The Wendy's Company (WEN) Q3 2013 Earnings Report, Transcript and Summary

Good morning. My name is Heather, and I will be your conference operator today. At this time, I would like to welcome everyone to The Wendy's Company Third Quarter Earnings Conference Call. [Operator Instructions] Mr. John Barker, you may begin your conference.

Thanks, Heather. Good morning, everyone. Our conference call today will start with comments from our President and CEO, Emil Brolick, who will highlight our key initiatives and provide an update on the progress we're making with our brand transformation. After Emil's comments, our Chief Financial Officer, Todd Penegor, will review our third quarter financial results and our outlook. Then after that, we'll open up the line for questions. Today's conference call and our webcast includes a PowerPoint presentation, which is available on the Investor Relations page of our corporate website, which is aboutwendys.com. Before we begin, I'd like to refer you for just a minute to the Safe Harbor statement 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. 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, let me turn it over to Emil.

Thank you, John, and good morning, everyone. Todd and I will be updating you on the strong third quarter performance of our core North American business, which we continue to feel has excellent long-term upside. We will also provide a current perspective on key strategic initiatives, including the system optimization initiative announced last quarter and our key Image Activation initiatives. We feel the strong performance of our core North American business, excellent progress on strategic initiatives and positive dividend posture combine to support our believe that we can provide investors with growth and income. During the quarter, we made considerable progress on all dimensions of our brand transformation, and momentum continues to build. This resulted in a strong third quarter, with solid growth in both sales and earnings. Our Image Activation reimage program, which started in 2011, has accelerated over the past 2 years and will accelerate again in 2014. We are also very pleased with the progress we have made with our system optimization initiative and are gratified with the strong interest from existing and new franchisees in acquiring company restaurants. We view this as an excellent opportunity to recognize franchisees who have demonstrated leadership and operational excellence, have a strong balance sheet and have an expressed commitment to grow in our Image Activation strategy. And finally, due to our strong year-to-date earnings and momentum from our brand transformation, we are raising our outlook for 2013 adjusted EBITDA to approximately $365 million and adjusted EPS to approximately $0.25. Let's take a closer look at these points. Today, we report a strong quarter of sales and earnings growth that continues the strengths seen in the past 3 quarters. We delivered adjusted EBITDA of $98.7 million in the third quarter, a 17% increase. Adjusted EPS increased $0.08 from $0.02 the previous year. Company-operated restaurant margin improved 170 basis points to 15.6% due to a number of actions that we initiated in 2012 and have continued to build upon over the past several quarters. We also reported a same-store sales increase of 3.2% and a 5.9% increase on a 2-year basis. This is the best 2-year same-store sales increase since the first quarter of 2005. The strong sales are the result of the momentum we have in our core business as we bring our Cut Above brand vision to life and execute our strategies in the Recipe to Win. Our Cut Above brand positioning is proving to be effective versus traditional QSR competitors and new QSR competitors, as our brand transformation continues to strengthen the emotional bond between the Wendy's brand and consumers. Versus traditional QSR competitors, this positioning provides consumers a new QSR quality experience, but at a competitive price. Versus new QSR competitors, it provides consumers a comparable experience, but at a substantially lower check. Our Recipe to Win brings our Cut Above brand positioning to life through all elements of the brand experience. Our goal is that every aspect of the Wendy's brand experience communicates A Cut Above, and customers are telling us this is what they feel in our Image Activation restaurants. Consumers are experiencing bold restaurant design, striking new packaging, friendly restaurant teams and innovative menu items like our Pretzel Bacon Cheeseburger. Through the execution of the elements of the Recipe to Win, we are transforming the Wendy's brand and reigniting latent brand equities to drive sales and grow profit. The strength of the third quarter sales performance came from high-end product promotions, as we worked to regain our heritage of product innovation. On the high end, our very successful Pretzel Bacon Cheeseburger delivered excellent results, while the second appearance of our Grilled Chicken Flatbread in the latter part of the quarter did not perform as strongly as we had anticipated. While sales momentum slowed at the end of the quarter, we have seen a very solid response to our October Pretzel Pub Chicken sandwich promotion. Pretzel Pub Chicken is a fantastic product that delivers A Cut Above eating experience. That's a new QSR quality at a QSR price. Our strong third quarter results and the consumer response to Pretzel Pub Chicken gives us the confidence to raise our 2013 outlook, as mentioned earlier. We're also excited about our Bacon Portabella Melt on Brioche, which will be in restaurants any day now. This is a unique great-tasting product, and the brioche bun simply melts in your mouth. We have also not lost sight of the fact that consumer benefits of convenience and value are the cornerstone of the business, and they always will be. There's a meaningful group of consumers to date whose personal economic situation involves frequent usage of quick-serve restaurants and a high degree of price sensitivity. Wendy's went through a period of time when we've lost share of this consumer segment but are now seeing very encouraging trends and regaining on our historical position with economically sensitive consumers. Our lower-priced messages for the third quarter included $1.99 kids' meals after 4 p.m.; our Right Price, Right Size menu featuring 6 items for $0.99 and 8 items ranging from $1.29 to $1.99; and a limited-time promotional item, the $0.99 Monterey Ranch Crispy Chicken sandwich that we featured as part of the Right Price, Right Size menu. We will continue to execute our high-low strategy in a way that appeals to consumers and drives sales, traffic and profits. On the promotional front, we are very encouraged by the results of our advertising campaign featuring the young consumer advocate we call Red. This campaign is our longest running since the Dave Thomas campaign ended in 2002. This endearing Red campaign is yielding significant impact, providing strong improvement in advertising awareness that is outpacing major QSR competitors who spend 2x to 3x what we do on media. Our total communication awareness is at a level we haven't seen in recent years. Yet, we recognized the media world has become increasingly fragmented. And an integrated approach of broadcast, PR, social and digital is essential to building awareness and brand esteem. Since 2010, people have been spending more time at digital devices than TV or radio, according to eMarketer. And we've evolved our marketing to tap into this medium. For example, we successfully launched the Pretzel Bacon Cheeseburger with the Pretzel Bacon Cheeseburger Love Song's digital promotion made up of consumer Facebook comments and tweets, extending audience reach to the all-important millenials at a fraction of the cost. And now, we are extending a similar digital campaign to Pretzel Pub Chicken. While all of these initiatives are essential to transforming the Wendy's brand, none of them is more important than people activation. People are our greatest asset and our greatest source of differentiation. And we are building a team of 5-star talent, both at our Dublin Restaurant Support Center and in our restaurants. 5-star employees deliver customers A Cut Above quality experience because we know in new QSRs, quality is not just about the food, but about the total experience. And we empower our restaurant teams by creating career opportunities and by creating for them a restaurant work experience that is second to none, A Cut Above experience where quality is our recipe. Our people are an expression of our band. And because we want to reimage the brand, we need to raise the appreciation for our people and the important role they play in creating a new QSR quality experience. As part of this, we have initiated an innovative marketing program to promote the tremendous personal growth opportunities at Wendy's for restaurant team members. And our people continue to perform. Wendy's was once again #1 in QSR drive-through speed as ranked by QSR Magazine's annual survey. However, we know that speed alone is not enough to win in the current competitive environment. We continue to look for ways to simplify operations at our restaurants through procedures, product simplification and next-generation kitchen equipment. These initiatives will help our 5-star employees to consistently deliver A Cut Above customer experience. Another key element of the customer experience is place, which is the new QSRs have elevated in the minds of millennial consumers. Our brand transformation is addressing this through Image Activation, a holistic transformation of the restaurant experience. It's more than a building. It elevates all the elements of the customer experience and finds the sweet spot between consumers' appeal, sales growth, margin enhancement, operational effectiveness and economic return. We're making great progress with our reimaging program, with more than 180 reimaged restaurants open today and nearly 300 expected to be opened by the end of the year. Todd will provide more perspective on this in just a few moments. Last quarter, we announced our system optimization initiative, a plan to help optimize our restaurant portfolio, with the sale of about 425 company-operated restaurants. We also expect this will improve operational effectiveness, efficiency and shareholder returns. And importantly, we're accomplishing this with what we expect to be EBITDA-neutral formula on an annualized basis. It should also provide more stable earnings growth and improve quality of earnings, with higher levels of royalty and rental income. To date, we have sold 118 restaurants for total proceeds of $66 million. We are pleased with the strong interest from franchise community. In summary, we are pursuing a growth mindset by consistently executing our Recipe to Win to assure brand relevance for our consumers, providing A Cut Above brand experience and relentlessly pursuing economic model relevance for the company and our franchisees by focusing on higher margins, average unit volume growth and reduced investment. The goal is to create a virtuous process that is forever evolving to meet consumer needs, drive value for our franchisees and value for our shareholders. With that, let me turn it over to Todd Penegor.

