The Wendy's Company (WEN) Q1 2013 Earnings Report, Transcript and Summary

John D. Barker - Chief Communications Officer and Senior Vice President Emil J. Brolick - Chief Executive Officer, President, Director, Member of Executive Committee and Member of Capital & Investment Committee Stephen E. Hare - Chief Financial Officer and Senior Vice President

Mitchell J. Speiser - The Buckingham Research Group Incorporated Joseph T. Buckley - BofA Merrill Lynch, Research Division Jeffrey Andrew Bernstein - Barclays Capital, Research Division John S. Glass - Morgan Stanley, Research Division Michael W. Gallo - CL King & Associates, Inc., Research Division Will Slabaugh - Stephens Inc., Research Division Michael Kelter - Goldman Sachs Group Inc., Research Division John W. Ivankoe - JP Morgan Chase & Co, Research Division Eric Gonzalez - UBS Investment Bank, Research Division Christopher T. O'Cull - KeyBanc Capital Markets Inc., Research Division Sara H. Senatore - Sanford C. Bernstein & Co., LLC., Research Division Jason West - Deutsche Bank AG, Research Division Keith Siegner - Crédit Suisse AG, Research Division

Good morning. My name is Brandy, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2013 Earnings Conference Call. [Operator Instructions] Thank you. Mr. John Barker, you may begin your conference.

Thank you. Good morning, everybody. Earlier this morning, we issued our first quarter 2013 earnings release, and we filed our Form 10-Q. Today, 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 that we're making on the brand transformation. After Emil, our Chief Financial Officer, Steve Hare, will review our first quarter financial results. And then we'll, of course, open up the line for questions. Today's conference call and our webcast is accompanied by a PowerPoint presentation, which can be found on the Investor Relations page of our corporate website, aboutwendys.com. And for those of you who are listening by phone today, make sure you do select the appropriate webcast player option from our website. That will make sure that you can sync up the slides with our 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 news 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 as 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, and thank you for joining our call. We are pleased to report solid first quarter adjusted EBITDA following the strong fourth quarter 2012 results. We delivered adjusted EBITDA of $77.3 million in the first quarter, a $13.4 million or 21% increase. This increase was consistent with our expectations for the first quarter and in line with our adjusted EBITDA guidance of $350 million to $360 million for 2013. Adjusted EPS increased from $0.01 in 2012 to $0.03 for the first quarter of 2013. From a same-store sales perspective, the first quarter was up 1% and 1.8% on a 2-year basis, despite holiday shifts and more severe winter weather. While the sales performance was below our expectations, we have made adjustments to our marketing calendar to better position the brand for stronger sales growth in the second half of the year. Again, we are reaffirming that we expect 2013 adjusted EBITDA between $350 million and $360 million, as the first quarter was in line with our expectations. As a result of the refinancing we've been working on in 2013 and the expected resulting interest expense savings of approximately $0.02 per share, we have raised our 2013 adjusted EPS outlook to $0.20 to $0.22 from $0.18 to $0.20. This represents an 18% to 29% increase over our 2012 adjusted EPS of $0.17. Steve will discuss the financial and refinancing in more detail. As we mentioned during our fourth quarter conference call, the investments and key actions that we took in 2012 paved the way for the solid performance we saw this quarter and will help us set out for a successful 2013 even with softer-than-expected first quarter sales. For example, you'll recall that in 2012, we conducted in-market testing to prepare for the launch of our Right Price, Right Size Menu. This effort paid off as we introduced Right Price, Right Size in January and kicked off January with solid momentum. We have seen improved franchise adherence to the Right Price, Right Size Menu pricing construct. It will be key to maintaining this pricing construct over time as we place increased media emphasis on Right Price, Right Size messages. Image Activation was another area of investment for us in 2012. We opened 48 Tier 1 reimages last year. The average cost of these Tier 1 reimages represented a 40% reduction from 2011 concept restaurants. The 2012 Tier 1 openings also helped inform the designs of our Tier 2 and Tier 3 Image Activation restaurants that have recently opened. These Tier 2 and Tier 3 restaurants are producing strong sales at a considerably lower investment than our Tier 1 designs. The pace of Tier 2 and Tier 3 openings will be accelerating throughout the year. Additionally, we announced in January we decided to discontinue breakfast operations at certain company and franchise restaurants. While this decision will negatively impact our 2013 same-store sales results as was anticipated, it will aid our earnings performance as we benefit from the reduction in breakfast advertising expense, as well as the elimination of unprofitable morning daypart operations in these restaurants. The positive sales impact from Image Activation is offsetting the lost sales from discontinued breakfast operations. And while growth is the absolute imperative, we remain ever vigilant in identifying cost reduction opportunities. The consolidation of our Restaurant Support Center from Atlanta to Dublin, our ongoing focus on G&A efficiencies and cost optimization will contribute to our 2013 results. In 2013, we will also benefit from reduction in beverage costs as a result of our new agreements with 2 of our beverage suppliers. And we continue to look at all costs at our restaurants, ensure that they are adding value to the consumer experience. However, I look at cost management as a defensive strategy. Our brand positioning and our Recipe to Win are all about growing our brand, growing our system sales and growing system profit. Growth is essential as this is an intensely competitive environment with modest real growth, where competitive positioning is crucial to the success. Since 1969, Wendy's has been a brand that earned unique position in the hearts and minds of consumers. We intend to leverage this latent brand equity, and we are confident that A Cut Above brand positioning is where we need to be. It is the natural position for the Wendy's brand. To this end, our current product, asset, marketing and operating initiatives are reclaiming the high ground in traditional QSR. We are focused on beating ourselves. For in this highly competitive environment, we need to invent the future to stay ahead. Our Cut Above brand positioning is brought to light through our Recipe to Win. Our Recipe to Win is not a theoretical idea, but real marching orders that are brought to life through our Image Activation, through innovative new products, through a transformation of how our brand is presented with striking new packaging, with a contemporary update of our beloved logo and through system-wide investments in technology that will facilitate connectivity with consumers through their handheld devices. Yes, our brand transformation is very exciting. We, however, are keenly aware that we are competing in a tough economic and consumer climate and a very competitive price environment. In this situation, we seek to set ourselves apart by offering new QSR quality food at a QSR price. The new Flatbread Grilled Chicken that we launched in April is a great example of this, a high end, premium product with new QSR quality at Wendy's prices. Right Price, Right Size is another example of new QSR quality at a QSR price. We offer high-quality Wendy's products with 6 items at $0.99 and 8 offerings from $1.19 to $1.99. As we say in our advertising, these price value products are so not the same. However, the reality is we have been growing large hamburger, large chicken sandwich and salad sales, but losing share for value menu customers. We are making refinements to our marketing calendar that will continue to place the majority of pressure against high-end messages that address value menu share loss. From a product perspective, you will continue to see our marketing calendar reflect a commitment to innovation and to playing a different game. Flatbread Grilled Chicken is the perfect example of playing a different game. In April, we saw the highest level of large chicken sandwich unit sales in 9 years. In May, we introduced Frosty Cones to drive add-on sales and drive traffic in snacking dayparts. You will see us promote Frosty Cones this month. And while we can't provide you the details, we are very excited about our promotional calendar in the back half of the year. Our promotional calendar is well conceived, balanced between the higher-end core, promotional products and price value messages. Marketing efforts are designed to build an emotional connection to the Wendy's brand and drive traffic. With this in mind, we know we can't outspend the competition, so we must outthink and out-execute them. Instead of trying to beat them at the same game, we must play an entirely different game. As the consumer environment evolves, we are refining our promotional calendar to optimize sales, check and transaction growth with modestly more emphasis on price values to go along with our premium promotions. The Tier 2 and Tier 3 restaurants are as stunning as the Tier 1 design, and all tiers deliver a striking street presence befitting the Wendy's brand and our Cut Above brand position. We plan to have Image Activation solutions for 85% to 90% of our system. And we are currently on track to open 200 total reimages in 2013, up from 48 reimages in 2012. In the last few months, we have opened several Tier 2 and Tier 3 restaurants, and the early sales results are very encouraging. Investment is a bit above the target, but we have a line of sight on how to get to our targets of 550,000 and 375,000 for the Tier 2 and Tier 3s respectively. You can see on this slide the beautiful interior of a Tier 3 restaurant in Salt Lake City. We have significantly reduced the investment in our Tier 3 reimages from the Tier 1 and maintained many of the critical customer-facing elements. During April, we highlighted our Tier 2 and Tier 3 restaurants as part of our spring franchise meetings, including restaurant tours. Franchisees are stepping up, as evidenced by the fact that we received more than 100 applications for 2013 reimages. We know that growth is an imperative, and we believe that through the drivers represented in the growth pyramid, we'll be able to grow our brand, grow sales and grow profits. We are working against all layers of the growth pyramid, and we are confident about the progress and growth that we will deliver in 2013. And we are optimistic that we will have more good news to share with you as the year goes on. And one final note before I turn the call over to Steve. As announced this Monday, Steve Hare will retire later this year. And I'd like to take a moment to recognize Steve for his leadership and many contributions here at Wendy's. Most recently, Steve has provided outstanding leadership to our Image Activation program, and he has been instrumental in helping us achieve significant savings through our 2012 and 2013 debt refinancing initiatives. Steve will continue to work closely with us over the next several months to ensure a smooth transition of his CFO responsibilities. As we announced in our news release earlier this week, Todd Penegor will be joining the Wendy's company as Chief Financial Officer. Todd comes to us from the Kellogg Company, where he most recently served as President of the U.S. Snacks Division, one of Kellogg's most important businesses. I am very impressed with Todd's skills, and we look forward to welcoming him to our team next month. So from me, personally, and on behalf of all of Wendy's, thank you, Steve. And now I'll turn the call over to you.

