Participants

Curtis L. Nichols; VP of IR and Financial Planning & Analysis; Denny's Corporation

Kelli F. Valade; CEO & Director; Denny's Corporation

Michael A. Tamas; Associate; Oppenheimer & Co. Inc., Research Division

Robert P. Verostek; Executive VP & CFO; Denny's Corporation

Eric Andrew Gonzalez; VP & Equity Research Analyst; KeyBanc Capital Markets Inc., Research Division

Jake Rowland Bartlett; VP; Truist Securities, Inc., Research Division

Nerses Setyan; Senior VP of Equity Research & Senior Equity Analyst; Wedbush Securities Inc., Research Division

Todd Morrison Brooks; Senior Equity Analyst; The Benchmark Company, LLC, Research Division

Presentation

Operator

Greetings, and welcome to the Denny's Corporation First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Curt Nichols, Vice President, Investor Relations and Finance. Thank you, Mr. Nichols, you may begin.

Curtis L. Nichols

Good afternoon. Thank you for joining us for Denny's First Quarter 2023 Earnings Conference Call. With me today from management are Kelli Valade, Denny's Chief Executive Officer; and Robert Verostek, Denny's Executive Vice President and Chief Financial Officer. Please refer to our website at investor.dennys.com to find our first quarter earnings press release, along with the reconciliation of any non-GAAP financial measures mentioned on the call today.

This call is being webcast, and an archive of the webcast will be available on our website later today. Kelli will begin today's call with a business update, then Robert will provide a development update and recap of our first quarter financial results before commenting on guidance. After that, we will open it up for questions.

Before we begin, let me remind you that in accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the company knows that certain matters to be discussed by members of management during this call may constitute forward-looking statements. Management urges caution in considering its current trends and any outlook on earnings provided during this call. Such statements are subject to 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 28, 2022, and in any subsequent forms 8-K and quarterly reports on Form 10-Q. With that, I will now turn the call over to Kelli Valade, Denny's Chief Executive Officer.

Kelli F. Valade

Thank you, Curt, and good afternoon, everyone. We're pleased to see 2023 off to a great start with system same-restaurant sales growth of 8.4%, consistently strong off-premise sales and improving restaurant margins despite a persistently challenging operating environment. Our leadership team and our operators remain focused on the long-term revitalization of the Denny's brand and on expanding the reach of the Keke's brand through our 5 strategic priorities.

As a reminder, these are developing best-in-class people and teams, driving profitable traffic growth, maximizing restaurant margins, leading with technology and growing restaurants as a franchisor of choice. I'll cover each of these as a framework to illustrate our progress and our results this quarter.

Because it always starts with people, our first strategy is to develop best-in-class people and teams. We experienced continued improvement in our rolling 12-month management turnover through the first quarter, once again leading the family dining segment this time by over 650 basis points. This means our teams are again positioned to take great care of the guests. But knowing there's nothing more critical than taking care of our operators, we're now doubling down on our offerings related to education, total rewards and even mental health.

First, set to launch in less than 30 days is our new Gain program, which is about helping our operators gain skills, education and opportunity. We'll launch a new program where operators can gain a coach to assist them in the process of attaining a GED, and we're also leaning into mental health as a key benefit that can help our operators overall be whole and happy.

We believe the business case is clear, investing in the development of our people just makes sense. Further highlighting our commitment of developing people through our culture, we are pleased to have been recognized again by Newsweek, this time as one of America's greatest workplaces for women.

Our second strategic priority is to drive profitable traffic through our relevant and improved guest experience. And our operators here and franchisees around the country have done an amazing job continuing to break internal records and beat the industry in guest satisfaction. Our overall net sentiment and guest service scores have doubled over the last year, reaching 42% and 47%, respectively. Our overall net sentiment scores also outperformed the Black Box Intelligence Family Dining Index by over 900 basis points in the first quarter, and we continue to see year-over-year improvements across all major metrics. And finally, our Google rating is improving as well, currently up to 4.2% compared to 3.8% 1 year ago. Yes, I said Denny's has a 4.2 Google rate.

Continuing to delight the guests also comes with the need to deliver a more personalized guest experience that drives a sense of loyalty and a connection with our brand. And we're especially excited to announce a new partnership with Sparkfly and Olo to forge a next-generation intelligent customer engagement ecosystem designed to surprise and delight our guests with personalized offers and experiences.

