The Wendy's Company (WEN) Q4 2012 Earnings Report, Transcript and Summary

Good morning. My name is Theresa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter and 2012 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. John Barker to begin. Please go ahead, sir.

Thank you, Theresa. Good morning, everybody. This morning, we issued our fourth quarter 2012 earnings release. We also filed our Form 10-K. Today, for this call, we'll start with comments from our President and CEO, Emil Brolick, who will provide an update on Wendy's Recipe to Win and the progress we're making on the brand and our key growth initiatives. After Emil, we'll have our Chief Financial Officer, Steve Hare, who will review our fourth quarter and 2012 financial results. And then we'll open up the line for questions. Today's conference call and our webcast is accompanied by a PowerPoint presentation that can be found on our Investor Relations page of our corporate website, which is www.aboutwendys.com. For those of you who are listening by your phone today, please make sure you select the appropriate webcast player option from our website, and that will make sure you can sync up the slides with the audio. Before we begin, I'd like to refer you for just a minute to the Safe Harbor statement that is attached to today's release. Certain information that we may discuss today regarding future performance, such as financial goals, plans and development, is forward-looking. Various factors could affect the company's results and cause those results to differ materially from those expressed in our forward-looking statements. Some of those factors are referenced in the Safe Harbor statement that is attached to the news release. Also, some of the comments today will reference non-GAAP financial measures, such as adjusted EBITDA and adjusted earnings per share. Investors should refer to our reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measure. With that, I'd like to turn it over to Emil.

Thank you, John. Good morning, everyone, and thank you for being on the call. I'll start with a high-level summary of our 2012 results. As communicated in our preliminary earnings release on January 16, our 2012 fiscal year ended with a strong fourth quarter as our year-over-year adjusted EBITDA increased 19%. From a same-store sales perspective, the fourth quarter was down 0.2%, but we were positive 4.9% on a 2-year basis. We began the fourth quarter with positive same-store sales momentum, successfully rolling over the launch of Dave’s Hot 'N Juicy Cheeseburgers with a promotion of our Bacon Portabella Mushroom Melt. Our sales momentum slowed in mid-November and through December as our marketing message for Mozzarella Chicken Supreme did not resonate as strongly as we had hoped amid intense value and price competition. However, momentum has returned with the January system-wide rollout of our Right Price, Right Size menu, which is consistent with our expectations for a solid first quarter of 2013. Steve Hare will take you through a more detailed look at the financials in just a few moments. Our conviction behind the growth drivers of our business became all the clearer during 2012 as we took action and made decisions that will position Wendy's well for a strong 2013 and beyond. For this reason today, I will focus on the growth layers that will drive the majority of the EBITDA increase over the next 3 years: first, driving North American same-store sales through an innovative product pipeline, compelling advertising and great operations; second, the continued expansion of our Image Activation initiative for company and franchise restaurants; and lastly, through new company and franchise restaurant development. Longer term, we do expect our global growth layer to contribute a more meaningful positive impact beyond 2015, and we believe that restaurant ownership optimization will make us more efficient heading into 2014. As we step back and look at the big picture, consumers are no doubt feeling the effect of higher gasoline prices, the 2% payroll tax increase and delayed tax refund checks. While we can't control these forces, we certainly can control how we think about this great Wendy's brand and how we bring this brand to life. We remain convinced that our A Cut Above brand position is the natural position for Wendy's and will serve us well against traditional QSR competitors as well as against new QSR competitors. I believe that in the first quarter of 2013, we are already able to see how our 2012 efforts in executing our Recipe to Win have begun to contribute to our performance. For example, in 2012, we tested our new Right Price, Right Size menu to enable a successful launch in January of 2013. We plan to sustain this strategic initiative with marketing continuity spaced throughout 2013 and beyond. And our franchise system has been supportive with higher degree of pricing consistency. Additionally, we are rebuilding our product pipeline and rekindling our heritage of product innovation leadership in leveraging our unique operating system and delivering on our commitment of playing a different game. From people perspective, we believe our people are our greatest asset and our greatest source of differentiation. People activation began with our Image Activation initiative and is now the standard. We are setting expectations