The Wendy's Company (WEN) Q2 2014 Earnings Report, Transcript and Summary

Good morning, my name is Keisha and I will be your conference operator today. At this time, I would like to welcome everyone to The Wendy’s Company Second Quarter Earnings Results conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. David Poplar, Vice President of Investor Relations, you may begin your conference.

Thank you and good morning everyone. Our conference call today will start with comments from our President and Chief Executive Officer, Emil Brolick, who will highlight some of our key initiatives and provide an update on the progress we are making with our brand transformation. After Emil, our Chief Financial Officer, Todd Penegor will review our second quarter financial results and outlook. After that, we will open up the line for questions. Today’s conference call and webcast include a PowerPoint presentation which is available on the Investors section of our corporate website, www.aboutwendys.com. Before we begin, I’d like to refer you for just a minute to the Safe Harbor statement in our earnings release. Certain information we may discuss today regarding our future performance is forward-looking. Various factors could cause our results to differ materially from the projections in those forward-looking statements. Also, some of our 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 measure. With that, I will now turn the call over to Emil Brolick. Emil?

Thank you, David, and good morning to everyone. Today we reported strong second quarter results and announced a growth initiative that includes the sale of our company-owned Canadian restaurants. These strong results and our Canadian growth initiative reflect the continued progress of our ongoing brand transformation. Let me start with a high level overview of the quarter. Our second quarter adjusted EBITDA and adjusted earnings per share results were in line with our expectations for the quarter and our outlook for 2014. This included year-over-year earnings growth despite a 20% net reduction in revenue resulting from the refranchising of 418 company-operated restaurants completed in the first quarter of 2014. The two keys to achieving this growth were our strong 3.9% same restaurant sales growth along with the improvement in restaurant margins of 110 basis points despite commodity headwinds. As pleased as we are with our second quarter results, we are also excited about the Canadian growth initiative we announced today in which we plan to sell approximately 135 company-operated Canadian restaurants to franchisees and reinvest the sales proceeds to promote incremental development of franchise restaurants in Canada. We believe a franchise model will help us penetrate the market more quickly than under a company-operated restaurant model as we plan to grow our Canadian restaurant base by approximately one-third and reimage approximately 60% of our Canadian restaurants by 2020. In addition, we anticipate that the Canadian growth strategy will benefit the quality and consistency of our earnings through increased rental income and royalties. Along with our new Canadian growth initiative, our goal is to return our U.S. restaurant system to positive net restaurant growth by 2016 at the latest. Enhancing consumer access to the Wendy’s brand through increased restaurant distribution is fundamental to our growth in North America. Top line growth is also key and we’re pleased with our 3.9% same restaurant sales growth at company-owned restaurants for the quarter. Franchise same restaurant sales in North America increased 3.1% during the quarter. The differential between company and franchise same restaurant sales was primarily due to the continued success of our image activation program, which Todd will update you on. The quality of our food and our product innovation team’s creativity also continues to produce results. In the second quarter, we successfully leveraged our brand heritage of product quality and innovation with product promotions including our Tuscan chicken sandwich on ciabatta, our new Asian cashew chicken, barbecue ranch chicken, and strawberry field chicken salads. These products all helped drive sales in the second quarter by distinguishing Wendy’s from other competitors and by reinforcing our ability to deliver new QSR quality at a QSR price. To give you some additional perspective regarding our top line performance, consider that our 3.9% second quarter same restaurant sales growth was our strongest since the fourth quarter of 2011 when we re-launched Dave’s Hot and Juicy cheeseburgers. We have now posted six consecutive quarters of same restaurant sales growth, beginning with the first quarter of 2013. As we enter August, we expect this trend to continue with another quarter of positive comp sales growth despite rolling over the strong performance of our pretzel bacon cheeseburger promotion in 2013. We expect our third quarter same restaurant sales growth to be slightly less than the low end of our full-year outlook of 2.5 to 3.5%. Todd will discuss our outlook for the balance of the year in greater detail in a few minutes, but we are comfortable reiterating our 2014 guidance based on our current trends and upcoming promotions. While we are happy with our sales performance, we are equally proud in the improvement in company-owned restaurant margins. As you can see by this chart, our top line growth along with our control of cost has resulted in company-owned restaurant margin expansion of 370 basis points over the past two years. The sale of 418 restaurants in 13 U.S. markets also contributed to the margin improvement over the past year. Consistent with our system optimization strategy, we believe our plan to sell approximately 135 company-operated Canadian restaurants to franchisees and reinvest the sales proceeds will provide a significant stimulus to incremental development of franchise restaurants in Canada where our restaurant counts have been stagnant for the past 10 years. We believe this strategy will be a catalyst for restaurant growth in Canada and complement our goal of returning our U.S. restaurant system to positive new development. Similar to the 418 restaurants that we sold in the United States, the purchasers of the restaurants in Canada will be committing to certain reimaging and development requirements as part of the transactions. We believe these commitments in turn will help ensure that the Wendy’s brand remains relevant with consumers by expanding brand access and assuring our restaurants convey a contemporary brand image consistent with brand transformation. We also plan to reinvest the sales proceeds in the growth of franchise restaurants in Canada using turnkey development programs which are more common in Canada. By 2020, we plan to grow our Canadian restaurant base by about one-third and reimage about 60% of our Canadian restaurants. As we have shared in the past, we expect that for the foreseeable future, we will continue to own a core portfolio of company-operated restaurants in the United States, which we believe is critical to demonstrating brand leadership to our system. We intend to prioritize the sale of the Canadian restaurants to successful, well-capitalized franchisees with a demonstrated history of operational excellence and a stated commitment to image activation and new restaurant development, just as we did with the disposition of our 418 U.S. restaurants over the past year. For a more detailed look at the financial impact of these transactions along with an in-depth review of our second quarter, I will now turn the call over to Todd.