In a notoriously competitive industry, the forthcoming relaunch of the Denny's Rewards program next month will position Denny's as a leader in customer-centric innovation, demonstrating the brand's commitment to using data and technology to drive growth and loyalty. This last quarter, Denny's also delighted our guests with the launch of our new It's Diner Time campaign squarely leaning into what we've uniquely offered our guests for over 70 years, the reliable comfort of a diner.

And we chose to launch the It's Diner Time campaign through an innovative and unexpected way. Hijacking the cultural conversation around daylight savings time. We were encouraged by the initial results of this campaign amounting to over 75 million earned media impressions. The activation also paved the way for a viral moment where Denny's social media mentions doubled, leading to the growth in overall Denny's Rewards members.

And finally, with this new campaign, we also launched a new menu, which features new craveable products like our Mac & Brisket sizzling skillet, Oven Baked Mac & Cheese, Oven Bake Lasagna and a new Apple Crisp dessert. These new products are selling incredibly well and above forecasted level. All these delicious offerings are now prepared using our newly installed kitchen equipment that allows us to continue to innovate in new and different ways.

Our third strategic priority is to optimize the business model to maximize restaurant margins. Our teams remain focused on identifying margin improvement opportunities with our no stone unturned approach. Our margin improvement task force has identified restaurant savings through several initiatives, which we are sharing with our franchise partners.

Two specific examples that are focused on inventory management and waste savings include some updated kitchen prep steps as well as portioning simplification methods, which also facilitate more consistent execution. The team is focused and the work continues to identify and deliver additional margin improvement opportunities.

Our fourth strategic priority is to lead with technology and innovation. Our kitchen equipment installations are now complete, and we're already seeing the impact given the launch of the new items I just mentioned, but we're also seeing operational efficiencies as well. Batch cooking breakfast proteins like bacon and sausage is yielding greater product consistency compared to cooking it at the time of order. This approach is already saving at least 1 hour per day of a cook's time during peak periods.

Additionally, the consistency and quality of those core products is significantly improved, which will only add to the gains we're seeing in our overall food quality scores. In fact, Denny's net sentiment scores related to our food are up over 800 basis points from a year ago, while the family diamond category saw a slight decline during that same period.

We also recently completed our conversion to a common network service provider, laying the foundation needed to ensure we have the speed, coverage and reliability to fully enable restaurants to optimize wireless capabilities and improve restaurant application connectivity. With this foundation now in place, we can begin moving faster towards the deployment of our new cloud-based POS system beginning in the third quarter. This will enable improved kitchen verification systems, server tablets and QR Pay each focused on consistent operational execution, labor efficiencies and enhanced guest experiences.

I personally witnessed the enthusiastic adoption of the server tablets recently during a restaurant visit to a test location. I walked away more excited about our technology transformation and the opportunity on the horizon.

Our fifth strategic priority is to grow new restaurants as a franchisor of choice. With over 200 global commitments, our current Denny's development pipeline remains strong, and we believe successful execution against these other strategies will yield greater franchisee interest going forward. In addition, we continue to take a close look at our restaurant image and remodel elements to ensure we are delivering an environment that meets guests' expectations for the modern American diner at a compelling ROI for our franchise partners. We expect to have new remodel elements in test later this year.

Finally, we remain focused on our big 3 near-term initiatives, staffing, 24/7 operations and value. We're seeing steady progress with staffing and reduced turnover rates at Denny's, as I mentioned earlier, and we continue to support our franchisees and assist with creating a culture built to support retention.

Second, we continue pushing forward on increasing the number of domestic restaurants operating 24 hours, which is currently at approximately 71% of the domestic system and continuing to grow. And third, as we stated before, our all-day Diner deals value platform allows us to continuously evolve the menu to ensure we deliver on our promise of everyday value for our guests.

We refreshed our all-day Diner deals menu in March, including the addition of our ever popular Super Slam. And total value mix in the first quarter was approximately 15% up, up slightly from the 14% mix we saw in the fourth quarter of last year. We will continue to lean into our barbell strategy where guests looking for a deal at Denny's can find it on our All Day Diner deals menu, while others have the option to choose from or more premium LTO and core menu products.

Now turning to Keke's Breakfast Cafe. We recently concluded our brand ethos work to better understand what makes Keke's so special to the many that enjoy it every day. This work has helped us to determine our unique position in the segment and it's informing decisions on interior decor elements, overall design for new builds and opportunities to enhance product offerings and overall menu design.