of staffing all of our restaurants with 5-star performers, and our franchisees are committed to making this an ongoing effort. Restaurant-level performance is fundamental to building a functional attachment to the Wendy's brand, and we are driving a culture of operational excellence. And our internal metrics show steady improvement in restaurant-level execution across our system. From a promotion perspective, we are undergoing a total brand transformation with a new, contemporary logo, inspiring packaging graphic, stylish uniforms and bolder advertising. And Image Activation visually repositions the brand to A Cut Above, physically redefining the brand experience. Together, our Recipe to Win and all 6 P's will work in unison to help drive consistent same-store sales and profitable growth. In the near term, we recognize the particular importance of sound product and price segmentation and balanced marketing messages. Consumers are facing economic stress, and competition is fighting for share. So we know that having a consistent price-value message is essential. We also believe that consumers know the difference between a pure price offering and a price-value offering such as our Right Price, Right Size menu. It's not just what you pay that is important, but what you get for what you pay. That's real price value, the kind of price value on our Right Price, Right Size menu. And we are working to be sure consumers understand this. However, we also believe that there is a large group of consumers that will be attracted to higher-end messages where Wendy's can uniquely deliver new QSR-quality food at a QSR price. Today's consumers are smart. And if they can have new QSR-quality food for about 40% to 45% lower average check, we think that makes a lot of sense in challenging economic times, and it makes a lot of sense any time. We reinvented our price-value offering during 2012 with our Right Price, Right Size menu and rolled it out into the entire system on December 31. We had been losing share of price-value customers for some time, and we knew we had to correct this with a compelling consumer offering that could also achieve broad franchisee support. The Right Price, Right Size menu does exactly that, featuring 6 items at $0.99 and 8 items ranging from a recommended price of $1.19 to $1.79. This 2-tiered pricing strategy has resulted in a higher degree of franchisee adherence, improved sales and enhanced margins on price-value offerings. And because we expect consumer discretionary income to continue to be under pressure from higher payroll taxes and increasing gasoline prices, our consumers and our franchisees should both win from our improved price-value proposition. We are committed to supporting the Right Price, Right Size menu throughout the year as part of our product and price segmentation strategy focusing on core products, premium limited-time-only offerings and solid price-value proposition. We are very intent on re-establishing our leadership in product innovation at the higher end of the product price spectrum. We began this initiative last year with the success of Bacon Portabella Melt and Spicy Chicken Guacamole club. We also continue learning on flatbread grilled chicken and other initiatives that treat consumers to a new QSR food experience that they typically have to pay considerably more for. These products are excellent examples of what we refer to as new QSR quality at a QSR price. And we've begun to see signs of this effort paying off in the fourth quarter of 2012 as we successfully built share of large hamburger and large chicken sandwiches and sold more large sandwich than in the previous year. So while we are working hard to re-establish product innovation leadership, Wendy's is undergoing a total brand transformation, including packaging graphics, new menu boards, new uniforms, a contemporary logo and bolder advertising. The most visible element of our brand transformation, our Image Activation initiative, continues to move forward aggressively. In 2011, we reimaged 10 restaurants that drove average sales increases of 25%, and those results continue to hold today. In 2012, we reimaged 48 restaurants with results that are very consistent to the results of our 2011 prototypes. Now in 2013, we are on track to achieve our goal to reimage 100 company-operated restaurants. And we are also offering an incentive program to qualified franchisees who complete Image Activation restaurant reimages. We recently expanded this program to include Tier 2 and Tier 3 reimages, and we have subsequently received franchise applications across all 3 tiers, which is moving us toward our target of 100 franchise reimages in 2013. In 2014 and 2015, we expect our Image Activation efforts to accelerate, and we believe that about 20% of the total system and about 50% of the company restaurants will have completed Image Activation reimages by the end of 2015. In April, we are holding our spring regional franchise meetings in 4 cities where franchisees will have the opportunity to visit a Tier 2 or a Tier 3 Image Activation restaurant. As you know, Image Activation is a key aspect of our long-term, strategic growth plan. And we will help -- we will keep you appraised regarding our progress throughout the year. And with that, I'll turn things over to our Chief Financial Officer, Steve Hare.