Thank you, Emil. Before I review our third quarter financial results, I'd like to add a few comments on Emil's overviews of our key strategic initiatives. As Emil mentioned, our Image Activation program has evolved over the past 2 years as we have determined critical consumer design elements and significantly lowered the required investment levels while preserving the wow factor and generating strong sales lifts. Our team has worked tirelessly on reimaging our restaurant portfolio. Our Image Activation design is clearly resonating with consumers, and they tell us we have something new and different. To meet the needs of our diverse restaurant system, we are working to provide affordable solutions and investment flexibility so that all of our restaurants have solutions tailored to their sweet spots in the trade areas where they are competing. We will continue to partner with our franchisees to help them optimize their investment and return. Our goal is to have solutions that will work for 85% to 90% of our system and produce solid returns for company-operated and franchise-operated restaurants. The new ultramodern standard design features forward placement of the signature blade, upgraded dining rooms with fireplaces, flat-screen TVs and many flexible upgrades. Depending on upgrades, formerly called tiers, and location, we are averaging 10% to 20% sales lift at Image Activated restaurants with strong flow through. We unveiled the new standard design at our recent franchisee convention and have received overwhelmingly positive feedback from our franchisees. This will be our standard for new builds and remodels as our 2014 Image Activation pipeline is building. We're also seeing strong lifts in our new builds, with significant increases compared to our older design. This, along with strong sales increases from our new scrape and rebuilds, confirms that Image Activation is elevating our brand. As Emil mentioned, we are in the process of selling 425 restaurants to franchisees, which we believe will help us generate a higher operating margin and stronger free cash flow. In addition, we expect earnings quality to improve through a more predictable revenue mix and steady stream of rental income. We anticipate that the system optimization initiative will be EBITDA neutral on an annualized basis due to increased royalties and rental income in addition to lower G&A expense. To date, we're about 28% complete with our system optimization initiative. And this process has attracted high-quality franchisees, such as NPC International, along with existing franchisees, such as Cedar Enterprises and Junior Bridgeman's BB St. Louis. We remain on schedule to complete the sale of all 425 restaurants by the end of the second quarter of 2014. Now, let's take a look at third quarter financials. We are pleased with our North American company-operated same-store sales of 3.2% in the third quarter compared to 2.7% last year. The resulting 5.9%, 2-year performance is our highest 2-year comp since the first quarter of 2005, and this includes the discontinuation of breakfast. Wendy's is again demonstrating its innovation leadership with the successful Pretzel Bacon Cheeseburger and Monterey Crispy Chicken sandwiches in the quarter, both products that support what the brand stands for, A Cut Above. Additionally, we reported a high-quality 170-basis-point improvement in restaurant margin due to a favorable sales mix, fueled by our innovation and lower paper and beverage costs overcoming a 100-basis-point increase in commodities. Now, let's take a look at a financial summary for the third quarter. Total revenue increased $4.5 million, or 0.7%, versus the prior year. Driving the revenue growth was higher same-store sales, as well as technical assistance fees and higher rental income from the sale of restaurants to franchisees pursuant to the company's system optimization initiative. Total revenue growth has partially -- was partially offset by lost revenue from the sale and closure of restaurants since the third quarter of 2012. Adjusted EBITDA of $98.7 million increased $14.3 million, or 17%, compared to the third quarter of 2012. We benefited from price mix, continued cost-savings initiatives and tight G&A management over ongoing expenses, including the benefits of system optimization. Partially offsetting these benefits were increased incentive compensation resulting from our strong year-to-date performance and the timing of franchise incentive expense for Image Activation restaurants open or under construction. Adjusted EPS increased threefold to $0.08 per share, driven by core operating profit, interest expense savings and a reduced adjusted effective tax rate, as we benefited from work opportunity tax credits and our foreign earnings reinvestment assertion. Our reported EPS is impacted by the overall GAAP tax rate, which reflected the sale of restaurants and a nondeductible nature of goodwill. These system optimization remeasurements primarily affect the third quarter for the 2013 year. As noted in the release, the previously reported third quarter 2012 adjusted earnings results of $0.03 per share decreased by $0.01 to reflect the impact of prior year tax matters, which we identified at year end and recorded in the third quarter of 2012. Note, this only impacts third quarter adjusted EPS. Our previously reported third quarter GAAP number and full-year adjusted EPS reported at year end does not change. Overall, this was another high-quality quarter, and we are happy with the momentum we have seen with the business year-to-date. As you can see, our brand momentum is translating into solid results. This quarter marks 4 consecutive quarters of solid growth in both adjusted EBITDA and adjusted EPS. Year-to-date, we generated net cash flow from operations of $252.7 million. Capital expenditures were approximately $131 million. We expect our CapEx to be heavily weighted toward the fourth quarter again this year, with the opening of the majority of our 2013 Image Activation restaurants. Of course, this supports our momentum going into 2014. As we focus on returning value to our shareholders, we've paid out more than $51 million in dividends this year, almost $28 million more than last year. As a reminder, our goal is to annually review our dividend rate with our board and consider potential increases as long as we continue to achieve our long-term earnings growth plan. We have also repurchased about 5.5 million shares for $41.5 million. We expect to continue opportunistically repurchasing shares under the $100 million authorization through year-end. We ended the quarter with approximately $513 million in cash on the balance sheet, a net increase of approximately $60 million year-to-date. Our strong cash position supports our growth initiatives and enables us to provide income to investors as we focus on driving total shareholder return. Now, let's look at a few other selected balance sheet items. At the end of the third quarter, total debt was approximately $1.5 billion and net debt was slightly less than $1 billion. Based upon our trailing 12-month adjusted EBITDA, our current net debt multiple is 2.6x compared to 2.7x at the end of the last quarter, a good trend. On September 10, Moody's upgraded our credit rating to B1 from B2 as a result of our steady operating performance and earnings that have resulted in credit metrics and liquidity that warrant the higher ratings and in anticipation of the refinancing of our 6.2% senior notes. We completed this refinancing on October 24, which, encouragingly, was over-subscribed and expect annualized net interest expense savings of approximately $2 million. This is part of more than $20 million in ongoing interest expense savings from our 2013 refinancing actions and $54 million compared to 2011. As Emil mentioned earlier, we are raising our outlook for 2013 adjusted EBITDA to approximately $365 million and adjusted EPS to approximately $0.25 due to our strong year-to-date earnings. And we are confident that we will finish the year with continued strong momentum. To round out our 2013 outlook, we expect full-year same-store sales growth of approximately 2%. As Emil mentioned, we are happy with the results we are seeing from the Pretzel Pub Chicken sandwich promotion that rolled out in October and are excited about the Bacon Portabella Melt on Brioche. We are raising our restaurant margin outlook for the year to 15% due to Image Activation flow-through, system optimization cost savings, ongoing operating efficiencies and expected favorability in our commodity forecast. As we've anticipated all year, our fourth quarter will be impacted by the construction and opening of 125 new and remodeled Image Activation restaurants and increased Image Activation franchise incentive fees. And, as I mentioned, given our year-to-date out-performance, we are evaluating incremental investments in the fourth quarter to drive sustainable future growth. While our fourth quarter year-over-year adjusted EBITDA is expected to decline by about 10%, our full-year 2013 adjusted EBITDA is now expected to increase by about 10%. We are pleased with our third quarter results and continued momentum of the business. We remain confident in our long-term outlook and look forward to sharing our 2014 outlook with you in January. With that, I will turn it over to John as we prepare to take your questions.