Thank you, Emil. I’ll start with a review of what we believe was a solid performance in the second quarter. As we expected, total revenue decreased 19.5% versus the prior year. The decrease was the result of lost revenue from the sale of company-owned restaurants to franchisees from our U.S. system optimization initiative partly offset by higher same restaurant sales, rental income, and franchise royalties. Adjusted EBITDA increased 2.1% compared to the second quarter of 2013 as we delivered growth in our first full quarter after the sale of 418 U.S. restaurants. We’ll take a closer look at the key drivers of our adjusted EBITDA growth in a few minutes. As the next slide shows, we are delivering on our G&A reduction commitments with a 10.4% or nearly $8 million reduction in expense compared to the prior year. Operating profit was $63.9 million compared to $57 million last year. The 12.1% increase resulted in part from a higher margin rate in 2014 compared to 2013. The 2014 results include facilities action charges net of benefits of $0.9 million compared to $6.4 million in 2013. The 2014 results include other operating expense of $4.4 million primarily related to increased rent expense from real estate subleased to franchisees, compared to $0.4 million in 2013. Prior to this year, this expense was in cost of sales. Also keep in mind that increased rental income in franchise revenue offsets this expense. Adjusted EPS increased from $0.08 to $0.09 per share despite a significant year-over-year increase in income tax expense as this quarter’s effective tax rate of 43.8% compares to 29.6% in the second quarter of 2013. The higher tax rate was primarily the result of our system optimization initiative and changes in New York State tax law, which we discussed on our first quarter conference call. Our reported EPS increased from $0.03 in the second quarter of 2013 to $0.08 in the second quarter of 2014. As demonstrated by this chart, we are improving the quality of our earnings. This grid shows we are delivering on our commitment for the sale of the 418 restaurants to be EBITDA neutral. On the left side of the chart, you see the $24 million in lost EBITDA from the sale of 418 restaurants along with the impact from the year-over-year increase in image activation closure time as we expect to double the amount of reimaging activity this year compared to 2013. As we mentioned in the release, this reimaging activity will increase significantly in the third quarter, both sequentially and on a year-over-year basis as we expect closures to reach their 2014 peak in the next couple of months. On the other side of the equation are the benefits in increased royalties, G&A savings, and rental income, all resulting primarily from system optimization. The other major component is the EBITDA improvement we delivered from our core North American restaurants despite the unfavorable impact from an 80 basis point year-over-year increase in commodity costs. Now let’s look at a few selected balance sheet items. Cash decreased at $372 million compared to $385 million at the end of the first quarter. At the end of the second quarter, total debt was approximately $1.4 billion and net debt was about $1.1 billion. Based upon our trailing 12-month adjusted EBITDA, our current net debt multiple is 2.9 times. Year-to-date, we have generated cash flow from operations of about $81 million. Note that this does not include disposition proceeds of $100 million primarily related to system optimization, which are in investing activities. Capital expenditures were approximately $115 million as the year-over-year increase of approximately $33 million reflects the acceleration of image activation reimaging activity compared to last year. We ended the quarter with approximately $372 million in cash, which is down from $580 million at year-end primarily due to our Dutch tender share repurchase completed in the first quarter through which we purchased nearly 30 million common shares at an average price of $9.25 per share. Now let’s take a closer look at the Canadian growth strategy that we announced today. Consistent with our previously articulated system optimization strategy, we expect the sale of our Canadian restaurants to help accelerate our growth. As Emil mentioned, we believe a franchise model will help us penetrate the market more quickly than under a company-operated restaurant model as we plan to grow our Canadian restaurant base by approximately one-third and reimage approximately 60% of our Canadian restaurants by 2020. We plan to accomplish these goals by generating incremental franchisee commitments to reimaging and development with each transaction, along with reinvesting sales proceeds into turnkey solutions for our franchisees. We also anticipate that the Canadian growth strategy will benefit the quality and consistency of our earnings through increased rental income and royalties. Along with our new Canadian growth strategy, returning our U.S. restaurant system to positive net development is a key component of our brand transformation plan. Here’s a more detailed look at the expected impact