In fact, we're currently testing alcohol and a new menu design as we speak, which will better highlight what Keke's customers love, our made from scratch, fresh ingredients and abundant portions. We'll leverage all these new learnings and test results to support accelerated long-term growth within and outside of the state of Florida. And we now have key training and operations leaders in place to ensure we're set up for future openings.

Finally, we're excited to recently open another franchise Keke's restaurant in April. We look forward to many more in the future. In closing, I'm confident we have the right leadership teams in place at both Denny's and Keke's, with our experience in dedicated franchisees, operators and shared service teams, we are poised for continued success for many years to come. With that, I'll turn the call over to Robert.

Robert P. Verostek

Thank you, Kelli, and good afternoon, everyone. Today, I will provide a development update and a review of our first quarter results before discussing our annual guidance. Starting with our development highlights. Denny's franchisees opened 5 new restaurants during the quarter, including 4 international locations. We have also opened 1 Keke's franchise location in April and continue to build a pipeline of both developers and site locations as we look to accelerate growth in the back half of 2023 and into 2024.

Denny's franchisees also completed 8 Heritage 2.0 remodels during the quarter. We are currently reassessing our existing remodel elements and expect to begin testing a modern American diner remodel image later this year. The goal is to ensure we deliver sales lifts and returns that are better than the full-service restaurant average, consistent with our previous heritage remodel programs.

Moving to our first quarter results. Denny's domestic system-wide same-restaurant sales grew 8.4% in the first quarter compared to 2022, including an 8.1% increase at domestic franchise restaurants and an 11.4% increase at company restaurants. Off-premise sales were approximately 21% of total sales for the first quarter. This consistent performance is a testament to the strength of our off-premise technology, infrastructure and innovation support teams.

Denny's domestic system-wide same-restaurant sales growth was primarily due to an increase in guest check average. For the quarter, pricing, net of changes in discounts and product mix was approximately 8.5%, yielding roughly flat traffic. As highlighted in our Q1 earnings investor presentation, domestic average weekly sales for Q1 were nearly $37,000. This represents a 10.7% increase in average weekly sales compared to the first quarter of 2022, whereas same-restaurant sales increased 8.4% relative to 2022.

The variance between these 2 metrics demonstrates that while our system portfolio is smaller, it is healthier and generating higher average weekly sales as lower volume restaurants exit the system. Franchise and license revenue was $64 million compared to $59.1 million in the prior year quarter. This increase was primarily driven by Denny's franchise restaurants -- same-restaurant sales growth in addition to $1.5 million of Keke's Breakfast Cafe franchise revenue in the current quarter.

Franchise operating margin was $31.6 million or 49.4% of franchise and license revenue compared to $28.5 million or 48.1% in the prior year quarter. This margin increase was primarily due to the improvement in sales performance at Denny's franchise restaurants. Company restaurant sales of $53.5 million were up 21.5%. This increase is primarily due to strong same-restaurant sales growth of 11.4% at Denny's and $3.7 million of Keke's Breakfast Cafe company restaurant sales in the current quarter.

Company restaurant operating margin was $7 million or 13% compared to $5.4 million or 12.2% in the prior year quarter. This margin change was primarily due to the improvement in sales performance at company restaurants, partially offset by commodity and labor inflation. Commodity inflation moderated sequentially from 13% in Q4 2022 to 10% in Q1 2023, and we anticipate meaningful improvement as we move through the balance of the year. Additionally, labor inflation continues to moderate as we experienced 4% inflation during the quarter.

G&A expenses for Q1 totaled $20.1 million compared to $17 million in the prior year quarter. This change was primarily due to increases in corporate administration expenses, deferred compensation valuation adjustments and performance-based incentive compensation, partially offset by a reduction in share-based compensation expense. These results collectively contributed to adjusted EBITDA of $18.5 million.

The provision for income taxes was $1 million, reflecting an effective income tax rate of 61.5% for the quarter compared to 27.1% in the prior year quarter. The 2023 quarterly rate included a 36.6% discrete item relating to share-based compensation. We expect the 2023 fiscal year effective tax rate to be between 26% and 30%.

Adjusted net income per share was $0.13. We generated adjusted free cash flow of $12.6 million, which represents over 60% of our adjusted EBITDA. Our quarter end total debt to adjusted EBITDA leverage ratio was 3.4x, within our target leverage range of between 2.5x and 3.5x adjusted EBITDA. We had approximately $275 million of total debt outstanding, including $264 million borrowed under our credit facility.