Thank you, Emil, and thanks for the kind words, and good morning to everyone. I'd like to start off with a quick look at the first quarter. As Emil had highlighted, North America company-operated same-store sales increased 1% in the first quarter and 1.8% on a 2-year basis. Driving the same-store sales increase were a favorable product mix and the benefit of rollover pricing from 2012, partially offset by a decline in transactions. As we discussed in January, Image Activation will have a favorable impact on same-store sales this year that will offset the negative impact on sales resulting from discontinuing breakfast in selected restaurants. Company-operated restaurant margin improved 100 basis points in the first quarter to 12.8%. Restaurant margin improved with the higher sales and a reduction in beverage costs from new contracts. In addition, the elimination of unprofitable morning daypart operations in certain restaurants improved margin with a reduction in breakfast labor, food and advertising expenses. Restaurant margin was negatively impacted by a 90-basis-point increase in commodity costs. Now let's take a look at our financial summary of the first quarter. Total revenues increased $10.5 million or 1.8% versus prior year. The same-store sales increase and incremental sales from a higher year-over-year net number of company-operated restaurants were the primary drivers of the revenue increase. Adjusted EBITDA of $77.3 million increased 21% compared to the first quarter of 2012, and adjusted earnings per share increased from $0.01 to $0.03 per share. As we articulated on our last conference call, we expected the first quarter adjusted EBITDA to have the highest year-over-year growth rate with lower growth rates in the second and third quarter of 2013. We also expect lower year-over-year profitability in the fourth quarter due primarily to the anticipated expense of about $10 million from the company's Image Activation franchisee incentive program. This quarterly earnings pattern is reflected in our 2013 adjusted EBITDA guidance of $350 million to $360 million. Now let's take a look at adjusted income and special items. Adjusted income was $13.1 million or $0.03 per share for the first quarter of 2013 compared to $3.3 million or $0.01 per share in 2012. Adjusted income for the first quarter excludes a $9.1 million after-tax impact for depreciation of assets that will be replaced as part of the Image Activation initiative, as well as $1.9 million in facilities relocation and other transaction charges. The Wendy's company reported net income for the first quarter in 2013 was $2.1 million or $0.01 per share compared to $12.4 million or $0.03 per share in 2012. As a reminder, the first quarter of 2012 benefited from an $18 million or $0.05 per share after-tax net gain on the sale of an investment. We want to provide you with some detail on our methodology to calculate the incremental depreciation charges related to Image Activation and what you can expect going forward. At the beginning of 2013, we accelerated the depreciation of the assets that we will replace in the 100 company-operated restaurants scheduled for Image Activation this year. The book value of these assets is depreciated until each restaurant's closure on a straight-line basis. So in the first quarter, we incurred depreciation expense for all 100 restaurants that we expect to open in 2013 for a total of $14.5 million or approximately 2/3 of the depreciation adjustment for the entire year. In the second quarter, we will incur depreciation charges for 73 restaurants, dropping to 29 in Q3, with a quarterly depreciation adjustment to scale down accordingly. We have also refined our total estimate for depreciation of assets to be replaced with Image Activation to a range of $20 million to $25 million, down slightly from our original estimate of $20 million to $30 million for the year. During the first quarter, we generated net cash flow from operations of $32.6 million. Capital expenditures were approximately $40 million for the quarter and included $20 million for Image Activation restaurants. The net decrease in cash for the quarter was approximately $24.7 million and included dividends of $15.7 million or $0.04 per share and debt repayments of $6.5 million. The quarter-end cash balance was approximately $429 million. Now let's look at a few selected balance sheet items. We continue to maintain a substantial cash balance for financial flexibility purposes and which far exceeds our liquidity requirements to manage the business. At the end of the first quarter, total debt was $1.46 billion, and net debt was approximately $1 billion. Based upon our trailing 12-month adjusted EBITDA, our current net debt multiple remains at 3x. As we announced last month, given favorable market conditions, we have entered into an agreement to refinance a portion of our debt to realize interest expense savings. We expect the 2013 refinancing to produce approximately $20 million in annualized interest expense savings. Of the total interest savings, we expect to realize about $12 million of these savings in 2013. Highlights of the 2013 refinancing, which is expected to close on May 16, include: We are refinancing $350 million of the $1.1 billion senior secured term loan B into a new senior secured term loan A. We are also repricing the remaining $769 million of term loan B balance by reducing the interest rate margin and floor, and we are extending the maturity of the $200 million revolving credit facility. Interest savings from the current refinancing, along with the $30 million in annual interest savings from our 2012 refinancing, generates total annualized interest expense savings of approximately $50 million compared to 2011. We continue to be encouraged by the results we are seeing from our most recent reimaged restaurants. Our initial class of 2011 concept restaurants generated a first year sales lift of more than 25%, with a sustained sales lift of approximately 20% after 1 year. For the Image Activation class of 2012, we have seen an average sales lift exceeding 25% since reopening, with sustained sales lifts of about 18%. These substantial sales lifts generate high incremental profit flow-through and combine to produce higher restaurant profits with attractive returns on investment for the company and its franchisees. We're also pleased to see the expansion and application of Image Activation, both system-wide and globally. As these photographs highlight, we recently opened a restaurant with Image Activation elements in Japan as part of our joint venture with Higa Industries. The first franchise reimage of 2013, a scrape and rebuild, recently opened in San Antonio. And for those of you in New York, by next month, we will open 2 in-line restaurants for you to visit, with 2 other reimages to follow later this year. We also continued to be enthusiastic about our progress with Image Activation and expect 200 total reimages in 2013. In 2014 and '15, we expect our Image Activation efforts to accelerate. We believe that 1/2 of our company restaurants and about 20% of the system will have completed Image Activation reimages by the end of 2015. To help accelerate Image Activation across the system, we have unveiled our franchise financing program with GE Capital. The program is specifically designed for reimaging of existing franchisee restaurants at competitive rates, with credit support provided by Wendy's. Over the next 3 years, we expect to invest $440 million to $500 million in Image Activation, including $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. On May 2, Wendy's declared its regular quarterly dividend of $0.04 per share payable on June 17 to stockholders of record on June 3. 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 quarter of 2013. Since the beginning of 2010, we have returned more than $445 million to shareholders in the form of both share repurchases and dividends. Our goal of 5% to 8% adjusted EBITDA growth compared to 2012 is based primarily upon core growth from our North America business, investments in important initiatives we developed in 2012, as well as incremental contributions from Image Activation. Due to interest savings from refinancing, we now expect 2013 adjusted EPS in the range of $0.20 to $0.22, an increase from our original estimate of $0.18 to $0.20. The new adjusted EPS range represents an 18% to 29% increase compared to 2012. When we look longer term, our goal is to sustain high-single-digit to low-double-digit range growth in both adjusted EBITDA and adjusted earnings per share. This higher long-term growth rate includes the anticipated positive effect from the expansion of Image Activation. And now, I'd like to turn the call back to John Barker.