of the sale of these restaurants, which will lower our total system company ownership from 15 to 13%. We expect an ongoing annualized reduction in G&A of approximately $8 million after completing these transactions in the first quarter of 2015. This is in addition to the $30 million reduction we achieved as a result of the sale of 418 U.S. restaurants over the past year. We also expect these sales to reduce adjusted EBITDA by up to $5 million in 2015. We expect little or no impact to EBITDA in 2016 and EBITDA accretion in 2017 and beyond. We expect no impact to net income in 2015 and slight accretion to net income in 2016 and thereafter. We plan to complete the sale of our Canadian restaurants by the end of the first quarter of 2015. We also announced today that our board of directors authorized a new share repurchase program for up to $100 million through the end of 2015. This share repurchase program is an important component of our capital allocation strategy. We are confident our strong balance sheet, financial flexibility, and cash flow will enable us to fund our organic growth initiatives, including the reinvestment of Canadian restaurant sales proceeds into new franchised restaurant development in Canada. Investing in our business, as we have stated, is our first priority for capital usage. Our second priority is to return capital to shareholders in the form of dividends, and our third priority is to use share repurchases to manage the impact of equity compensation and to build shareholder value. As we look at the remainder of 2014, we are reaffirming our guidance for adjusted EBITDA and adjusted EPS as we continue to control G&A effectively and have taken some modest pricing to help us manage our way through a challenging external environment. For the balance of the year, we have confidence in our strong marketing calendar and we have clear plans to realize restaurant margin improvements even with much greater pressure on beef prices than we initially expected. We are now forecasting a 2% increase in the commodity cost for the year, which is nearly double our forecast from the first quarter. We continue to expect full-year same restaurant sales growth of 2.5 to 3.5% at our company-owned restaurants. We also expect our interest expense to decrease approximately $15 million due to our 2013 refinancing efforts. We expect capex in the range of $280 million to $290 million, higher than last year’s $224 million due to increased image activation activity in 2014. As we disclosed last quarter, due to the impact of changes in New York State tax law as well as the impact of our system optimization initiative, we now expect an effective tax rate of 38 to 40% for 2014. As we enter August, we expect momentum from our brand transformation to continue with another quarter of positive comp sales growth despite rolling over the strong performance of our pretzel bacon cheeseburger promotion in 2013. As Emil mentioned, we expect our third quarter same restaurant sales growth to be slightly less than the low end of our full-year outlook of 2.5 to 3.5%. We also anticipate a significant year-over-year increase in temporary restaurant closures related to our image activation program during the third quarter when we expect reimaging activity to reach the 2014 peak. Due to the impact of these restaurant closures, we expect year-over-year third quarter adjusted EBITDA to be approximately flat; however, we also expect to generate a significant year-over-year increase in adjusted EBITDA in the fourth quarter of this year when we anticipate realizing the benefits of this accelerated activity. We remain on track to achieve our image activation goals for the year, which include the reimaging of 200 company-operated restaurants, including 35 scrape and rebuilds in addition to the reimaging of 150 to 200 franchise restaurants. This would represent an increase of nearly 75% to approximately double our total image activation activity from last year. A key component of our 2014 outlook is our commitment to realizing $30 million in G&A reduction from our U.S. system optimization initiative. We are on target to achieve the $30 million reduction, although higher equity compensation will partly offset these savings. The tables on these two charts show the estimated savings compared to our 2012 and 2013 actuals. In addition to these savings, we expect to realize an incremental $8 million in G&A reduction from our Canadian growth initiative upon the targeted completion of these transactions by the end of the first quarter of 2015. The planned sale of our Canadian restaurants will change our 2015 outlook somewhat. Specifically, we now expect adjusted EBITDA growth in the mid to high single digit range in 2015, followed by high single digit growth in 2016 and low double-digit adjusted EBITDA growth beginning in 2017. We continue to expect mid-teens adjusted earnings per share growth beginning in 2015. This outlook includes the expectation for annual same restaurant sales growth of at least 3% beginning in 2015. With that, I will now turn it over to David Poplar for the Q&A portion of our call.

