussed up a little bit from a culinary standard.

So these are kind of things that are driving innovation on the eat-out industry. I think it gives family dining a very good place to be. This renaissance we've been talking about, where people just want really good moms cooking but with a twist and maybe something they wouldn't have been able to prepare at home. So that's what we see with the consumer.

We saw basically the fourth quarter grow in momentum all the way through the holidays, and that's about what we expected to see happen. Rate of growth was about 67% since the launch of Denny's on Demand, which started about 7% of total sales and grew to 12%. And Q3, that grew from about 11% total to about 12% in Q4. So it's [Inaudible] calculate that percent momentum.

Robert, do you want to answer that?

Robert Verostek -- Senior Vice President and Chief Financial Officer

Yes. I'll take the middle question, Brett. With regard to the openings and closings question, so kind of to set the table there, let's talk about the closing side first. In the current year, it was 36 closures.

That is down from 56 closures that we had in 2018, so we worked diligently to get that number back in line. 2018 actually was impacted by some higher and better use issues where we would have preferred to keep the unit open, but the landlord would not necessarily -- we couldn't necessarily negotiate what we needed to, to get those open. So that was about half of the -- about half the size of what it was in 2018. We had about 17 or so of those in 2018, about half that number in 2019.

So the 36 number that we had in 2019, is actually pretty close to the system average, if you look over the last decade or so. And when you're working with a brand that's 67 years old, that 2% range is likely the number that will continue to persist. There's just a natural evolution of trade areas and units moving in and out of trade areas. So I wouldn't expect that that number, the closing number, will necessarily change all that much from that 10-year kind of historical average.

Now, where we can go with the openings is the other side of the equation. So when you look at the guidance for the current year, it's 30 to 40 openings with a range of down 5% to up 5%. As we spoke a little bit ago, as John mentioned in his comments and I reiterated, there are 78 development commitments that we have captured through our franchising and development strategy that will likely come online in 2021. Those will have very little impact in 2020 given the lead time that it takes from the signing of that commitment to the actual opening of that first unit.

That's typically in the 18-to-24 month range. So that will have a much broader impact in 2021. We are also quite excited about the development agreements internationally that we have captured and have experienced some really solid growth in there, particularly if we look at Canada and the Philippines. So with continued momentum there with the development commitments coming online from the development and refranchising strategy coupled with maintaining that level of closure, I think you will get to really kind of get to the question that you're after, which is when will we be beyond the plus 5% in net unit growth.

So again, I think it should be more seen on how to get the gross openings up as opposed to the closings down.

Brett Levy -- MKM Partners -- Analyst

And still one more question. Could you provide a little bit of background and thought process on how we should think about your plant-based initiative?

John Miller -- Chief Executive Officer

Yes. So we launched Beyond Burger, and it's doing well, I'd say. We had a conservative estimate on it, and because of that, it's outperforming that conservative estimate. But it's only in the California market.

Well, we started it in the California market before it went nationwide, so it's just now showing up across all menus. I think that we get asked this question all the time, is this to add a trend long term. My sense of it is whatever it is, it will be around for a while. The downside, people are critical of the fact that it may not be really better for you from high sodium and the processes that are required to get there.

On the other hand, there are those people that conscientiously want to eat less red meat and are concerned about that. And the high amount of sodium they put on their carbohydrates, snack foods and the likes in any case, so they're not particularly concerned about that trade and there is a very high trial period going on right now. So I would expect more things to come from bacon and eggs, to fish, to chicken to anything plant-based, you can imagine. And my sense of it is good brands will have some placeholders in their menu over the now or the coming year.

Operator

[Operator instructions] We'll take our next question from Stephen Anderson, the Maxim Group.

Stephen Anderson -- Maxim Group -- Analyst

Most of my questions have been answered, but I do want to have a follow-up question with regards to the off-premise program. And specifically, I know you've mentioned potential for catering. Is that something you and the franchisees potentially looked at and something that -- with regard to the potential for raising average ticket? I just want to see if that's something you've discussed.

John Miller -- Chief Executive Officer

Yes. So the catering aspects, I think, are -- when you have stronger dinner equities than Denny's has, like a Cracker Barrel, that would be an appropriate conversation. I think when you look about a breakfast centric menu like we have today, it's not our long-term goal to be strictly breakfast oriented. But today, it's dominant on our mix.

When you're not coming to dine-in, then to-go has lots of drive-through solutions. So the notion that it's the kind of product that you would naturally cater in trays or party trays or box meals like Bakery & Deli does where it can sit on the shelf until you're good and ready to eat it and break from the meeting or what barbeque does is sort of room temperature stable for a three-, four-, five-hour period or easily to reheat. That's not the kind of thing you see with eggs, pancakes, or even burgers where the bottom bun gets soggy. So off-premise family packs, I think, is what we more specifically spoke to, but catering in the traditional sense is not an initiative that we've announced.

Operator

And there are no further questions at this time. So, Mr. Nichols, I'll turn things back over to you for any additional or closing remarks.

Curt Nichols -- Vice President, Investor relations, and Financial Planning and Analysis

Thank you, Sarah. I'd like to thank everyone for joining us on today's call. We look forward to our next earnings conference call in late April to discuss our first-quarter 2020 results. Thank you and have a great evening.

Operator

[Operator signoff]

Duration: 59 minutes

Call participants:

Curt Nichols -- Vice President, Investor relations, and Financial Planning and Analysis

John Miller -- Chief Executive Officer

Mark Wolfinger -- President

Robert Verostek -- Senior Vice President and Chief Financial Officer

Nick Setyan -- Wedbush Securities -- Analyst

Michael Tamas -- Oppenheimer and Company -- Analyst

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

Todd Brooks -- C.L. King and Associates -- Analyst

Brett Levy -- MKM Partners -- Analyst

Stephen Anderson -- Maxim Group -- Analyst

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