Thank you, Todd. Before we open up the line for questions, I'd like to introduce Meg Nollen, our new Senior VP of Strategy and Investor Relations. Meg comes to us with an impressive background, most recently serving as Senior Vice President of Strategy and IR for the H.J. Heinz company. Her role at Heinz, she was responsible for aligning global strategies and investor communications for the $12 billion global sales company. Prior to Heinz, Meg was the Vice President of Investor Relations at Georgia-Pacific. She had also worked at Dynegy, where she served as Senior VP of Corporate Development and as a Senior Vice President, Investor Relations. Meg will be on the lines -- phone lines this afternoon with Todd and David as they follow-up with many of you. And she'll have a chance to talk with you as soon as this afternoon. Before we open up the phone line for questions, I would like to take just a moment to go over a few upcoming events on the IR calendar. This year, we introduced a new layer in our IR outreach with the Image Activation restaurant tours in selected markets. And our next event, the last one for the year, will take place in Dublin, Ohio, and that will be hosted by Will Slabaugh of Stephens on November 13. And as for our next reporting period, on Monday, January 13, we intend to release our preliminary 2013 earnings and issue our 2014 guidance at the ICR Conference in Orlando, Florida. We look forward to seeing many of you there. And with that, operator, we would like to open up the phone lines for questions.