Thanks, Steve. Just before we open up the line for questions, I'd like to take a moment to just go over some of our upcoming events on the Investor Relations calendar. In May 23, we have our annual meeting for stockholders in New York City. In June, we will introduce a new layer of our IR outreach for the investment community. We'll hold some Image Activation restaurant tours in select markets where we have a good Image Activation presence perhaps all the tiers. And we'll work on, with the sell side, to host and communicate these events and look forward to seeing you out at some of those in the near future. And then just for your planning purposes, our next reporting period for earnings is on Wednesday, August 7, where we plan to release earnings for the second quarter of 2013. Now Brandy, we are ready to open up the line for questions. If you can give instructions again, let's start the Q&A.

[Operator Instructions] Your first question comes from the line of Mitch Speiser with Buckingham Research.

My question focuses on the Right Price, Right Size Menu. Emil, you mentioned in your prepared comments that your -- that the price value component represents a challenge. I was wondering if you can maybe just go through the first quarter. It seemed like things started off pretty strong in January, then maybe softened throughout the quarter. I guess a couple of parts. Can you maybe break out maybe what the weather and holiday shifts were and maybe just give us the experience of the Right Price, Right Size Menu? Did it start off at a higher mix and then tail off? Did you see trade down to the Right Price, Right Size? Or did you see -- it seemed like, with traffic down, that you may have lost some value customers. If you can maybe just give us a little more granularity on assessing the performance of Right Price, Right Size through the first 4 months that it's been out or so.