Thank you, Emil, and good morning. Let's take a look at a financial summary of the fourth quarter. Despite relatively flat same-store sales, total revenues increased $15 million in the fourth quarter of 2012 or 2.4% versus the prior year. This revenue increase included the net benefit of new and acquired restaurants over closures and restaurants sold. Adjusted EBITDA for the quarter was $95.9 million, a 19% increase over the fourth quarter of 2011. Adjusted earnings per share was $0.09 in the fourth quarter, a $0.05 per share increase versus 2011 and $0.01 greater than the fourth quarter adjusted EPS number stated in our preliminary earnings release on January 16. The change to 2012 adjusted earnings per share was due to a $4 million increase in net income from continuing operations. This result -- this increase is the result of a downward revision to our preliminary estimate for the charge related to discontinuing breakfast operations at certain restaurants and a reduction of depreciation and amortization, net of taxes. North America company-operated same-store sales increased 1.6% for 2012 and 3.6% over the 2-year period. As Emil mentioned earlier, 2012 performance benefited from the successful promotion of premium products like the Spicy Guacamole Chicken Club, Bacon Portabella Melt, Son of Baconator and the Berry Almond Chicken Salad. Wendy's company-operated restaurant margin was flat at 14% of sales in 2012 despite the negative impact on margin from a 100-basis-point increase in commodities. For the full year, total revenues increased almost $74 million or 3% versus the prior year. Approximately 1/2 of the sales increase was generated by same-store sales increases and 1/2 by a net increase in our company-owned restaurant count. 2012 adjusted EBITDA was $333 million, an increase of $2.2 million. Full year adjusted earnings per share was $0.17, an increase of $0.02 per share over 2011 adjusted EPS of $0.15. Now let's take a look at income from continuing operations and special items. Adjusted income from continuing operations was $33.6 million, or $0.09 per share, for the fourth quarter of 2012. For the full year, adjusted income from continuing operations was $65.3 million or $0.17 per share. Adjusted income adds back special charges due to the early extinguishment of debt, facilities relocation and other transaction costs and asset impairment charges. Adjusted income also excludes the gain on sale of an investment, a special dividend that we received on our investment in Arby's and benefits from prior year tax matters. Including these special items, net income attributable to The Wendy's Company in 2012, as reported, was $7.1 million or $0.02 per share. In 2012, we generated net cash flow from operations of $190 million. Capital expenditures were approximately $198 million for the year, including $72 million dedicated to Image Activation for both new and reimaged restaurants. The net decrease in cash for the year was approximately $22 million, resulting in a year-end cash balance of $453 million. Now let's look at a few selected balance sheet items. We continue to maintain a substantial cash balance which is far in excess of our liquidity requirements to manage the business. As a reminder, during 2012, we completed the refinancing of our bank debt and high-yield notes with a new senior credit facility. As a result, we expect net interest expense savings of approximately $25 million on an annualized basis. At the end of the fourth quarter, total debt was $1.46 billion, and net debt was approximately $1 billion. Based upon 2012 adjusted EBITDA, our current net debt multiple is 3x. I'll now briefly review our 2013 outlook, which we previously shared on January 16. Our same-store sales guidance of 2% to 3% includes traffic and check growth from new product marketing and our price-value offering, as well as the benefit from Image Activation, offset by fewer restaurants serving breakfast. This range also includes the impact of adverse weather conditions that we have experienced in certain regions. Despite the weather and other macroeconomic headwinds, our first quarter is off to a solid start. We expect commodity increases of 90 to 120 basis points, primarily in beef and chicken, to be partially offset by cost savings initiatives. We expect commodities to continue to rise due to regulations such as the federal government's renewable fuel standard, which directs about 40% of the national corn crop to ethanol production, and puts tremendous pressure on corn prices and other grains. This impacts the cost of beef for us and for many other of our proteins. Company-operated restaurant margins should be between 14.2% and 14.5% in 2013, a 20- to 50-basis-point improvement from 2012. Restaurant margin will be favorably impacted by sales leverage, Image Activation, discontinuation of breakfast at certain restaurants as well as food and purchasing cost savings initiatives. We expect 2013 adjusted EBITDA in the range of $350 million to $360 million, a 5% to 8% increase over 2012. Adjusted earnings per share should be in the range of $0.18 to $0.20, a 6% to 18% increase over $0.17 in 2012. This slide summarizes the quarterly distribution of adjusted EBITDA in 2012. The first quarter of 2012 was clearly our lightest of the year as we got off to a slow start. This year, we expect a more traditional spread with more than 20% of our annual adjusted EBITDA contribution in the first quarter. And when you look ahead to our expected fourth quarter performance in 2013, we'll be lapping the very strong adjusted EBITDA performance of 2012. In addition, our $10 million franchisee incentive program designed to accelerate franchisee adoption of Image Activation will lower our fourth quarter EBITDA because those incentives are not payable until completion of the project. In summary, we expect higher year-over-year profitability in each of the first 3 quarters with gradually declining growth rates and lower year-over-year profitability in the fourth quarter due primarily to the anticipated franchisee incentive expense of $10 million. From a development standpoint, we are targeting a total of 200 company and franchise reimages for the year. We have scheduled 100 reimages on the company side, and you can see the quarterly schedule of reopenings here. Most of the activity will be in the second and third quarter. And we are looking for our franchisees to open 100 reimages in 2013, which will be largely tilted toward the fourth quarter. On the right side of the slide, you can see the company's distribution by type of reimage. In 2013, we expect more than half of these reimages on the company side to be our new Tier 2 and Tier 3 design, which will provide our franchises with a first look at the returns on investment of these lower-cost reimages. Looking at the new development restaurant under Image Activation, we expect about 25 company new restaurants in 2013. The franchisee pipeline is approximately 40 for North America, and we have about 60 expected new restaurants in our global expansion program for 120 to 130 in total. These new restaurants will feature Image Activation designs. I should also point out that you'll continue to see a higher-than-historical level of closures, especially on the franchisee side of the business. This is a purposeful decision that we have made to work with our franchisees to eliminate some lower-performing restaurants, which will not qualify for Image Activation. These closures will allow franchises to reallocate capital to Image Activation instead of maintaining those lower-performing restaurants. As you can see, we are making a major and increased commitment of capital spending in 2013 in support of our restaurant operations. We spend in the ordinary course about $100 million of base capital. About $40 million of that is nondiscretionary, and $60 million improves our capability and efficiency in the restaurants. More importantly, we've committed $145 million to fund both new restaurants and reimages in 2013, a substantial amount of cash to fund and accelerate the Image Activation program. This commitment represents a 100% increase over 2012. Over the next 3 years, we expect to invest $440 million to $500 million in Image Activation, including the $145 million in 2013. With more than $400 million on the balance sheet and ongoing cash flow generation, we have the financial flexibility to fund these growth initiatives and also return cash to our shareholders. During the fourth quarter of 2012, our Board of Directors authorized a 100% increase in the quarterly cash dividend rate from $0.02 to $0.04 per share. Our board also authorized a share repurchase program for up to $100 million of our common stock through the end of 2013. We did not repurchase any shares during 2012 or in the first 2 months of 2013. Our goal of $350 million to $360 million in adjusted EBITDA for 2013 is based primarily upon the core growth of the North America business, plus incremental contributions from Image Activation. When we look longer term, our goal is to sustain high single-digit to low double-digit range growth in adjusted EBITDA and adjusted earnings per share. This higher, long-term growth rate includes the positive effect of the expansion of Image Activation and the assumed return on investment from this planned capital spending. And now, I'll turn the call back over to Emil to wrap things up.