[Operator Instructions] Your first question comes from John Glass.

Could you just maybe provide a little more color on the comps in the quarter? And a couple of maybe areas of interest, one is how things progressed throughout the quarter, because you indicated that maybe the second promotion wasn't as successful as the first. Can you also just talk about the other piece of the business? You talked about your value efforts. So how did those perform? Were you able to use the Pretzel Burger as a way to get more people in to try other products where they're essentially coming in to buy that product and maybe you didn't see as much sell-through in those other products?

Yes, John, the -- as I mentioned, what we saw in the quarter is, I tell you, the first 2 periods were very, very strong for us. And we're thrilled with the performance of the Pretzel Bacon Cheeseburger in all regards. And clearly, the Flatbread Grilled Chicken sandwich did not perform as we expected it to. You'll remember that we originally launched that product in April of this year and really had a solid performance. And that was also at the time that the McWrap was launched. And given that, we were particularly impressed with its performance. But it didn't perform as strongly as we thought it was. And I think that, that certainly slowed sales at the end of the quarter. But the great news is that we're very happy with what we've seen in Pretzel Pub Chicken. And then we have confidence in the Bacon Portabella Melt on Brioche in terms of finishing the year. In terms of the lower-end messages, what we've seen is, as I've mentioned on previous calls, John, that we had been losing share of that price value consumer. And we've really made substantial progress in bending that trend in a positive direction. And so we were very, very encouraged by that, and we really believe that this rhythm of a high-low strategy is the way to think about the business.

And if I can just follow-up with one other question. Your full year margin guidance of 15% would actually imply that, and maybe that's just the starting at 15 number, but would it imply down margins in the fourth quarter at the restaurant level? So I just want to understand the investment in G&A, but that's not really included in that. Is this a function of more Image Activation restaurants coming on and maybe some incremental start-up costs, or what are the other pressures in the fourth quarter at the restaurant level?

I think, John, if you look at our margin, we're 15% restaurant margins year-to-date, which would imply consistent margins into the fourth quarter. It's really relative to a comp that we had last year, coming off of a 15.9% restaurant margin year ago.

Your next question comes from Will Slabaugh.

I want to ask you about the LTO pipeline, just given the success you saw with the premium LTO so far in 3Q and the start of 4Q. Is it safe to assume that the number of premium LTOs next year will meaningfully increase?

Yes, I think the -- I feel very good about where our product pipeline is. And as I've shared in the past, it continues to build and build. And I think you can safely assume that we are going to execute this high-low strategy, where, I'll call it, our top layer of messages are all going to be high-end messages. And the vast majority of those will be LTO items, which could include hamburger. They could include chicken. They could include salads as well. And then we'll continue to have supporting price value messages underneath those. Does that answer the question, Will?