Okay. Sure, Mitch. The -- what we had shared previously was absolutely accurate that we had a very nice start with our Right Price, Right Size Menu. And then you'll recall in the first quarter, just as a reference, we moved into 2 weeks of promotion starting February 11, with a fish promotion, obviously, to kick off Lenten season. And then we moved into what was a 5-week window of a local marketing window with a variety of messages out there. And basically, what we saw is a definite softening in the business at the end of that Right Price, Right Size pillar. And so that change occurred predominately underneath the fish message, and then specifically, most importantly, underneath that local message. We looked at the holiday shift and it's very difficult to pin down the weather. That holiday shift and some weather probably at least 0.5% impact there. And it clearly was a very challenging winter for us, particularly when you consider how non-winter weather we had in 2012. The other thing I would say, Mitch, as we look at our marketing calendar, I mentioned some refinements, that we feel that we have to evolve to a situation where we have more continuity against a price value message out there as opposed to having a pillar approach. And just because there is so much pressure against price, we don't want to move away from our high-end messages because they're serving us extremely well. As I mentioned, we're building our large hamburger, our large chicken sandwich and salad business, but it is the price value. And so we have to make sure that we're addressing that consumer. And I'll also point out that while we have the use -- some limited use of coupons, that the value menu consumer is a different consumer, generally speaking, than the coupon user. So you have to have both of these tools out there to attract those different price value consumers. So I hope that helps a little bit.

Your next question comes from the line of Joseph Buckley of Bank of America Merrill Lynch.

Can I ask for a little bit more clarification on the sustained sales comments around the 2011 concept stores and 2012 Image Activation stores? So when you say the 2011 class sustained up 20% and 2012 sustained up 18%, I guess in the case of 2011, does that mean they comped up the second year? Or are they up 20% above the initial starting point and maybe after the honeymoon period, we're actually a little bit lower?

No. They're -- what that indicates is the 25% refers to the full year including the opening phenomena of those. The 20% refers to a steady state. So if you would go back to a pre-opening period, what we're indicating is those restaurants are 20% above that pre-opening period. Does that answer the question, Joe?

Okay. Yes. So -- but there's no like year 2 benefit. I mean, I realize you're getting your honeymoon period. But is there no year 2 benefit where they would might comp up better than the average again? I mean, not that strong double-digit rates, but maybe better than the averages?

Well, but when you've added -- I would say that there's definitely a year 2 benefit when you've added that the average volumes of these restaurants are up 20%. That's a big number.

Sure. Yes. Okay, and then...

I don't think we would expect them to continue necessarily comping up at a faster rate because, again, you've gotten that benefit, but you now get that volume benefit theoretically in perpetuity.

Okay. And then just a question on the GE Capital financing you mentioned with credit support from Wendy's. Could you elaborate a little bit on what you're doing with that program?

Yes, Joe. This is Steve. What we're doing is working with them, and we'll provide some credit support in the way of some -- really some first loss protection on that program, just in the early stages, but before we have a complete database of experience on this loan portfolio. We're glad to backstop it because we think, given the returns we're seeing, we think that's going to be a fairly low-risk loan portfolio. So we're working with them in the early stages. We wanted to have something early on and on the table because our franchisees are looking to move now. So we were glad to provide that kind of credit support to help provide an early adopter financing program.

Your next question comes from the line of Jeffrey Bernstein of Barclays.

A couple of questions, just wanted to follow up on the last one with regard to the financing and the backstop. So the idea being if they don't achieve the desired result, so let's say they don't achieve the 15% lift on a Tier 2 or the 25% on a Tier 1, you guys then jump in? Or how do you determine when you are legally responsible for a portion of that?

No, Joe -- I mean, Jeff, we're talking about the loan losses. So if there was actually actual losses on the loans, we would backstop those. There's no implied guarantee of performance.

Got it. Okay. And that starts in '14? Is that...

We announced it. Actually, we just did our franchisee roadshow in the last couple of weeks, and GE was onstage with us and announced the program. So it will take effect here in the next couple of weeks.

And in fact, one of the nice provisions about this is they committed to -- they felt that -- I think the term that they used is they felt that 90% of franchisees would apply for this -- would, excuse me, would qualify for this and that they committed to responding to any loan application within a 10-day period of time. So they're taking a very aggressive posture on this.

Got it. And then just a follow-up on the Right Price, Right Size. It seems like it obviously has a pretty strong $0.99 component. So it's I guess somewhat surprising I guess that the higher end is doing well, but maybe the lower end is not doing enough for you. Can you break out how the menu plays out in terms of what you're seeing mix shift-wise, or however you can break out the $0.99 versus the higher-priced items?

Well, Jeff, I think the key is if you even go back and look at the advertising, we basically positioned this as a way of starting at $0.99, and that really struck the cord of differentiating the quality of our products from this. And again, when you look at the price value consumer, the consumer that, just because of their economic situation, needs to shop for $0.99 items, we feel that there's the messaging that needs to be sharper against specifically a $0.99 price point for that consumer just because their economics basically dictate that they have to be shopping for $0.99. And having more continuity against that, we feel, will help give us the balance that we need in our messaging. But again, the majority of our messaging, as we look at our entire calendar for 2013, will still have a much stronger portion of this against high-end messages.

But the mix shift of the total menu, I don't know if you're breaking out kind of what your -- what the entire mix shift is, for the entire menu or the components within it?

Well, actually, as we reported, what we saw is that we've actually, in the first quarter of the year, had a positive mix shift as a result of Right Price, Right Size Menu. And it has some positive margin effect along with that. Now that's a significant point because remember, we moved from a situation when we had our My $0.99 menu where we did not have a lot of continuity across the United States in terms of franchisee support. We now have significant support for this pricing structure of 6 items at $0.99, 8 items above -- between $1.19 essentially and $1.99. And what that's done for us it's given our franchise partners some pricing flexibility on those 8 items and got them more comfortable with having more continuity in terms of this decision. But again, we do feel the need to put more emphasis upon the pure $0.99 portion of this.

Your next question comes from the line of John Glass with Morgan Stanley.