Subsequent to the first quarter, we entered into an amendment of our credit facility, transitioning our credit facility benchmark interest rate from LIBOR to adjusted daily simple SOFR. This conversion to adjusted daily simple SOFR is not expected to have a material impact on our consolidated financial position or results of operations.

During the quarter, we allocated $9 million to share repurchases, continuing our commitment of returning capital to shareholders. Since beginning our share repurchase program in late 2010, we have allocated over $658 million to repurchase approximately 63 million shares at an average share price of $10.44. As a result, at the end of the quarter, we had approximately $144 million remaining under our existing repurchase authorization.

Let me now take a few minutes to expand on the business outlook section of our earnings release. We are reiterating the previously announced full year 2023 guidance as follows. We anticipate Denny's domestic system-wide same-restaurant sales will be between 3% and 6% compared to 2022. Given our strong start to 2023, our current expectation is to be towards the upper half of this range, and we look forward to providing future updates as we move through the year.

We anticipate opening 35 to 45 restaurants on a consolidated basis, inclusive of 8 to 12 Keke's openings with a consolidated net decline of 15 to 25 restaurants. We are projecting commodity inflation for 2023 to be between 4% and 6%, with roughly 60% of our market basket currently locked. We expect labor inflation of approximately 5% for the year.

Our expectations for consolidated total general and administrative expenses are between $79 million and $82 million, including approximately $14 million related to share-based compensation expense, which does not impact adjusted EBITDA. This consolidated range contemplates a full year of Keke's G&A and assumes fully reloaded incentive plans. As a result, we anticipate consolidated adjusted EBITDA of between $86 million and $90 million.

In closing, I would like to thank our dedicated franchise partners, restaurant operators and support teams who have remained focused on our guests and strategic priorities to ensure both Denny's and Keke's continue to thrive in the many years to come. That wraps up our prepared remarks. I will now turn the call over to the operator to begin the Q&A portion of our call.

Question and Answer Session

Operator

(Operator Instructions) Our first question is from Michael Tamas with Oppenheimer.

Michael A. Tamas

Kelli, you talked about driving profitable traffic growth going forward? And I guess it's a long-term comment. It's not necessarily about any one period or quarter, but the traffic was flat in the first quarter against what I think it was an easy comparison. So what do you actually need to do to push traffic into the positive territory? Or what do you think you need to do differently to get over that hump?

Kelli F. Valade

Yes, it's a great question. Thank you for that, Michael. So we, like some of the others started the quarter. We know the January and February, there was obviously an omicron impact there. And so it started out sequentially stronger, was a bit weaker towards the end for us and yes, ended in flat traffic, as you mentioned.

So we've got a lot of the right leading indicators in place. That's why it's about driving profitable traffic through an improved guest experience. Some of that momentum is now clearly there, and we know that will benefit us. We also have new products that we have just launched. So we expect that. Those are some of the -- this is the first time in a little bit we've had some new products that are doing fairly well, as I mentioned. So we expect that, that over time will help us as well.

And then we've also got, obviously, all the diner deals for us is there's a big impact. When we are on there and talking about value at a time when consumers need that, we know it helps our traffic as well.

Michael A. Tamas

Got you. And you sort of touched on this in the prepared remarks and in your answer a little bit. But can you talk about maybe how the first quarter played out relative to your internal expectations? And obviously, I think Robert mentioned being at the higher end of your same-store sales guidance. With just the choppiness that we're seeing out there in the macro, what are the sort of the risk factors at play that might cause you to not be at the higher end that you guys are closely monitoring?

Robert P. Verostek

Mike, this is Robert. Yes, that's an excellent question. With regard to the quarter itself, it pretty much played out the way we thought it would. I think during our year-end call, we provided guidance that we thought Q1 would be one of the stronger quarters of the year given what you remarked is that's somewhat of an easier lap.

Towards the end of the quarter, and I think you've heard this commentary on several that have reported right now, you started to get pretty choppy frankly, as we move through the rollover spring break and Easter. The mismatch year-over-year presented a pretty difficult read. I would suggest that's the way April is for us is somewhat more difficult to read.

With regard to the balance of the year and what would prevent us from achieving the higher end of that guidance range, the verbiage in my script with regard to guidance. The biggest item to me, I think it would be staffing, unemployment, just people being employed, right? Lower unemployment, higher employment. As long as that holds, which right now it appears to be regardless of what the rhetoric is about the macro environment. I think we're in pretty good shape. So again, low unemployment, high employment, it would be a good indication.