Yes, yes, very helpful. And then on to the remodels, if I could, and the changes that you instituted there. Can you talk about where you took the cost out to bring the investment down on average? And then what that new return profile might look like for franchisee?

Yes, I'll make a couple of comments and then turn it over to Todd. So first of all, all along, Will, we have been sharing that the goal here is to look for this sweet spot of continued wow impact with consumers, great sales response, excellent flow-through, as well as continuing to get the investment down. And so through the learning process and by going through these tiers -- the whole idea of the tiers was to help parallel path that process so we could get to that sweet spot as quickly as we did. And all along, we were getting consumer learning as to what were the items that really were most essential for the consumer. And what we have now is a great situation whereby we have the standard design, but then what we call these plus-ups. So depending upon the particulars of your trade area, you can go with the standard design, or you may choose to opt-in on some of these plus-ups if you have a trade area that warrants that. But I'll ask Todd to make some comments as well.

Yes, Will, I think a couple of things, right? I think we get smarter as we continue to evolve the restaurant design and build, right? We've done a lot of work to actually not impact customer-facing design of the building, so we've done a lot of work around reverse engineering. We've done a lot of work partnering with our purchasing co-op around sourcing. We did take the blade and move the signature blade forward, so it's less intrusive on the building, which really helps us from not only a closure time perspective, but from a cost perspective. So we've continued to make all of those adjustments to really make sure that we deliver what matters most to the consumers as they come into our restaurant.

Your next question comes from Michael Kelter.

I guess the first one, I was curious -- I was surprised that company and franchise same-store sales are roughly the same this quarter or last quarter. Why aren't company same-store sales higher, given you have some of those Image Activation restaurants with the big lifts in there?

I think you've got a couple of pieces that are happening, Michael. You've got 2 pieces that offset, right? You've got, not only the Image Activation impact, which we see the good news, but you do have offsets for the discontinuation of breakfast. So those have -- we've been talking on a full- year basis largely offset one another.

And remember too, Michael, with the aggressive rate at which we're opening Image Activation restaurants, particularly later in the year, those restaurants do close and you do also lose sales, too.

Makes sense. And then also curious, the guidance of 2% same-store sales for the year, what about traffic within that? Are you getting customers to come back to Wendy's, or have you simply figured out how to extract more money from the existing customers?

Yes, no. We are seeing some encouraging trends in traffic, Michael, particularly when you account for the traffic that we've lost from the breakfast -- the restaurants which we removed breakfast from. We have seen positive traffic then.

And then lastly, you've referenced these fourth quarter investments a couple of times. What specifically are you referring to? And what are the costs behind the initiatives?

Yes, thanks, Michael. There's a few things going on, right? If you think about the fourth quarter, it will be impacted by the construction and opening of the 125 new and remodeled IA restaurants. So we will have some closure and lost sales. But that really helps set us up for 2014. You have the Image Activation franchise incentive fees, which we've been talking would be more weighted to the fourth quarter all along. And then what we're going to continue to do is, since we have some flexibility, is put some investments consistent with A Cut Above brand positioning in our growth pyramid to really set ourselves up for consistent and sustainable growth into 2014.

Your next question comes from Michael Gallo. Michael W. Gallo - CL King & Associates, Inc., Research Division: I just had a follow-up question on the investments as well. In the fourth quarter, have you called out how much you expect those incremental investments to be?

We have not called out anything specific, Michael. We're looking at, in the spirit of our guidance, on how we want to land 2013 and really set ourselves up for growth into 2014. We'll see how that progresses as the quarter progresses. Michael W. Gallo - CL King & Associates, Inc., Research Division: Okay, and then...

And, Michael, we can control the timing on some of those things just by the nature of the items. And there are items that are very consistent with our growth pyramid and our Recipe to Win. These are not unusual items in that regard. And so, we're very committed to finishing the year very strongly here. Michael W. Gallo - CL King & Associates, Inc., Research Division: And then how much do you expect preopening to be in the fourth quarter around the large number of Image Activation units opening?

Preopening? Can you clarify the question a little bit, Michael? Michael W. Gallo - CL King & Associates, Inc., Research Division: Yes, just in terms of between lost sales days and any preopening costs around the Image Activation stores in the quarter.

We wouldn't comment on that and give specific guidance. We'll always have ebbs and flows with closures and new openings coming on and we'll consistently see that through the quarter. So there'll be ups and downs, but can't provide anything specific.

Your next question comes from Jeffrey Bernstein.

A couple of questions. Just first on following-up on the Image Activation comments you've made. Sounds like we're going to see an accelerating rate in '14. So, one, I just wanted to confirm, I think in the past, you talked about maybe doubling what you did in '13. So shall we still expect 200 of company and franchise? And that standard design you talked about, is that at a cost below the $550,000? Because I think in the prepared remarks you mentioned that the sales lift is maybe 10% to 20%. I know in the past it was 15% to 20%. So wasn't sure if the lower standard design is perhaps generating a lower sales lift, and it's skewing based on the investment type.