First, if I could just go back to the question asked earlier about the lifts on the Tier 1 remodel. Is -- when we talked initially about 25%, I think we all assumed that would sustain at that level and then maybe build over time, maybe not at the rate of overall comps, but build. Now you're saying it sustains at a lower level. Was that what you initially expected? Or is this maybe lower than you had thought?

No. I think this is in the -- for those 2011 restaurants, I think this is in the territory that we thought it would be in. And I would assume that these restaurants will comp at a similar rate to the overall system comps and continue to grow. We're not suggesting that they won't grow.

If a franchisee were to look at the unit economics of the investment, would they use that 18% lift and say, that's the right way to look at the returns now, not the 25%?

Yes, what we -- John, what we really anticipate as we look at Image Activation is that if you look at, first of all, scrapes and rebuilds and new restaurants, that the focus of the Tier 1 will be against that. But when I speak of Tier 1, we're continuing to learn from the Tier 2s and 3s, and we feel that there are things in the Tier 1 costs that we simply don't need to have there. They may be nice to look at, but they don't necessarily make a difference in terms of either the consumer experience or sales. So we think that we can get that Tier 1 down lower and use that to -- for new restaurants, as well as scrapes and rebuilds. And we really believe that the Tier 3 is going to become more of the workhorse of the system for the Image Activation. Because as we look at the early results that Tier 3 restaurants are achieving in terms of sales, it's very attractive. And by the way, the flow-through in the Tier 3 restaurant, just because of some labor staffing issues, is also nicely above what is in a Tier 1 Image Activation.

And you mentioned that -- did you -- I don't think you quantified in your comments what the lift you're seeing in these early results for Tier 2 and 3. Can you provide any color on what kind of sales lifts you are seeing?

John, really, it's way too early to put any numbers on that. We'll obviously share as we get some more experience with these, and we're opening quite a few of these this year. So hopefully, later, we'll be able to do that. But all I'm saying is that based upon the early results and just the patterns that we've seen in the past of how these hold up, we're very encouraged by the response we got. And as some of the graphics show you, when you look at the street presence of a Tier 2 and 3 restaurant, for most people, I'd defy you to tell the difference between a Tier 1 and Tier 2 and Tier 3.

Okay. And then just lastly, your confidence around the 2% to 3% comps, given comparisons get meaningfully more difficult at least for the next 2 quarters, so would one expect this to be a backloaded 2% to 3%, where the fourth quarter is really going to help? Or do you feel like you can overcome this tougher comparison to get into that range in the next 2 quarters?

Yes, I think the backloading is probably more realistic to look at that. It obviously, as I mentioned, is an interesting environment out there that you're seeing in the reports from a lot of people. And this was below our expectations, but we're making adjustments to recognize that. But we do believe that fundamentally, Right Price, Right Size and the approach we're taking to our business is a sound approach. And we will gain from a strong calendar. And we've got several really what we think are exceptional products coming later in the year.

Your next question comes from the line of Michael Gallo of CL King. Michael W. Gallo - CL King & Associates, Inc., Research Division: A couple of questions. Question for Steve, the G&A obviously has come down significantly. I know some of that is the breakfast spend. But that $65 million or so area that we saw in the first quarter, is that a sustainable kind of level going forward? I mean, I guess if I look at the cadence, first 3 quarters, really 4 quarters of last year was relatively similar.

No, I think if you look at patterns, I'd say the G&A in the first quarter tends to be a little bit lower just on a seasonal basis -- just like sales are lighter in the first quarter. I think if you look at the difference of the $65 million or so that we ran G&A in the first quarter versus last year, what you're really seeing is there's nothing unusual in there. But I would say there is sort of a mindset here that in the environment we're in and recognizing how tough it is from a sales and pricing standpoint, we know we've got to run a tight ship here. And I think what you're seeing is a couple of things. I think from a G&A standpoint, you're seeing us run, I think, from a staffing standpoint, a little tighter. We've completed the move from Atlanta to Dublin and the consolidation here. And so I think we're getting -- being able to realize some efficiencies from having that behind us at this point in time. We really are taking a hard look at some of the outside services that we're using. And so you saw some of those savings, but nothing of unusual or onetime nature. I really think it's a discipline we've put in into the business that, frankly, we're going to have to sustain for the full year. Michael W. Gallo - CL King & Associates, Inc., Research Division: Great. And then just a follow-up question on the reimages. I know it's early on the Tier 2s and 3s. But I was wondering if there's anything you're seeing in terms of the patterns of the consumer feedback. Again, I think we've talked about that at least from the street, the stores look very similar. And a lot of your asset base certainly is old and you have some of these markets that haven't been remodeled in some time. So it would just seem that the consumer might not notice a lot of the difference. I was wondering if you see any pattern changes in terms of the dine-in component of the business versus the drive-through, where I think that you would probably see the least difference in terms of the pickups. And then from the standpoint of returns, it would seem early on, given that difference, that the returns on the Tier 3 should be dramatically better than what you've seen on say the Tier 1s. So I was wondering if you can give us any further color on that.

Sure. The -- my sense is that the consumer response to these -- the Tier 2 and Tier 3 is very similar to the response we saw on Tier 1. And remember, Michael, that for those of us who have been in all 3 tiers, we can see some difference. But for a customer that has been, let's say, visiting very consistently a 25-year-old Wendy's restaurant, you walk into one of these and what we hear is, "Oh my gosh, I can't believe the difference." And we're also generally seeing -- and again, it's early, but the same kind of pattern where we see a very nice lift in our dining room business. But dining room, drive-through and carryout are all growing. And again, I think there's -- it's particularly powerful testament to what the Image Activation does when your drive-through business also increases because, again, essentially, that experience is very similar to what that used to be, other than you're pulling up to a restaurant that just looks fantastic. But it tells you how important that is to the consumer. The other part of this I'll emphasize as we continue to go through the people activation piece of this. And so we're working very, very hard to make sure that, that people experience that's taking place in these restaurants is very positive. And I will tell you that in the spring franchise meetings, which we held 2 in Columbus, Salt Lake City and Philadelphia and in Toronto, but in all the cases, with the exception of Toronto, we had a Tier 2 or 3 restaurant to visit for our franchisees and we had strong turnouts for those visits, they were very surprised at just how attractive these restaurants were outside, inside for the significant reduction in investment. And then lastly, to your point, yes, we do believe that the returns on the Tier 3 restaurants are going to be considerably stronger. By the way, we feel good about the returns in all the tiers, but we feel that the Tier 3 is going to be even considerably stronger.