But even -- let's say, it does back up, just a conjecture, not hypothetical. In that environment, we believe we -- and we -- it's talked about in the environment right now, we believe that we are the beneficiary of trade downs in the restaurant segment. So again, we don't anticipate that happening. I think unemployment will remain low from what we've seen. But in the eventuality of a kind of a cooling, we think we're pretty well positioned for that also.

Operator

Our next question is from Eric Gonzalez with KeyBanc Capital Markets.

Eric Andrew Gonzalez

My question is about the off-premise business. There's been some headlines out there about DoorDash potentially penalizing some operators that charge higher menu prices on the platform versus what they charge in store. I'm just wondering what the implications for your off-premise might be and assuming this tactic were to be implemented. And does it make your -- you want to rethink your strategy at all? And how do you think your franchisees will adjust to that change?

Robert P. Verostek

So with regard to that, Eric, we are really kind of bullish about our off-prem business. As others over the course of this earnings season have talked about they're somewhat losing that position. We remain -- we believe it's a strength of ours with regard to 21%, a solid 21% there.

With regard to the pricing, the DoorDash idea of the differential in pricing, I guess we'll just cross that bridge when we get to it. We do -- we are one that employs a strategy of higher third-party delivery pricing that is to offset some of the significant fees that come with that platform. So I guess we'll just cross that bridge when we get to it.

Eric Andrew Gonzalez

Okay. Fair enough. And then maybe just one on inflation. You reiterated your commodity outlook sorry, versus last quarter. Egg prices have come down fairly precipitously in the last month or so. I'm just wondering, is there upside or sort of downside to that inflation outlook, should that trend continue? Are there other offsets that we should think about?

Robert P. Verostek

Yes. That's a really interesting question. So we did -- in my remarks, we came down from 13% to 10%, that's Q4 to Q1. We did, at this point, reiterate guidance of that 4% to 6%. If you just do the math, that's a pretty meaningful decline when you get into the back 3 quarters of the year. To give you a sense, we are seeing the same things that -- with regard to pork, dairy and eggs. We think that those will begin to come down in the next 3 quarters. Poultry has improved pretty dramatically, and we expect that to improve.

Beef likely will inflate beyond the Q1 levels and potatoes are really the punch in the stomach so far this year. But we are -- to make known we are fully locked on potatoes at this point. I would like to hope that this whole environment continues to moderate and at some point that we could come off that guidance range. There certainly is trending that -- both in labor and commodities -- that we are hopeful about, and we would look to update that as soon as with our Q2 earnings call.

Operator

Our next question is from Jake Bartlett with Truist Securities.

Jake Rowland Bartlett

Great. My first is about the 24/7 operations and you mentioned you've gone to 71%. I think when you spoke in mid-February, you were at 67%. And at the time, you're adding about 100 basis points a week. So clearly, that's slowed. I think from what we're seeing, it really hasn't grown much at all in the last few weeks. So the question is, how confident are you in hitting the 90% target that you've laid out before? And I think at one time, we were talking about kind of mid-'23 for that target. Is that something that now you'd expect maybe by the end of '23? Or how -- when should -- when do you expect to achieve the 90%?

Kelli F. Valade

Yes. Great questions, and we appreciate that. And so this is an ongoing conversation. It's an ongoing discussion. And actually, we do feel good about the progress. And yes, you could look at it and say, sequentially not as exciting as where we -- the momentum that we did have, although every week, we are still adding new locations to that number. And there is a lot of promise that we see in the conversations we're having.

We've basically gone from really segmenting the entire population and having conversations with every franchisee to now showing them profitability analysis, helping them understand what the market is doing around them. And honestly, the conversations are really positive, very fruitful conversations. So I think the conversation or the comment about kind of the half year, I think we didn't confirm nor deny that in the past. But we still believe that this is doable for us. Haven't necessarily -- we're not necessarily thinking we have to extend any time lines, but this is something that every day we're working on in partnership with our franchisee.

And frankly, we feel like we're being really good partners to them right now, helping understanding what it takes for them to do this. There's been a lot involved in it, staffing and retention were the issue, profitability. We finally are getting some tailwinds. Everyone knows that. So we're finally seeing that, which is helping them also really see the fact that profitability is a grape is in front of them with the return to 24/7.

The late-night daypart is still strong for us and growing. And so that business case is there. It's just a matter of being good stewards, being good partners with them and continuing to have the conversation. But our plans are still in place, and we are working towards that every day.