Yes, so, Jeff, the guidance that you mentioned is still in place. And we'll update that in January when we speak at the ICR Conference. But clearly, the intent is definitely to accelerate Image Activation into '14. And you are correct that the standard design is at a lower investment level than was the Tier 3 -- what we call the Tier 3 design previously. And where -- the sales that we're seeing in these very early standard designs are very consistent with what we saw in our Tier 3 Image Activation restaurants. And we're very encouraged and pleased by the sales that we are seeing.

But you do expect, I guess, how do you -- I know in the past, you used to talk about what percentage you'd expect to be Tier 1, 2 and 3. Is it possible that everyone just goes for the more standard design and, therefore, the part 20%-type lifts are no longer, or do you think you will get a skew of people doing those true-ups as you mentioned?

Yes. And Jeff, the goal here is really to engage every franchisee as they come in for their Image Activation and to really fit the restaurant for what the trade area is. And so if you have a very high-performing trade area that -- our encouragement will be to plus that restaurant up. Let's also remember that some 40% or 45% of our restaurants out there are image restaurants. And next year alone, we have a very aggressive number of scrape and rebuilds that we'll be doing because these restaurants are somewhere between 20 to 40 years old. And so if you have strong trade areas and those, in many cases, can warrant a scrape and rebuild. And I'll also remind you that the performance we're seeing of our scrape and rebuilds, as well as our new restaurants, is very strong and above what we're seeing on a typical Image Activation restaurant.

Got it. And separately, you mentioned setting yourself up for growth in '14. I know all the granular guidance is coming in January. But looking back last year at this time, you gave some initial color. I didn't know whether at this point, without that color, we should just assume that 2014 EBITDA and EBITDA -- or EBITDA and EPS growth would be kind of in line with the long-term guidance you've provided in the past of high-single- to low-double-digit EBITDA and mid-teens EPS. Is that a reasonable starting point or should we...

Yes -- no, I think that is a very reasonable starting point to go there. And our goal, as we've stated, is we want to be a brand that our investors and shareholders can rely upon and produce very consistent results quarter in, quarter out and year in and year out. And we're being very thoughtful about that.

Got it. And just if I could ask 1 last question in terms of the food inflation. It seems like you got COGS leverage this quarter despite 100 basis points of increase in commodity growth, I think you mentioned. I was wondering what, perhaps, would be still favorable and kind of any early look at '14. Should we still expect continued leverage on the COGS line?

I think if you think about where we've been tracking, right, our previously provided guidance was 90 to 120 basis points of commodity inflation. Clearly, we're coming in below that this year. And then as we look out into 2014, and we'll provide more specifics in January, we're encouraged on where commodity prices are going in the marketplace.

Your next question comes from Joe Buckley.

I just had a couple of clarifications to start. So are the Image Activation restaurants now coming in less than that Q3 investment level, which I think was about $375,000 per restaurant, as the costs are even down below that for what you're doing on average?

I think it's important, as you look at where we are, Joe, those were targeted levels that we had out there. If you look at where the actual numbers had been coming in for Tier 3, we were actually tracking around $550,000. So we've actually made some adjustments looking at the design, everything we've talked about earlier and now look at kind of the new standard coming in much below that.

Okay. And then a question on the restaurants you've sold so far, the 118 restaurants for $66 million. Talk a little bit about those restaurants. Were any of those markets remodeled already, or did the purchase agreements or the sale agreements with the franchisees require them to upgrade these restaurants in the image reactivation? And maybe too, what kind of real estate was attached to those restaurants versus the portfolio at large?

Yes. So a couple of answers to the questions, Joe. I think, as you look at it, as we talked in the past, system optimization is restaurants primarily west of the Mississippi. Several of those markets did have restaurants that we had been image activating. But as we've gone out to sell them, we've looked at several financial factors, historical sales and profitability, adjustments for royalty rent and G&A, margin improvement opportunities that we could see. But we also looked at new and recently reimaged restaurants and valued them at full development cost to ensure that we recoup some of our cost in the price. So when you see our total proceeds come in, it's all of those elements that come in to that purchase price as well as picking up technical assistance fees along the way. And then importantly, what we're trying to do is as we bring in key strategic partners as part of system optimization, whether existing franchisee or company, we're wanting to make sure that they're committed to future Image Activation, new restaurant development going forward.

So, Joe, and in these properties we're selling, as we've indicated previously, we own a little less than 60% of the land underneath these restaurants and so we are in 100% of these cases retaining that land.

Okay. And so these 118, Emil, will that 60% figure hold as well?

It's about 50%, is where we will have under...

50%, I'm sorry.

A little lower than 50% on fee based, to be clear. But you also got -- not only do you have the rental income from the fee-based restaurants, but you also have some leasing income that comes in along the way, too.

But on those 118, I won't recall what the exact mix of land was underneath those, Joe. But overall, on the 425, it is a little under 50%.

Okay. And then just to clarify, so you're saying these 118 included the reimages done by and large?