Your next question comes from the line of Will Slabaugh of Stephens.

I wanted to ask you about the reception of your new Flatbread. You mentioned that was successful in your release this morning. And then also just in the context of your comment around the price value relationship there being a little bit challenging in the quarter.

Well, yes. And that's the interesting dynamic that we're seeing is that as you look at the consumer environment out there, that we're probably seeing an increasing bifurcation of consumers where you still have consumers that have the capacity to spend on higher-end items. And as I mentioned, when you look at units of our large chicken sandwiches, which we would put Flatbread in that, they were at a 9-year high, so that says something about the results of that. But at the same time, we have lost share in the price value arena, but basically have not had pressure against price value message since go back to the launch of Right Price, Right Size Menu in January. And that's why my earlier comment, Will, about -- it's apparent to us that this core group of $0.99 price shoppers, they're heavy users often of quick-serve restaurants, and you need to continually remind them that you have products available for them every day just because their economic situation necessitates that price point.

Got you. And just as a quick follow-up to that. Is what you've seen -- or has what you've seen in the last few months changed your thoughts around what the pipeline might look like for the rest of the year from the standpoint of offering more differentiated premium items such as a Flatbread versus maybe just a little bit more of a focus on that -- the lower end of that Right Price, Right Size?

Well, I would say that our approach to this is really what we call the power of the and. It's not stepping away by any means from the high end because you'll see that we have some outstanding products coming into the pipeline. But we feel we also have to have ongoing pressure against the price value end, which was my earlier comment about thinking about price value less in a pillar sense and more in a continuity sense. It's almost like, for some of the price value shoppers, it's out of sight, out of mind. And if they're not -- if you're not constantly reminding about your offer because, let's face it, there are a lot of other people who are -- do have pressure against these ideas and they need to be reminded of this on an ongoing basis. So we feel our strategy has to continue to put pressure against those high-end items where we clearly can differentiate ourselves, but also recognize that probably 20% of the overall business out there in quick serve is that price value shopper.

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

Well, I guess -- first off, I just want to clarify what exactly you've been trying to convey with the various comments about Flatbread being a solid launch but price value remaining an issue. Does that essentially mean that even though you sold a lot of Flatbread sandwiches that same-store sales haven't picked up at all?

Yes. I think that it means that some of the growth that we've seen through the -- this very strong sales of Flatbread have in fact been offset by some of the share losses on the price value end of the business. And -- but as you know, Michael, we don't give specific comments on monthly same-restaurant sales.

And then you mentioned earlier that sale softened when the Right Price, Right Size messaging rolled off. And I guess my question is, how do you disaggregate how much of the deceleration was simply because you reverted to a more normal run rate of ad spend versus the large amount you spent in January to support the initiative? And I ask because as you suggested in your prepared remarks, you can't necessarily shout as loud as the larger competitors on a sustained basis.

Yes. My instincts are, Michael, that yes, there were some differences in media spend, but I think it was also -- the message to me is the key thing. So if you look at the 3 components of promotion, message, media and creative, far and away, from a consumer point of view, the most important thing is the message. You can take a C piece of creative and put it against an A message, and you're going to get great results. But if you have a C message even with an A piece of creative, it's not going to get the job done. So the message is very important. And I think when we hit the -- some of that local pillar, I just feel that the messages didn't carry the day. And by definition, you are more fragmented because the local DMAs are given options to run 3, 4, 5 different messages as opposed to having a continuity of a national message.

And then, Steve, you mentioned on G&A, because it was much lower this quarter, that a lot of it was just having a mindset about running a tight ship, and that's great. Could you break out the $7 million of delta this year versus last year first quarter, kind of what the big buckets of difference are so we understand what the moving pieces are within that?

Sure, Michael. $3.8 million of the decrease was in the category of employee expenses, so that's where I talked about running at the lower staffing levels. I think that's where you're seeing some of the efficiencies bringing the Atlanta support center together with Dublin. And sort of having that whole process behind us, we're now able to focus on efficiencies around staffing. So that's about half of the change. When you look at sort of outside services, consulting expense, we've been taking a hard look at that outside legal services. We've been doing some management of that in terms of in-house versus outside. And so about $1.5 million of that $7 million, I'd say, would be in the professional services arena. And then another $1.7 million is really just a lot of small items that net up. But I think it just brings to light the internal process we really started last year, which was really trying to look at G&A spending overall and try to bring that into more of a best-practices approach to looking at our total G&A, recognizing we got pressures at the top line.

Yes. And I'll add, Michael, they just -- that we also do some competitive benchmark and then we look at our G&A as a percent of revenues or on an average restaurant basis and things like that. And we felt that it's a little bit above where it needs to be, just as we look at it even in a competitive context. And so we feel that we can't be out of whack with where other people are in the business.

Your next question comes from the line of John Ivankoe of JPMorgan. John W. Ivankoe - JP Morgan Chase & Co, Research Division: The question is on the Image Activation. And I'm just wondering if you're targeting a sales to investment type of ratio that we can think about, especially for the Tier 2 and Tier 3, I mean, it does seem like -- I mean you're not -- obviously, you're not seeing a commensurate sales drop based on the investment costs that your spending in the Tier 2 and Tier 3. But what is it that you're targeting, and what do you think an acceptable level is for franchisees to invest? In other words, do you spend $1 -- or I mean I guess, do you spend $3 in investment cost to get $1 of sales, for example? How are you thinking about it?