Robert P. Verostek

Yes. And just a slight add to that, Jake, with regard to that, as you would expect, with regard to timing, not really a specific timing, but I can tell you that our guidance contemplates the pace at which we're adding inclusive of the language that we pointed towards the top end of our guidance range.

Jake Rowland Bartlett

And Robert, maybe just -- so what -- I guess that's the question. What does your guidance incorporating -- at this point, it feels like it's probably not incorporating kind of by mid-'23, but maybe you think you can in the next couple of months, get it to 90%. But is that what's incorporated? Or is -- I think the question is before we're kind of talking 2% to 3% potential boost, is it -- should we be thinking about 1% to 2% in that guidance now? Or maybe that's really the question, I guess.

Robert P. Verostek

Yes. I think that this has proven out, Jake, to be, as Kelli described, very fruitful conversations and it ebbs and flows. The first half of this quarter, we added more in the back half, a few less. All of the comments that Kelli made are spot on. They're very productive conversations. And we will continue to make progress week-in and week out. The math that I have done on previous calls that you acknowledge would suggest that going from the 63% that we were added at the end of the year to a 90% level and the weighting of that day part would have added that range, that 3-plus percent.

I would -- I am still bullish, but that's why we provide ranges, frankly, right? I mean, within a 2% range, that could mean that we could get there in June. That could mean we could get there in September, and we would still fall within that range. Again, I'm very bullish. I think the business case is absolutely there. I think all of our external benchmarks that we read suggest that the people that get open late night are winners, but that's why we give ranges because it's just not an exact science at this point.

Jake Rowland Bartlett

And just one last one for me on franchise margins. And it was a little bit less than we were expecting, then I think what the consensus was expecting, the absolute margin. Maybe just if you can maybe help us out as to whether there was anything unusual in the franchise margin in the first quarter? And maybe should we think of the first quarter kind of margin as a good proxy for what you expect the rest of the year? Maybe just help us better model that in the future.

Robert P. Verostek

Yes. I'm looking around the room here. Jake. I'm looking at Curt and Michael. For the way we're viewing it is an improvement from that point. There is some volatility in that given our oven programs are creating the finalization of the rollout of our ovens. We are -- technically, we are counting that as a sale of that equipment, and it's fully offset below by the cost of that. So that's a 0 margin business that could be impacting it. So we'll roll out of that as we move through the balance of the year. So I'm not sure I have a better answer at this moment, but we'll do so to provide better guidance as we move forward.

Jake Rowland Bartlett

And then just building on that last one, but Mike asked this question earlier, but in terms of your internal expectations, was there anything -- were margins about where you expected them? It seems like sales were strong, but maybe didn't flow through as much to the margin. So was there anything across the income statement in margins that surprised you that maybe that won't recur? Or how do you view the margin performance in the quarter internally?

Robert P. Verostek

Yes. We -- margins, again, very similar to sales. We're pretty much on what we expected. Now that does not mean that they are what we want. Again, with commodity inflation still 10% and labor inflation at 5%, we're still -- we're about the point that we can get ahead of this, and we will continue to grow these margins. If there was anything that would have been a slight off to what we were expecting, utilities kind of ramped a little bit faster than we thought. But the reality is, is nothing that we can't overcome. And again, at 13%, likely in line with the internal thinking, but really the opportunity to continue to grow those.

Operator

Our next question comes from Nick Setyan with Wedbush Securities.

Nerses Setyan

I think you guys said 8.5% pricing in Q1, net of all the movements. Any way to break that down between menu price and mix?

Robert P. Verostek

Sure, Nick. Good to hear you. With regard to that, in general, it's predominantly pricing. And most of it, rollover pricing, about 75%, near 80% of that is rollover pricing with a pricing window in January. With regard to mix, it was virtually flat, frankly. So it was really mix driven -- or sorry, really pricing driven.

Nerses Setyan

And how are we thinking about price going forward? Do we have any plans to take some incremental price as the year progresses? Where does sort of Q2 pricing fall?

Robert P. Verostek

Yes. I think the answer to your question is that, yes, there will be additional pricing. We had a pricing menu in March. There will be one in June and again in October. I think the way to think about pricing for us is that there will remain strength in the rollover pricing, but sequential decline in the amount that was taken over the course of the balance of the year.

As the inflationary pressures moderate, Nick, as labor and commodities to continue to come down, we believe that the pricing should fall in line with that. So strong rollover pricing that will roll off through the end of the year and then what we add March, June and October. Our goal is to have that be lower than what was added in the prior year. So sequential improvement as we move through the year, a sequential lowering.