Well, there would be -- no, no. There would be -- in those markets, there will be some restaurants that have already been reimaged. We've been reimaging restaurants all along across the country, so we might have completed an Image Activated restaurant already, where we would have spent the investment. What we're doing is making sure that we recoup some of that investment as we sell it to new franchisees.

But no, there's still a lot to be done in those markets. And again, all of these agreements have stipulations as Image Activation, as well as any further new restaurant development, Joe.

Your next question comes from Sara Senatore. Sara H. Senatore - Sanford C. Bernstein & Co., LLC., Research Division: I just have a couple of follow-up questions. First, on the comp line, is the idea that maybe the Flatbread didn't do as well. Is there anything to suggest that like maybe there's a limit to how many people or what kind of transactions you can drive with premium since you had it look like more premium emphasis with the Pretzel Bacon Cheeseburger? And so in that sense, just are you kind of, I guess, hitting up some sort of governing factor in terms of how much traffic you can drive at the premium -- on the premium side? So that was my first comp because I think we're all trying to figure out like next year, as you lap some really great menu innovation or what are sort of the constraints in being able to lap that? And then I do have a follow-up on the re-franchising.

Okay, yes. No, I do not feel that there's any kind of constraint out there, Sara. Remember, this is a massive market that -- there's about 63 billion visits to restaurants every year. And so we feel we have a lot of opportunity to continue to grow. And the rhythm of the high end as well as the low end, I think, speaks to this. And, Sara, to me, a good reference point to use is look at the growth that we've seen in the new QSRs over the last 10 years. And essentially, those were approaching what you might characterize as the higher end of the market. So I think there's a lot of latent demand out there. And again, I emphasize our strategy of giving people a new QSR quality experience, but giving them that at a QSR price, to me, is an unbeatable combination. Sara H. Senatore - Sanford C. Bernstein & Co., LLC., Research Division: Okay, great. And then I guess the second question is on the reimaging that you're asking franchisees to do. Again, I'm assuming the sort of 10% lift was for the reimages that are at the low end of your cost range. But if that's not the case, the returns on invested capital look like they may be in the low double-digits for on average. And so I guess I'm just trying to figure out is that compelling to franchisees? Have you seen any change in responsiveness or either acceleration or deceleration or in interest or people signing up to do the activation?

Sara, no, I think allowing us to have a standard designed with flexible upgrades that we can actually tailor to the trade area allows the individual franchisees to really make the right choices of what matters most in their restaurant in the community that they compete. And what we see is when folks invest in their community in their Wendy's restaurant, we do get a nice response. So it's not necessarily saying that just because you've got a lower investment, you're getting a lower return. We see returns all between the 10% and the 20%. And it really is market specific to where they're actually competing along the way. So I won't get fixated on the low end of the return for a lower end of the investment. And then the plot on selling the restaurants is to have a commitment over the next 5 years to continue to Image Activate restaurants at a pre-agreed pace going forward.

Your next question is from Chris O'Cull.

Emil, did the company conduct a market test of the new brioche product? And if so, how did it perform?

Well, you remember that we actually have previously run the Bacon Portabella Melt product, Chris, and a very, very nice response to that product. And so this really has been upgraded with the brioche bun. And we have conducted consumer research on this product. And the research numbers -- and I won't be specific, but they were extremely strong.

Will the advertising levels be as heavy with this product as they were with the Pretzel Bacon Cheeseburger?

Yes, we have a very strong integrated effort against that. And what I mean by that is, as I mentioned in my comments, we're clearly seeing the importance of the combination of public relations, broadcast, digital and social working together. And we're just going to continue to keep up that rhythm.

Is there a plan to increase the national marketing fund contribution rate for next year from the franchisees?

I think you will see -- and I'm not going to be specific on this, but you will see heightened levels of national media expenditures next year.

Okay, okay. And then, Todd, I apologize if I missed this, but did you give the components of the same-store sales growth this quarter?

We don't provide the specific components of the same-store restaurant sales growth.

Okay, okay. Was it safe to say, though, traffic was positive during the quarter?

If you look at it, traffic was slightly down during the course of the quarter. But if you exclude breakfast, it'd be slightly up.

Okay, okay, fair enough. And then, Todd, you mentioned the flow-through on the increased sales from the Image Activation was good. Could you give a little more color on the profit or margin improvement a store sees once it's gone through the Image Activation?

Yes, what we've been talking, right, is consistently seeing flow-throughs at 30% to 40% on the image activated restaurants. And as we evolve to a more standard design, we're starting to see it creep up towards the high end of that.

Does that include the additional labor requirements once the store's been through the program?

It does include that, so that's on all in flow-through net of all the investments that are made.

And, Chris, that's one of the important things here is that as we've evolved the design, we've also evolved some of the traffic flow of the restaurant to make it more efficient and to extract the higher levels of the flow-through on this. So we've taken the investment levels down, still getting excellent sales responses and heightening the flow-through, all of which obviously contribute to great returns.

Your next question is from Jason West.