Thank you, Steve. As I mentioned earlier, we are undergoing a holistic and highly integrated brand transformation that includes a new, contemporized logo that began appearing this week in our advertising. You'll start to see the contemporized logo appearing on all consumer touch points, including product packaging, new crew uniforms, new restaurant signage, menu boards and our digital assets. This exciting evolution of our brand reinforces our mission to position Wendy's as A Cut Above. You can expect to hear more about our progress on this transformation in the future. And with that, I'll turn it to John Barker.

Thanks, Emil. Just before we go to Q&A, I'd like to just go over some upcoming events that we have with investors. We plan to present at 3 conferences in the next several weeks. The Bank of America Merrill Lynch Consumer Conference, which is on -- we'll be there on March 13 in New York. March 14, we'll be at the UBS Global Consumer Conference in Boston. And in early April, the Morgan Stanley Retail Conference in Orlando is on our schedule. We look forward to seeing many of you on the road. On -- a little bit later, in May, on Wednesday, May 8, we'll be releasing our earnings for the first quarter of 2013. And then our annual stockholder meeting will be on May 23 in New York City, and we'll be sending out more information about that meeting in the near future. Now, operator, Theresa, we're ready to open up the line for questions, if you can help us with that.

[Operator Instructions] And your first question comes from the line of Jeffrey Bernstein of Barclays.

Two questions. Just first, as it relates to more recent comp trends, I know you guys had told us, I believe, perhaps in the middle of January that you were very pleased with the initial launch of the new value platform. And, of course, since then, as you noted in your press release, there's been a variety of headwinds that have pressured the group. So I'm just wondering, I know you said you're off to a strong start, but can you give us some sequential color, how you closed out the fourth quarter and how you've kind of trended through the first now, I guess, it's 2 months, whether you're seeing some of the pressures that others are talking about or whether you think this new menu has really helped you to avoid a lot of those pressures?

Sure. Well, Jeff, as I mentioned in my comments regarding the fourth quarter, we had a very strong start to the first -- fourth quarter with Bacon Portabella Melt and actually positively rolled over Dave's Hot 'N Juicy launch, then the Mozzarella Chicken Supreme event started, I think, November 17. And we pretty quickly saw a slowdown in performance and really through December. But then, there was a clear step-change response to the Right Price, Right Size menu as we launched that initiative. And as you know, we do not give guidance on individual periods or months, and so, as we have reiterated, we are, at this point in time, still comfortable with our guidance of 2% to 3% same-restaurant sales for the year.

Okay, that's fair. That's your annual target? I presume that's not referencing the first quarter?

That is correct, yes.

Got you. And then in terms of the Right Price, Right Size menu, now that it's been, I guess, 60-plus days, can you give some color in terms of how the consumer's using that, whether you're pleased with -- I guess you call it trade down although at $1.99, maybe not, but -- and the mix and perhaps the margin, is that margin percentage similar with -- relative to the traditional menu now that you have kind of various price points on there?

Actually, I would say we are very pleased with the response that we've seen to this. And from several perspectives: one, the sales response; two, the level of adherence to the pricing structure on the part of our franchise system, which is obviously very important; and three, the fact that there's an enhanced margin on the -- our value items with this menu because some items -- we took 3 items off our original My 99¢ menu. We took price on a number of items on there as well. So -- but we believe that the thing that's important here, Jeff, is with this construct of the 6 items at $0.99 and then your 8 items at prices above that, we believe that we can get continuity throughout the year and beyond that across our system. And that is what we had been missing historically and why we had been losing share of that price-value consumer. So we're excited by the start we have.

And did you mention advertising spend? I know -- in terms of how you spend it by quarter or what -- how you'd skew it between premium and this new menu, obviously, with the early launch this year?

I -- we did mention when we spoke in Miami that our media budget this year is higher than it was last year. And that's the result of some efficiencies we have found and just how we've allocated money. So there is actually more money allocated. And I will tell you that the -- certainly, Right Price, Right Size is going to receive some nice attention throughout the year.

Your next question comes from the line of David Palmer of UBS.

Just a question on Image Activation. Your second and third tier versions of that, they're obviously a lower price. Could you just give us a sense for the -- I've not seen those tiers, how they look. How have you been able to value-engineer those down in price? What are some ways that you can make us understand that? And that price tag of -- those price tags for those tiers are more similar to the type of levels that we are hearing for Burger King's reimaging, for instance. And I know you believe the natural brand position for Wendy's is above that of Burger King. How do you think that you're maintaining that sort of quality difference in the look at a more similar price point?

David, I'll start out and then ask Steve to join in here. What we did is through customer research, we looked at what were the most, I'll call it distinguishing characteristics of the Tier 1 designs. And then we worked hard to preserve those to as great an extent as we possibly could in both the Tier 2 as well as the Tier 3 designs. And so we used really consumer input to guide this. And the other perspective I would add here is we're looking at this from the context of a Tier 1 design, which really is a reconstruction of a restaurant. It's not a refurbishment, okay? I mean, it's a major redo. From a consumer perspective, they're going to look at it in comparison to the Wendy's that they used to go to, to this Tier 2 or Tier 3, which they're going to see a dramatic improvement in that restaurant. And I believe that -- the first Tier 2 and Tier 3 open at the end of March, and I believe that they are a significant step up from the designs that I personally experienced in terms of what -- the upgrades that Burger King is making in the marketplace. Obviously, we don't have any perspective on the sales yet because they haven't opened, but we're very, very optimistic in that regard. So we do -- we definitely feel that these designs are absolutely consistent with our A Cut Above positioning. So Steve, I don't know if you want to add anything else to that or...

David, I would say that just in general, I think as you go to Tier 2s and 3s, more of the savings come from the exterior work that we're doing where we're using some less expensive materials. We've done some structural design changes that makes it a little more simple -- simpler construction projects. I think that's where the cost reduction. We're trying to maintain as much of the interior features that are getting such a good customer response that we're seeing in the Tier 1s. And so that's the balance we're trying. Hopefully, what you'll see is as we start to open these in 2013, is a similar exterior look as you're driving by so that you would say, "Oh, that's a new Wendy's," but doing it more cost effectively when we drop down to the 2s and the 3s.