John, this is Steve. Let me take a crack at that. I think what we've really been focused on is, as we selected the company restaurants for Image Activation, taking a broad spectrum of restaurants at different AUV levels, different markets across the country and really seeing how the concepts work with both consumers from a reaction standpoint and then really focus on the sales lift. And as we'd start transitioning and talking about as we have more experience, the sustainable sales lift I think is really the key I think as a starting point in looking at the overall returns on investment. When we talk about sustaining our sales lift in that 18% to 20% range, the incremental profit flow-through on that kind of sales lift is certainly well above our average restaurant margin. So it really does produce a nice flow-through on that existing asset. And we think it's hopefully something that can be sustained over a long period of time, given the dramatic change of these restaurants. As Emil's talked to you, when you see even the Tier 2s and 3s, it's a dramatic change from the condition of the restaurant, if it was an average 20-year-old restaurant. So we think the -- from an overall financial return attractiveness standpoint, that we can sustain those high teens of sales lift, really get a high incremental margin flow-through on that sales lift overall and continue to bring the cost of these investments down, so that we can get that Tier 2 and 3 down to very attractive levels. We think that's a compelling financial case. John W. Ivankoe - JP Morgan Chase & Co, Research Division: And it is a classic way to look at least at new unit development and I think remodels as well, like the sales-to-investment ratio. But if you're not ready to talk about that yet based on your experience, I guess that's fine.

Yes. We tend to look at that more of a new unit, so we could talk about that. We know we've got some Image Activation new units as well. I'd like to get a little more seasoned sales data, and then we could talk about that maybe on the next call.

Well, the other reason is that when you're providing an incremental sales like this, the flow-through on those incremental sales is different than if you're building a new restaurant. So that does make a big difference in the calculation. John W. Ivankoe - JP Morgan Chase & Co, Research Division: Of course, which is why I even phrased it the way I did, maybe it is $3 of investment for $1 of sales. And given your flow-through, that would probably still make sense. And can I ask something else, maybe just to clarify, what level of income statement G&A do you expect for 2013? I mean, some of the comments that I think you've been making to a variety of questions suggest that first quarter is more or less carryforward, maybe with the exception of the fourth quarter given the incentive? But I mean, what should we expect from an income statement G&A perspective for '13 that puts with your guidance?

John, we've not broken that out as part of our overall guidance. I mean, you do know that we're going to have about $10 million of incremental G&A just from the franchisee incentive program. So in the fourth quarter, we've highlighted that will impact our quarterly flow of EBITDA, and that expense runs through G&A. I'd say other than that, what we're trying to do is, as I've said, sort of tighten the belt versus last year. And hopefully, we can show a small decrease year-over-year on the core G&A, but recognize we'll have that $10 million add-back in the fourth quarter.

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

This is actually Eric Gonzalez in for Dave Palmer. I think you mentioned in the prepared comments that the absence of breakfast might negatively impact comps in 2013. I was wondering if you might quantify the impact that it had on 1Q on both sales and margins. And then just real quick on reimaging, what impact is reimaging having so far on company same-store sales? And given the outlook for reimaging, how might that ramp through the rest of the year?

Well, I'll -- what we've shared previously -- and we're not giving specific comps on the breakfast impact or the Image Activation impact. But what we've shared previously is that for this year, we expect to have the impact of breakfast removal about offset by Image Activation, and we saw that basically taking place in the first quarter of the year. So in other words, they're almost identical.

Your next question comes from the line of Chris O'Cull of Keybanc.

Steve, did you say how many of the 100 applications for the incentive program have been approved and are expected to be converted to reimage restaurants in '13?

No, I did not. I did not go into that. What we've got is we're probably up to about, after going around the country on this franchisee road show and having the Tier 2s and 3s open, where people can touch these restaurants and see exactly what Emil talked about, is that there's -- it's hard to tell the difference, in some cases, between the 1s and the 2s and the 3s. I think that's added some enthusiasm out there. So we're up to about 130 franchisees now that are signed up. In terms of actual openings, it's not a big number. We had 2 last year, we've had 2 open already this year and we've got 2 that I think are very near completion. But it's a little bit hard. It's through the construction process. I think that we're probably, if I look at the pipeline we're working through now, we probably have 25 that are in their early stages of the permitting construction process. And as we've said, we're working very hard to try to get 100 company restaurants done and 100 franchise done by the end of this year.

And I think that's the key, is that we're still committed to the 100 company and the 100 franchise.

Okay. And then just as a follow-up to the remodel economics we talked about earlier, it looks like, just using some simple math, that Tier 1 remodels are boosting pretax cash by maybe $90,000, I'm assuming a 35%, 40% flow-through. So if they cost $700,000, is it reasonable to assume a payback could be 10 years?

Yes, Bill -- Chris, we've gone through those economics with the franchisees. I think when you look at the cost of the Tier 1s, and I think that's what Emil was alluding to, we've got to continue to bring the costs down. We've got a lot of features in those restaurants, and I think there are some opportunities to continue to bring that cost down. The other opportunity we've got is around the flow-through on those restaurants. That $90,000 of cash flow, for example, would assume an incremental lift of around 30%, I think, if I'm following your math. And that is generally below the kind of incremental flow-through we'd like to see for that kind of sales lift. So I think there's an opportunity as we -- especially as we come down the learning curve on how to manage and operate these Image Activation. We're having some higher operating costs initially. Part of the learning we're gathering as we go through and do more of these is how to operate these even more efficiently. So I think the flow-through will go up over time and make it, I think, a more attractive return. However, your point is well taken. I do think that the opportunity here is for the Tier 2s and 3s to have even higher relative returns than the Tier 1s.

Okay. And just one last one. Has GE Capital agreed to provide financing for all 3 tiers?

Yes.

Your next question comes from the line of Sara Senatore of Sanford Bernstein. Sara H. Senatore - Sanford C. Bernstein & Co., LLC., Research Division: Just a few follow-ups and a couple of tactical and one maybe strategic. From a tactical perspective, what I hear what you're saying about marketing, it sounds like when you do global marketing, it's not as effective. And I think we heard that in December also, the franchisees may be weren't quite as much onboard with value. You lost some traction there and then regained it in January. So is there any opportunity for you to shift the marketing spend to be more national or just be more consistent? So that's part one. And then I had another question about commodities. It seems like they've come in. Is there any potential that there's an offset there if top line is lighter than you expect?