Thank you, Todd. In a minute, we will open up our phone line for questions. We are aware that some of our peers also have conference calls scheduled this morning, which may limit the length of our call today. If we are unable to address any of your questions due to time constraints, Todd and I will be available later today as we conduct our scheduled calls with the sell side this afternoon. If you need to reach us, please email me at david.poplar@wendys.com, or leave a message at 614-764-3311 and we’ll get back to you as soon as we can. With that, we are now ready to take your questions.

[Operator instructions] Our first question comes from the line of Will Slabaugh with Stephens. Will Slabaugh – Stephens: A couple questions, if I could. One, I want to ask if you could go into a little bit more detail on how you’re going to reinvest that money into Canada to accelerate that restaurant growth, whether it be through refinancing—or sorry, providing financing or other means. And then a follow-up on the pricing – could you tell us how much pricing you did take and how much you expect to be on the menu in the back half of the year?

Hey Will, this is Todd. On the pricing front, as you know, we don’t disclose pricing. Transactions were positive during the course of the quarter and we’ll continue to look at modest price increases as well as managing our menu through mix going forward with the promotions that we have. In regards to Canada, what we really want to do is get to a scenario where we have a build to suit program, so what we want to do is take the proceeds from the sale of these restaurants and really provide turnkey solutions for the franchise community, all of what they’re used to from the other competitors in Canada, and we’re working through that program as we speak. We may also (indiscernible) or other support to really help stimulate that growth too, but we’re going to work through that as part of the transactions as we start to negotiate the deal points with prospective buyers. Will Slabaugh – Stephens: Great, thanks Todd.

Our next question comes from Michael Gallo with CL King. Michael Gallo – CL King: Morning. My question is just on the Canadian business. It would seem like from the numbers that the operating margins on a per-store level are pretty low in that business, so I was wondering if you can frame for us what the operating margin percentages are and what kind of impact you should expect that will have on consolidated company store margins as you finish up the refranchising in ’15. Thank you.

Hey Michael, this is Todd. The margins are a bit lower in the Canadian restaurants, and you will see a modest impact on the total company margins going forward post-the sale of those 137 restaurants. Michael Gallo – CL King: Okay, thank you.

Our next question comes from the Jeffery Bernstein with Barclays. Jeffery Bernstein – Barclays: Good morning. Thank you very much. I had two questions. One, on the image activation and the impact it has on comps, it looks like this quarter your company-operated comp outpaced the franchise by 80 BPs. It seems like that’s accelerating modestly from the past couple of quarters, and I think you mentioned image activation was the driver. So just purely on the numbers, is it fair to assume that we should expect a further widening of the gap near term? Is there a reason to believe otherwise? Just essentially trying to confirm that the image activation beyond ’14 is still generating exactly the ranges you talked about in terms of sales lifts and whatnot; and then I have a follow-up.

Hey Jeff, this is Todd again. Yes, we are seeing, as we’ve talked about, sustainable sales lift of 10 to 20%, depending on the investment level, across all of our IAs, and your assumption, you actually clearly see that we have a bigger mix of our restaurants image activated. That’s what’s really driving the delta on our growth relative to the franchisee growth. But what we would hope and what we are seeing is we continue to lead as we’re working towards those 200 restaurants that we’ll image activate this year. The franchise community is quickly following as they believe in the economics, they believe in the lifts, and as they start to pick up a bigger portion of mix IA restaurants, you might see a little widening of that gap in the short term, but over time it will start to flatten out, and then over the longer term start to tighten. Jeffery Bernstein – Barclays: Got it. Then just a question on the new product side of things, especially the pipeline for the second half and into ‘15. I think some were expecting you to maybe launch a new product to lap the pretzel success. I’m just wondering if you could talk about the thought process to repeat and kind of the outlook for the rest of the year. It seems like you’re confident the comps are going to accelerate in the fourth quarter, but the comparison is just as hard, so any thoughts around the new products in the pipeline?