And your next question comes from the line of Joe Buckley of Bank of America Merrill Lynch.

A couple of questions on the image reactivation as well. The scrapes and rebuilds -- of -- for the company stores, do they all become Tier 1 version?

Yes, they do.

Okay. And then the incentives to the franchisees being spread across all 3 tiers, is it scaled? I know the incentive for Tier 1 was $100,000 per unit. Is it lower than that for Tier 2 and Tier 3? Or that $100,000 number kind of stay intact?

Yes, we did. We did do that, Joe. And we also -- actually, the people that are into the Tier 1, we've actually given them slightly more than the people that have not because they've been great test partners on this. And this is very important because we do believe that the Tier 2 and the Tier 3 are really going end up being the workhorses of Image Activation. The Tier 1 will essentially become a new building or a scrape and rebuild. So having franchisees engaged not just at the Tier 1 level but at the Tier 2 and 3 is also extremely important. So we're excited to have them participate.

So Emil, just to clarify, the -- so the Tier 2 and Tier 3 will also qualify for the $100,000 incentives?

No, no, no. There -- we have scaled that down a little bit.

Okay. So will the total number, do you think, end up being more than 100 then? Because you can spread those incentive dollars over more restaurants?

Well, first of all, the $10 million is -- we're not going to exceed the $10 million, just for clarity on that. And right now, our target, we are keeping our target at 100 at this time, Joe. 100 franchised restaurants. So yes.

And your next question comes from the line of Jason West of Deutsche Bank.

Just one on -- along those same lines. Can you say roughly how many franchisees of the 100 are kind of signed up so far just so we can get a sense of kind of uptake? Or are they still waiting to see that the sales lift on the 2 and 3?

Steve, you know the exact...

Yes, we're -- right at this point, we have, say, more than 100 applications into the program across all the tiers. So I would call it sort of fully subscribed at this point. But obviously, until we open the Tier 2s and 3s, I mean, people need to see the results here so that we can begin to make real progress on this front. But we're pleased with the response. And that was really one of the reasons why we wanted to expand the program to include Tier 2s and 3s, so that we can build momentum as we start to open up a couple. And some of the 2s and 3s will start to open here at the end of the first quarter.

Okay. And then just a question on the guidance. Can you talk a bit more about the decision to exclude the higher D&A from the earnings guidance? I mean, is that sort of a onetime D&A sort of impairment or, I guess, write-off that happens this year? Or is that a number that's going to continue to be carried as you continue to ramp the reimaging? I would think that number can continue to grow if you're increasing the reimaging into next couple of years.

Yes. And so just for everybody, make sure we're all on the same page, what Jason is referring to is as we go through Image Activation, especially at a Tier 1 level, it's an extensive renovation of the building. And so as a result, what we're doing is replacing a fair amount of equipment and the cost of the building that is still on the books. So those historical assets are being written off. So I think it is comparable, in my mind, to an impairment charge related to then renovating the building and then we bring the new assets on. So as we look at depreciation and amortization over the next couple of years while we're ramping up Image Activation, we think we're going to see elevated amounts of depreciation and amortization, the core amount will be from just spending more capital dollars and then depreciating those assets. But the aspect of the write-offs, this sort of impairment charge related to replacing these assets, we're going to identify that separately and then you can decide. We're going to break it out as part of our adjusted earnings per share, but we'll break that number out for you so that you can see what the impact of that Image Activation is from a write-off standpoint.

And your next question comes from the line of Michael Gallo of CL King. Michael W. Gallo - CL King & Associates, Inc., Research Division: Emil, just as -- as I look at the -- you now have the pricing construct seemingly right on the value menu. It's been an area you've obviously had some trouble with the last few years. I was wondering, as you look to the next kind of evolution of that, whether you might look to do more limited-time offers around value and keep that value menu fresh throughout the year.

Yes. Well, Michael, I think right now, our focus is going to be on making sure that we see the awareness and understanding of the Right Price, Right Size menu. And the other dimension to that menu that I think is very important is we're seeing that more and more people, and particularly the millennial generation, are eating 4 and 5 meals a day but smaller ones. And so that's the reason for the Right Price, Right Size nomenclature on that menu. But we are also sensitive to the fact that consumers -- some consumers consume value and price value differently. And what I mean by that, there are some people that are inclined to use value menus like Right Price, Right Size; some are inclined to use coupons. And so we're going to be very sensitive to making sure we're in tune with the marketplace and that we're not out of step. But I think that the dominant focus you're going to see in 2013 certainly is going to be on the Right Price, Right Size as the balance part of our high-low messaging. Michael W. Gallo - CL King & Associates, Inc., Research Division: Okay, great. And then just a follow-up question. I guess when you look at the remodels, I assume as stores get done, you're going to get everybody on a common POS platform. I was wondering just how long you think it'll take to get the system on a -- more of a common POS platform so you can better utilize the new app and be able to really utilize some of the tools that hit those customers more efficiently from a marketing standpoint.

Yes. Well, I'll start out and then ask Steve to jump in here. But there is a fairly high percentage of our system that has fairly old POS software, and they're going to need to evolve to this fairly quickly. There are also franchisees, however, who have quite recently made important investments in what we call modern POS hardware as well as software. They will eventually have to transition out of that into the common platform that we have identified, which is NCR's Aloha. But that might be 5 years down the road for them. But again, they have modern POS that can run this. So that's not an issue. But to do the things we want longer term, there -- they, too, are eventually going to have to change. But there's a decent piece of the system that's going to have to move to this really pretty quickly. Steve, I don't know if there's any. . .