So first of all the -- in regard to your question on shifting from local to national, the large pillar is the only local pillar we have, but DMAs do spend some money on a local level which typically is in support of the national message. And one of the things that we're looking at is asking them to spend more of that money against a more targeted price value message to have more continuity against price value as I spoke about earlier. And certainly, there's the possibility of us also having a conversation with them about converting that local pillar and taking those dollars and converting that to national, and that's something that is under consideration. And I'm sorry, what was your second question, Sara? Sara H. Senatore - Sanford C. Bernstein & Co., LLC., Research Division: It's about commodities.

We saw a 90 basis points of commodity impact in the first quarter. And if you look at our guidance for the year that we had projected 90 to 120 basis points. And so, obviously, it'd be wonderful if it can continue to come in at 90 basis points or even lower than that. But I think it's too early in the year to really -- to know exactly. Sara H. Senatore - Sanford C. Bernstein & Co., LLC., Research Division: Okay. And then just one sort of strategic question and that is, just in terms of thinking about the overall, you get a lot of questions about capital use, with respect to the portfolio of owned versus franchised or company-operated versus franchised, and recently you've actually I think been buying in some franchisee -- franchise units to turn them around. Would you think about maybe re-franchising a little bit more aggressively, given how tough the demand environment seems to be and that the kind of sort of high levels of capital you see a need for the reimaging?

Yes, Sara. As we look at our growth pyramid, we've got that one piece of that which talks about system optimization, and that is something that we do have an active thought process around. And we do want to optimize the system. And we mentioned that over time, we expect it to probably have 400 restaurants fewer than we do now, but do that in a way that really works extremely well for franchisees, use that as an opportunity to put those in the hands of some great operators. And some of those operators may be inside the system currently, some may be outside the system, and also make sure that what we're thoughtful about as we do this that we do this in a way that encourages both new restaurant development, as well as Image Activation. Sara H. Senatore - Sanford C. Bernstein & Co., LLC., Research Division: And should we expect to see that in the near term or that's more of a medium-term goal?

I think that we're going to continue to work on that, and I think you'll see activity on that yet this year.

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

Just one thing back on the Tier 2s and 3s. I believe those have just opened in the first quarter, the first couple of those. I may be wrong on that. And then how many of those do we have open so far?

Yes, those were opened in the first quarter this year. We did not have any open -- and Steve, I don't know if you have an exact count on those?

Let's see. Give me a second, Jason.

Yes, I'd say Jason, the number is probably under 10 or about 10 right now.

Okay, got it. So it really just don't have a lot of data yet?

But I would tell you that as we look across the spectrum of those openings, I will tell you that we're seeing consistently good sales performance on those.

And Jason, we're really right -- in the next couple of weeks, we will open up a fair amount of these.

We've got an explosion.

So we will begin to get a lot of data coming from these very quickly.

Okay, got it. And then on the GE commitment, what is the size of the commitment you guys are making as a backstop in terms of, I don't know how you want to define it, in terms of total at-risk capital? Or how much -- how many deals or Image Activations this might represent, something like that?

Yes. No, the program itself, I think, is going to start in total a $100 million program, but we would expect that to be increased depending on demand for this particular loan product. Our backstop, we're providing a partial credit support of this, which is really not material from a financial standpoint to Wendy's. But I think it's important from a timing standpoint. I think it was a helpful piece of the puzzle to get GE to commit early in the process which was important to us.

Okay. So your at-risk capital is a little bit -- some fraction of the $100 million?

Exactly.

Okay. And then on the D&A guidance of 15% to 20% D&A growth, it was obviously a lot higher than that in the first quarter. Does that exclude the reimaging piece or is that the actual GAAP guidance?

Yes. So let's spend a minute because I know that depreciation is a little confusing because of the Image Activation impact. But what we talked about is that if you look at our D&A from last year, we reported $146 million of depreciation. And we said in the earnings release, just to give you some guidance because of this unusual sort of onetime write-off as we go through Image Activation, that, that increase should be around 15% to 20% for the year, so say $20 million to $30 million of higher total depreciation. But in that one table, you can see we recognized $14.5 million of, call it, this accelerated depreciation on just the Image Activation piece. And for the year, we think that will be a $20 million to $25 million. So of $20 million to $30 million increase, $20 million, $25 million of that will be related to these write-offs that we take when we renovate these restaurants.

Okay, got it. And as we look into next year, I'm assuming the Image Activation numbers are going to go higher for '14. Is that D&A number, the write-off piece, going to be similar I guess next year or relatively similar to the amount of Image Activations that you're doing?

Yes. So $20 million, $25 million is our number this year on 100 remodels. We're going to shoot for 200 next year. So it may not completely double, but it will move in that direction. And the reason it may not completely double is that when you drop down to a Tier 3 remodel, less of the assets are replaced, so the write-off will be a little bit lower on a per-restaurant basis.

Your final question comes from the line of Keith Siegner of Crédit Suisse. Keith Siegner - Crédit Suisse AG, Research Division: Just one quick one to cap this off. We've talked about the barbell strategy, we've talked about Right Price, Right Size and tying that into strategy. What about on the core menu? The bulk of the sales, tying it into the commodity question from before, where is the pricing on the core menu now? How are you and the franchisees thinking about pricing in this environment on the core menu?

Well, as we mentioned, there is some carryover pricing that is in the numbers for the first quarter. But as we put together our annual operating plan, we really didn't assume a lot of incremental pricing beyond what was carryover, in part, just because of the competitiveness of the environment out there and that we felt that the most effective way to get a price increase is quite honestly through our higher-end promotional products that cause a positive mix shift and increases in average check and accomplish it that way. And it's still our intent to have that be the predominant way in which we get incremental check impact. Does that help, Keith? Hello? Okay. Operator, if that's our last question, we appreciate that. Thank you all for joining today. Later this afternoon, Steve Hare and us will be talking to many of you as follow-up and look forward to catching up, and thanks for joining today.

Thank you. That concludes today's conference. You may now disconnect.