Just one on the -- I know you're not talking much about '13. But as we think about the re-franchising getting done early next year, but you still have the 1,000 company stores left and I'm guessing a lot of those would need to be reimaged. I mean, should we think about CapEx, post the re-franchising, as similar to this year but then shave about 1/3 of that for the company stores that are going away?

I think we'll provide specific guidance on 2014 CapEx. But if you look at this year's guidance, right, we were at 245. We've taken that down to 235. Still having, as a subcomponent of that, $145 million against Image Activation. But naturally, as we sell restaurants in the west, right, the maintenance expense goes away on those restaurants going forward. The offset to that, though, Jason, that we'll have to be careful of is we're going to increase the level of company restaurants Image Activations into 2014. So we'll be doing more restaurants in total.

Okay, got it. And can you talk about, as you've had some of these restaurants out there for a couple of years now, in year 2 of the Image Activation, do you continue to see a very strong comp in year 2, or does it sort of settle in to more of a company average comp at that point?

Yes, it really starts to settle into the company average comp. What we see is that initial big lift. You get through the grand opening period. It settles in at the nice lift on an ongoing basis. And then in year 2, you start to see that restaurant growing a normal clip from that new higher your AUV base. But we've got several success stories where it's a lot different because it's really connected with the consumers in that market and they keep coming back time and again.

Yes. So if you take our 2012 restaurants for an example, okay, so they've settled in at the, like, in the very high teens close to 20%. And so you keep that lift you got from those restaurants, and then they continue to grow at the average growth that we're seeing across our system. So very powerful combination of retaining that sustaining pop and then building upon that.

Okay, got it. And then just the last thing on the outlook for next year. I know, again, you're not giving guidance yet. But you said sort of a good starting point is the long-term guidance. But I guess given the re-franchising that you're doing, you're kind of getting back to breakeven on the EBITDA with that program, what's going to drive EBITDA growth outside of the re-franchising for next year, because that seems like you're just working hard to get back to neutral on those stores.

I think there's a few things. I think as we continue to look at ongoing cost reductions, right, there's still opportunities as we continue to partner with our purchasing co-op to drive cost savings on that front, partnering between the brand team and our co-op and the restaurant operators. There's still opportunities on productivity enhancements that we can make to continue to drive restaurant margin. But we'll get into specifics around the guidance on restaurant margin and the like in January, Jason.

Your final question comes from John Ivankoe. John W. Ivankoe - JP Morgan Chase & Co, Research Division: A follow-up on Jason's question and then a separate, if I may. First, at least, I understood that there was maybe some point-of-sale or systems-related upgrades in product development upgrades that were in CapEx in '13 that might not recur in '14. Do I remember that correctly?

Yes, John, we've been working through our common POS system, which would be some of the investment that we're seeing on the IT side, that we'll have some of that behind us in 2013. Some of that will continue to ebb into 2014 as we try to get the system on a common POS solution. John W. Ivankoe - JP Morgan Chase & Co, Research Division: So it's not necessarily a CapEx tailwind in the '14, I guess you're saying?

It will be a slight benefit but we'll put all the components together for you in January so you've got a complete picture of the pluses and minuses. John W. Ivankoe - JP Morgan Chase & Co, Research Division: Okay, understood. And given, I mean, what's obviously been high demand for your re-franchised stores that you've accomplished very quickly, are you kind of beginning to think about what the right company ownership mix is for you? I mean, there've been examples of systems that have obviously been extremely successful, anywhere between 93% or 100% franchised in some cases. So, I mean, just you -- kind of philosophically, if you can kind of walk us through what you think the right level of company store ownership as we look beyond the currently announced 425?

Yes, I think that gets us down to, I think, 15% ownership. And for the time being, we're comfortable at that level, and we're going to provide a lot of leadership and be aggressive with our Image Activation, which we believe encourages the whole system to be aggressive on this. But this is something that, obviously, over time that we can -- we'll continue to evolve this. And remember, our system is a bit unique in the sense that we have under 500 restaurants outside of North America. And so we have to have a growth strategy that is -- reflects the composition of what our system is. But this is something that clearly, as we do our long-term thinking, is one of the items that we are always evaluating. John W. Ivankoe - JP Morgan Chase & Co, Research Division: And do you think that you need to be in multiple markets and multiple regions to demonstrate leadership, or could it potentially be kind of 1 DMA, for example?

Well, if you look at what we've done with the changes we've made here, we've essentially moved the company system to east of the Mississippi, again to achieve efficiency and effectiveness not only for the company, but also for the franchisees. So if you would take that thought, that if there were more of this to take place in the future, I think it would be safe to assume that we would probably use a similar approach to continue to get us in a more concentrated region and geography of the country that works very well for us as well for our franchisees. And I believe that one of the reasons we've had a tremendous response from both outside the organization as well as inside the organization to these 425 restaurants is people are having the opportunity to buy entire markets, which doesn't come along very often. And it works extremely well for them and it works extremely well for us.

Okay, we want to thank everybody for tuning in today. As I mentioned, Todd and the gang will be talking to many of you this afternoon. And of course, follow-up with David or Meg as appropriate, and we'll talk to you soon. Thank you.

This does conclude today's conference call. You may now disconnect.