Yes, Michael, I think it's hard to put a timetable to it. But I think as Emil has mentioned, it's really, I think, the pressures in terms of just our customers and their use of technology that's really going to drive this, and to be able to work directly with customers who want more access to information about our menus, eventually will want to be able to order and pay for their orders with their iPhones or whatever they're using. That's really what's driving, I think, our system towards a common point of sale that just needs to be modern and able to keep up with what our customers expect. So as you know, that technology is moving very rapidly. So it's something that I hope we can achieve over the next couple of years fairly quickly.

And your next question comes from the line of John Glass of Morgan Stanley.

First, just on the commentary around the first quarter comps, is that led by traffic versus check? I could see a scenario where if you've put higher prices on the Value Menu, maybe you've just traded your existing value customers up. Are you actually seeing new customer traffic?

Yes. John, we're not in the habit of breaking out transactions and check and doing that. But again, we're pleased with what we're seeing in our first quarter performance.

Okay. And then as we think about the benefits you're going to get this year from the reimaging, I know it's still early, but then there's also the detriment from removing breakfast, how do those balance each other out on a comp store sales basis? Do they wash? Or is one going to weigh more heavily than the other?

Yes. It's interesting, John, because our estimate is they'll virtually be identical and wash out.

Okay. And then just sort of a broader question on the remodeling, sort of. As you -- Emil, as you look at the business over a couple -- next couple of years, you're reimaging and you hope to get extraordinary lifts, or you know what I mean by that is above the average industry growth. Burger King expects the same thing. McDonald's, which is only a third through, also expects it. So is the entire industry poised to grow? Or is it really everyone's going to have a good idea, but, in fact, you're not going to experience collectively a lift because the industry growth just doesn't support it?

Well, we're seeing a lift of 25% on the 11 that we did -- excuse me, the 10 we did in '11, and a similar number on the 48 we did in '12. Is the industry going to grow by 25%? I don't think so. But we believe that we're going to continue to grow share through this initiative as well as the other things that we are continuing to do. So I cannot speak for our competitors, but we are quite confident with the numbers that we are seeing. And in terms of the other dynamic that I think is going to take place, remember as we do more and more of these, that certainly, I think there's a motivation for our franchisees in mixed markets that they don't want to be the last piece -- people to be image activating, as well as these will also be required contractually in transfers and renewals for new restaurants. And so there's kind of a natural momentum that we're going to continue to see behind Image Activation.

Your next question comes from the line of Michael Kelter of Goldman Sachs.

Yes, I wanted to ask Steve. At ICR, I recall you guys referencing not only the cash on your balance sheet but also the real estate, which I think may be worth something in the area of $600 million or so. Is there anything that you guys are exploring, whether it be a sale leaseback or an internal REIT or a partial REIT spin, something to unlock some of that value? Or does it not make sense for you for some reason?

No, Michael. I think when we look at the real estate ownership, we think it's an important asset that we have, and we do think that the current market value of that land probably exceeds what's on the balance sheet right now. So in terms of monetizing that, I think that's always a possibility for us and gives us another degree -- when we talk about financial flexibility, I think that's another degree of freedom that we have. I would say that we do not have any immediate plans to head down a monetization path, primarily because we have ample financial resources today, I think, to fund the increased CapEx required to support Image Activation and, at the same time, do some of the positive things we've done on the shareholder returns of capital with the higher dividend. So we're -- with the debt where we have it today and the cash flow dynamics of the business, I think we're comfortable that we don't have to do something like a sale leaseback or some kind of REIT on that. But those potentials are always there and, as you know, those markets get very hot sometimes. And so that's an opportunity down the road, something that certainly is available to us.

And then separately, the updated guidance the -- in aggregate suggesting that unit closures, which, as you said, was purposeful at this point. When will that have played out? When -- is there a path for you guys over the next few years to turn to unit growth? Or not -- don't expect anything like that over the next 5 or so years while you focus on remodels?

I think it's going to be a relatively shorter-term phenomenon because I think it's -- as our system starts to look at Image Activation, as we start to provide more visibility, especially at Tier 2s and Tier 3s, I think people are looking at -- our franchisees are looking at their portfolios of restaurants and saying, "All right, the lower-AUV restaurants probably are not candidates." And so there's a pruning that's going on right now that we're helping to facilitate, I think, by working with them because we obviously want them to be able to participate fully in Image Activation. So I think that's -- we're going to see a bit of a flurry of activity here in the beginning phases as we ramp up Image Activation, and then I would think it would stabilize and go back to more historical levels. That clearly will happen on the company side. We did a portfolio review of our company restaurants and did some closures at midyear last year. Beyond that, other than some lease locations that we need to look at over time, I think we're in pretty good shape on the company side.

And then lastly, could you maybe talk briefly about the new product pipeline for the year? Are flatbreads the big idea for the year? Or is there something else? Even if you're not willing to talk about what exactly it is, just something else that you're even more excited about?

Yes, Michael, we -- I'm pleased with the progress that we've made on restoring our product pipeline to where it needs to be. Are we at full bright? Not yet, but we -- I think we have a line of sight on that. And so we have some I would characterize as exciting things that we'll have on display this year, and I'm really not willing to get a lot more specific than that.