Nerses Setyan

And I apologize if I missed this, but what was the kitchen equipment within royalties in Q1?

Robert P. Verostek

It's really not in royalties. It's a revenue, Nick. It's again, one of those accounting things like it's the rev rec that keeps giving, very similar to a few years ago when we had to include the advertising as both a revenue and a complete expense line. So the kitchen equipment, we actually purchased that all in advance prior to the rollout, and that was to secure the supply chain. So when we installed it in franchise units, that appears to be revenue to us, but then it's offset down below as a cost to that.

So again, pretty much a 0 margin business with regard to the kitchen equipment. That begins to go away. We're basically through that process. We have ovens in virtually all of our Denny's restaurants now. There may be a little bit of a tail with regard to equipment that didn't get built. But again, a 0 margin business that just kind of complicates franchise margins.

Nerses Setyan

And what was that number? I know you guys disclosed it all throughout last year. And if that's not available, that's fine, too. Just curious what that number was.

Robert P. Verostek

Yes. I don't have it at my fingertips, Nick. I'm kind of looking. It's about -- what Curt's telling me is it's about 2 points on the franchise margin.

Operator

(Operator Instructions) Our next question comes from Todd Brooks with the Benchmark Company.

Todd Morrison Brooks

Two quick questions for me. One, you talked about the early reads on the new menu items and the early signs of success with that platform and the new cooking platform and what it's unlocking for you. As you look towards the June menu or the October menu, how much more can we broaden out new offerings that the new ovens are unlocking since the customer seems to be embracing this newness? How much does that expand as we go through the next 2 menu iterations?

Kelli F. Valade

Yes. So that's a great question. So we are excited. In fact, this is the strongest kind of new dinner product launch that we've had in, I think, we'd say, since the pandemic, since prior to the pandemic. So we're excited about it. Our baked lasagna has actually doubled the forecast way ahead of our test results. So there's been great adoption to some of these new craveable items.

So yes, the goal is exactly that. It's to leverage this for future LTOs. We've got a lot of those kind of locked and loaded and there's plenty of innovation and room to continue to use. Primarily, the ovens is the new equipment that has made lasagna possible,, this Mac and Cheese brisket, skillet and even a new dessert that is also selling well. So yes, we plan to continue to leverage that equipment for efficiencies as we mentioned, but then also for new product launches throughout the year. So we're excited about that.

Todd Morrison Brooks

And I think there was commentary Kelli, on the efficiency, getting kind of 1 hour out of cooks labor from the new equipment so far. Where are we in that journey? Like how much efficiency are we going to harvest with these platforms now fully rolled out?

Kelli F. Valade

Yes. So it's a great one. It's a moving target, right? We've been doing this for several years to get these to the point of fully rolling it out. We've watched that. We also were watching that with a lot of noise during a pandemic, but it's obvious when you think about that just simple batch cooking of bacon and sausage. You're not doing it at the time of service now. So we're able to do that. The quality has improved, as I already mentioned. But you definitely have the efficiencies there. We're going to continue to build on that through leveraging technology with [Xenial].

But just in terms of those efficiencies on that kitchen equipment, it's absolutely helping just speed of service and batch cooking and keeping that quality even -- helping that quality be even better than before. But yes, as I said, it's about 1 hour in peak periods of the week. So 1 hour a day. And again, we'll continue to leverage this. We'll continue to look for other technology improvements like our kitchen video display systems and things that are also being tested now. So we'll continue to find those, look for those inefficient -- look for those efficiencies rather and build out the business case for leveraging that technology.

Todd Morrison Brooks

And my last one. I think in the commentary, you mentioned that retention and turnover levels have improved at the managerial level. Can you talk about at an hourly level. I know staffing feels like it's back in a place that you want it, but how are the turnover levels? And maybe what the duration of people being in those roles and how much more productive they can get going into some peak periods around key holidays around Mother's Day, Father's Day, graduation season, all of that in the second quarter.

Kelli F. Valade

Yes, sure. That's all coming, right? Those peak periods are coming. And I think we're in a good place. So when we talk about retention and turnover, when we talk about hourly even, we're talking, obviously, company restaurants. And so we continue just to see significant strength there. Our company, also they're doing a phenomenal job.

So I don't have the tenure or the latest kind of tenure numbers for general managers or managers. But as we mentioned, significantly beating the industry. That's been that way now for at least 2, if not 3 quarters, where we've really been able to say, yes, it's now stable. So that's truly a tailwind for us and truly something we'll be able to do a lot with, whether it's embracing new technology that we're bringing into our company restaurants to provide the business case for the rest of our franchise community. We're seeing all that, and we're getting that benefit of efficiencies.