Your next question comes from the line of Sara Senatore of Sanford Bernstein. Sara H. Senatore - Sanford C. Bernstein & Co., LLC., Research Division: I just had a question about actually sort of an industry dynamic that seems to be going on. And it's basically that this year, you have the Right Size, Right Price. McDonald's is aggressively advertising its Dollar Menu. And then we heard from Burger King, that they felt like they lost share in January because they weren't promotional enough, so they're going to step back up. So I guess I'm just trying to gauge, do you -- are you seeing kind of a -- do you sense an uptick in promotion around value versus last year when you benefited from a lot of premium launches? And if so, does that have any implications for industry-level kind of profitability? I'm not suggesting that we're going back to the burger wars. But obviously, when everybody starts talking about more promotions, that is something in the back of people's minds.

Yes. Sara, once again, the -- I can't speak for what other people are doing. This has always been a highly competitive business. It continues to be a competitive business. And we are very focused on beating ourselves versus beating the competition, and we're very focused on getting better and better and better, and having a layered mix of marketing messages out there that include high-end premium products, our core items and then our price-value messages that provide what we believe will ultimately prove to be traffic-driving messages as well as a great mix that provides the economic model that we need to be successful. And if you look at this business, the beautiful thing about this business is it's a massive business. The QSR space has continued to build share. It's now 79% of all the traffic. Its share continues to grow, while mid-scale restaurants and casual dining continue to lose share. So -- and for the most relevant brands out there, there has always been a tremendous opportunity to be very successful out there, and we at Wendy's are determined to be one of those brands that are very relevant and successful. Sara H. Senatore - Sanford C. Bernstein & Co., LLC., Research Division: And if I may, just one follow-up, and that's on the Image Activation. I know these are very, very new, the Tier 2 and 3, I guess -- or not open yet. But I guess if -- can you give a best guess, given that they cost maybe half as much as a Tier 1, should we expect some sort of proportionally lower lift? Or are they happening in lower -- in sort of lower-cost markets or lower-tier markets where you could get a disproportionately high lift?

We are anticipating that the sales lift on these might be somewhat below what the Tier 2 is, Sara. But they are happening across really the United States. So we've not tailored them to 1 market or 1 situation versus the other because our vision is that these become the workhorses for Image Activation in the future. So they're going to have to work in a broad range of circumstances. But yes, they are Tier 2 and 3, but when you look at how nice these are versus maybe the existing restaurant, we're really quite optimistic about this. But the first Tier 2 and Tier 3 will open -- first Tier 3 is -- will open end of March in Orem, Utah, which is Salt Lake City, and the first Tier 2 will open in Columbus, Ohio. And so we're -- we'll be anxious to share those results as quickly as we can.

And your next question is from the line of John Ivankoe of JPMorgan. John W. Ivankoe - JP Morgan Chase & Co, Research Division: Just a follow-up to, I think, a couple of other questions. Was there a material mix in the preference of items ordered when you changed from My 99¢ to Right Size, Right Price?

There was definitely some shifting taking place. But I will tell you, John, that the shift we have seen very much mirrored the shift that we saw in test markets. And so I will say that there has been no surprises in terms of shifts of product mix. We totally anticipated what's taken place. John W. Ivankoe - JP Morgan Chase & Co, Research Division: I mean, do you mind if I ask? I mean, do people like kind of order fewer of those items and actually find themselves trading up on the menu? Or is it vice versa, that people actually traded down from premium to some of the higher-end items on the new menu?

Well, John, there are some customers who are $0.99 shoppers, and it's because they just don't have a lot of money. And so what you see often is those customers will -- if the item that they used to order went up from $0.99 to $1.19 to $1.29, okay, that pure $0.99 purchaser is going to more than likely now going to move into another $0.99 item versus purchasing that other item. But of the -- we have a good level of mix on those 8 items that are selling for above $0.99. And the thing is those items, even though they're above $0.99, are an excellent, excellent value on there, too. So just because they're above $0.99, it does not indicate that they're not a great value. John W. Ivankoe - JP Morgan Chase & Co, Research Division: Right, agreed. Understood. And then secondly, looking at Tier 1, 2 and 3 remodels, I mean, I think probably your biggest opportunity for having capacity enhancements, whether at the front counter, at the drive-through would be through Tier 1. So comment on that. But secondly, are there any capacity enhancements that are available for the Tier 2 and 3 remodels? Or is that largely cosmetic on the lower tiers?

When you say capacity enhancements. . . John W. Ivankoe - JP Morgan Chase & Co, Research Division: By capacity, I mean like a redesign of the restaurant that allows you to process more transactions in a given hour, which would be especially important around lunch, for example.

Yes. No, there's nothing inherent on -- in the designs other than in these situations, you have -- and this is unique to Wendy's -- we're moving the beverages from being behind the counter, okay, to a self-serve beverage situation. Now that doesn't sound like much, but now the order taker can focus exclusively on taking orders as opposed to having filling drinks and do refills as well, which is a distraction to them and does slow them down. I would tell you the other interesting thing is that as we've shared before, that volumes are up inside the dining room, carry out, as well as at the pickup window. So it is interesting that all 3 channels of sales have increased. And when you look at contribution to the growth, it's interesting that the dining room and actually the drive-through are very similar in their contribution to the growth. So the point is that at the pickup window, you would think that nothing fundamentally has changed other than you're pulling up to a restaurant that looks dramatically more attractive. And -- but we are seeing excellent growth at the pickup window as well.

Your next question comes from the line of Keith Siegner of Credit Suisse. Keith Siegner - Crédit Suisse AG, Research Division: Just one question left for me, and I want to ask about repurchases with this authorization. How do you think about repurchases? Is this geared towards offsetting dilution? Is it geared towards using some of this excess cash in the balance sheet? Do you look at it as a return on that spend? And if you do look at it as a return on that spend, how do you weigh that option against, say, incremental reimage incentives to get that program and hit -- going faster, hitting critical mass more? How do you approach repurchases?

Keith, this is Steve. Let me take a crack at that. I think if you look at our priorities around capital today, the clear number one priority for us is funding Image Activation, which we're very excited about what we've seen so far, and how quickly can we roll this program out not just across company restaurants but across the whole system, and what kind of support can we provide to do that such as the incentive program that you've seen us put in place. So when you look at capital, we've talked about a 3-year plan to spend up to $500 million on the company side to get over 50% of our company restaurants to that standard, that's far and away our number one priority. We've got our normal base capital spending that goes along with that. But clearly, the incremental returns we're looking for is from that growth capital that's going back into the restaurants for Image Activation. Then as we looked at our overall cash generation that's likely here going forward, we -- and the cash on the balance sheet, which continues to be $400 million-plus on the balance, sheet, that gave us comfort to make a recommendation to the board last year that we thought we could increase returns to shareholders in addition to funding Image Activation. And that's what led us to double the quarterly dividend, which takes the cash dividend for the year up to about a $60 million level on shares we had outstanding. And then that's, I would say, would be our second priority, would be providing a return to shareholders. The third level, I think, would be the stock buyback program, where I think the board gave us the flexibility to opportunistically look at buying some shares depending on what's happening in the market. So if you remember, when that program was authorized, the stock was in the low $4 range. And so as a result, we were in a position where if the stock did not respond to the progress we're making operationally, to the progress we're making around Image Activation and also whatever response we would get to this increase in dividend, which we think widens the universe of investors who can look at the stock, so that program clearly, I think, in terms of priorities is lower on the list. And our philosophy is one to look at that as purely an opportunistic program in terms of our overall use of capital. So again, clearly, reinvestment in the restaurants, number one priority. Sustaining this dividend, we think, is a good thing for our investors because we are clearly on a long-term program here with Image Activation. We think that's consistent and sharing. And with the liquidity we've got, we're comfortable that we can achieve all of those goals. And then last -- and last -- but a degree of freedom we have is the stock buyback.

And our final question comes from the line of Nick Setyan of Wedbush Securities.

We know what the deleverage from commodity inflation is going to look like. Could you maybe talk about the distribution of the lift from labor and the other expense line and really, it's -- kind of where -- what's contributing to that? Is it -- or to the mix between leverage from the comp lift, productivity initiatives and then also the Image Activations. Just given that framework, I think we could better think about not just 2013 but beyond, past 2013.

And Nick, I assume you're talking about sort of our view around restaurant margin going forward. Is that the context?

Exactly.

Yes. So what we said and what we've put out there for people to consider for 2013 is we think with a 2% to 3% comp lift, we do think we'll be able to increase our restaurant margin from what we came in this year, 14%, and we said about a 20- to 50-basis-point improvement. Now we recognize that's going to be in the face, as you mentioned, of commodity increases. And our basket that we're looking at -- again, we're -- 20% of our costs of food is in beef and another 20% on the chicken side. We're going to see increases, we think, in those commodities. And so our basket, we're saying this year, we think is going to be about 3% to 4% of increase again for all the reasons that we've talked about in the past. And on the beef, you've got a supply and demand imbalance. You've got the high cost of the inputs here. The corn, in particular, we see that as an ongoing problem. Even residual impact from the drought from last year. We think they're all going to drive that into that 3% to 4% range, which we were at the low end of that range in 2012. So we do see the potential maybe for even a little bit higher commodity cost there as we work through the year. Now what we've done to try to mitigate some of that is we're aggressively looking at some cost savings initiatives where we're looking at how we're spec-ing our products, how we're buying our products, trying to work very closely with our purchasing co-op to say, "Are there some ways we can manage the underlying cost of our products down to help mitigate that commodity basket increase there?" And that's a big exercise. But we've got good momentum. We got an early start on that. And I think there are some things there we can do that still will be very consistent with A Cut Above product quality. And that's the key there when we look at our food costs on that side. Leverage, as you mentioned, I think with the 2% to 3% same-store sales growth, we would expect to get leverage in terms of restaurant labor. Image Activation, as we've talked about, has a higher flow-through on those incremental sales that we're generating. So we think that is a natural pull on our margins as well. And then the last component, I think, would be the discontinuation of our breakfast daypart program in those restaurants where it was unprofitable in 2012. So by pulling that out, 2 things happened. One, we've been supporting a number of the franchisee markets with advertising. And also, we've been having some operating losses at those dayparts in those particular restaurants. So the benefit of discontinuing breakfast will help us on the margin side in 2013, and that's actually, I think, a key part of our comfort around saying we think we can increase restaurant margins, notwithstanding the fact that, as Emil mentioned going in, that there's a lot of macroeconomic headwinds out there. And we certainly think that we're going to have commodity increases to offset to do that.

Okay, everyone. That concludes our call for investors today. Steve, myself and Dave Poplar will be talking with many of you later today. There were several calls lined up. If you have other questions, please just send us an email or call us, and we will certainly get back to you. Thanks a lot.

Thank you, everybody.

Thank you. And this concludes today's Fourth Quarter and 2012 Earnings Conference Call. You may now disconnect.