Again, the company restaurants also show incredibly strong net sentiment scores, and we can see that correlation as well there. We track the success rate on training and completions of our e-learning training. They all -- we measure it and correlate that to really just demonstrate the power of us taking care of your people. So pretty excited about what we can see there and what it can do to help us take care of the guests going forward in peak periods, as you mentioned.

Operator

Our next question is from Jake Bartlett with Truist Securities.

Jake Rowland Bartlett

Just one quick follow-up here. And that's on regional performance. And my question really is on California and the performance there. I would have thought that atmospheric rivers would be dampened sales, but it seems like California has actually done pretty well. So any commentary just on how California has been trending for you.

Robert P. Verostek

Yes, Jake, happy to take that follow-up. So we did take a look at the atmospheric stuff, the storms that were hitting California. And we tease it out for -- that it had an impact for about a week, and so not material on the quarter itself. When we look at California, they're actually -- when we look at them in totality, they're actually slightly above the average that we're reporting. So they're holding in there. There's real strength in California, which works really, really well on a brand that has 25% of its restaurants in California.

Jake Rowland Bartlett

Got it. And then another while I have you. Just maybe a little more detail on what you're seeing from the consumer. It feels like given the strength of some of the fast food concepts that we reported so far, it feels like there's got to be some trade down supporting that segment. But then your results don't suggest that. So I guess anything you can talk about in terms of whether you see any trade down, maybe that's being made up for trading into family dining. But just what are -- any details you can share from the behavior of the consumer as you're seeing it?

Kelli F. Valade

Yes. It's a great question. There's a lot in there. And I do think that's fair, exactly how you phrased it. We'd love to benefit a little bit more. When we look at industry data, we absolutely can see when you just look at the segments, the different segments that make up the industry, you'd see fine dining then go to casual, even upscale casual and see that there's definitely a benefit happening for family dining, quick service to your point. I would like a little bit more of that, as you mentioned.

But I think the anticipation or the conversation around consumer confidence is definitely -- you can see, went down in March. You can see consumer spending momentum slowing. You can see trade down, as I mentioned, is possible. So all those indicators are there. And yet when we look at our guests, we went from 14% value incidents to 15%. That's not really significant on air talking about value and part of that time. So that's not necessarily significant. Check has remained where it has been also not necessarily signaling to us that the consumer is necessarily changing.

And then Robert mentioned this, but the labor environment, that remains strong, it gives us a reason to believe there's -- you can be somewhat optimistic about this in that they are not necessarily changing their behavior all that much. It's about share then. So we have to grab more of that market share. That's the goal. Drive traffic, as has already been mentioned, that is obviously the goal, and we've got lots of good things in store going forward to work on that.

Operator

Our next question is from Todd Brooks with the Benchmark Company.

Todd Morrison Brooks

Thanks for the quick follow-up. Robert, I know you were a little opaque about pricing, kind of talking about future increases being at maybe diminished levels as the inflation pressures hopefully wane over the course of this year. But can you talk to maybe what's baked into the guidance as far as the pricing waterfall? What we should be looking at from a quarterly standpoint, just as we're trying to match up traffic assumptions on our side with where menu pricing should sit for the next few quarters. That would be helpful.

Robert P. Verostek

Yes, Todd. Happy to try to remove some of the opaqueness. Part of the opaqueness frankly, is that we don't make the pricing decisions for 95% of the restaurants. We help guide that and we help make -- to drive judicious decisions, but that's part of the opaqueness. Until we get to that cycle, we don't know exactly what that will be.

I can tell you that there -- we had 2 pricing cycles so far this year, 1 in January, 1 in March. They delivered between 4% and 5% pricing in total between them. You can likely just split that in half, with regard to that. And then with regard to the June and October cycles, again, I don't really know that. But given my commentary, if you take kind of the midpoint of that, that it was 2% to 2.5%, it would likely be lower than that as you move into June and October. That improvement that you -- that I kind of talked about seeing as we move through a lower inflationary environment.

Operator

(Operator Instructions) There are no further questions at this time. I would like to turn the floor back over to Mr. Nichols for closing comments.

Curtis L. Nichols

Thank you, Camila. I'd like to thank everyone for joining us on today's call. We look forward to our next earnings conference call in early August, during which we will discuss our second quarter 2023 results. Thank you, and have a great evening.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.