Sure Jeff, this is Emil. First of all, if you look at the pretzel bacon cheeseburger in 2013, period 7, or July, was our toughest rollover so we knew obviously that we were going to have a tough comparison to that; but we felt that with the promotional activity that we had planned behind it, we could have a successful rollover with that. When we now look back at it, and while we don’t obviously give guidance by quarters or survey by periods, period 7 was the strongest two-year comp that we’ve had this year, so to accomplish that I think is a good testament to the plans that we have. We have what we think is a very strong calendar for the remainder of the year that does include new product innovation for that, and the team has already laid out a tentative calendar as we look to 2015. We want to, of course, continue to build on our heritage of product quality, but in all honesty, we also hope that there are windows out there that we can use products, whether it’s a spicy chicken or items like that, the Asiago ranch chicken club did extremely well for us in January this year, so we also believe that there will be products like that that we can use to continue to build sales. Jeffery Bernstein – Barclays: Great, thank you very much.

Our next question comes from Matt Difrisco with Buckingham Research. Matt Difrisco – Buckingham Research: Good morning. I just wanted to talk a little bit about the digital initiative and what you’re seeing in that, or what’s the cadence and the timing of that, how we could expect that to be rolled out in the U.S. potentially with both mobile payment and ordering sort of as one unit on the mobile app.

Yes Jeff, so on the mobile payment side of the equation, we have about 85% of the restaurants up and running on that, and we’ve always said that that was a nice to have and a convenience for the customer base, and we’ve been pleased with the uptick that we’ve seen in folks utilizing the mobile payment feature. We are in a beta test, as Emil talked about a couple of weeks ago on CNBC, on the mobile ordering side of the equation, and then eventually we’ll take some of that beta test and start to think about how do we connect that into our loyalty program going forward. So we really believe that the digital space is a great opportunity to not only create more loyalty, to drive more transactions, but can also create some operational efficiencies for us over the longer term, so stay tuned for more of that going forward. Matt Difrisco – Buckingham Research: I guess just as far as that mobile ordering, is there anything that needs to be added to the stores, or given that they’ve already got the payment option in there, is the software and everything pretty much in there? Would it be conceivable to do it in a couple of quarters rather than multiple years?

Yeah, I think of the big bases that we need to really set up is to move ourselves to a common POS system and to get us onto the Aloha platform that we’ve been talking about for a while. We’ll have all the company restaurants up on the Aloha platform by the middle of September. We have commitments from the franchise community to be up on the platform by the middle of July of next year, with the exception of a small portion that have been grandfathered with some newer POS system. So we think we can actually get there relatively quick, and with our image activation activity where we’ve actually separated order pay from pick-up, it’s really a nice enabler to create the efficiency within the restaurant when you combine the mobile ordering and mobile payment features. Matt Difrisco – Buckingham Research: Excellent, thank you.

Our next question comes from David Palmer with RBC Capital Markets. David Palmer – RBC Capital Markets: Good morning, guys. Congrats on the market share gains that you’re producing here. Food margins were up 80 basis points last quarter. How about looking into the second half – I would imagine beef costs might be a little bit worse the way you priced them up, but I think there’s some pricing going on out there. Any thoughts on food margins?

Yeah, so David, as we continue to look at inflation out there, we talked about beef inflation ticking up in Q2 and then Q3 on the last quarter’s call. Clearly, there’s been continued inflation on beef into the fourth quarter of this year. We’ve got ourselves locked in through the third quarter. We’ve taken a conservative estimate to what we think beef will be in the fourth quarter, and we’ve planned our initiatives around that – you know, modest pricing, how we’re managing labor, how we’re managing food costs to continue to drive restaurant margin increases quarter on quarter for the rest of this year. You see that we had that nice strong restaurant margin improvement here in the second quarter, and we’re going to continue to drive for restaurant margin expansion into Q3 and into Q4. David Palmer – RBC Capital Markets: Just one follow-up on the returns from reimaging, if we take your assumptions from one of your slides today – you know, 10 to 20% lift and take the midpoint of that, and the 40% flow through on over $200 million of spending on reimaging, you would get some pretty chunky EBIT, incremental EBIT for your company; in other words, pushing what your EBIT growth is for the company. I’m just trying to get my head around that, and when you think about the puts and takes for your incremental profitability from reimaging and the friction costs that go along with that near-term, how should we think about that, particularly as we evolve into ’15 where more of these are up and running? Thanks.

Yeah, so I think David, the key is if you go back to the beginning of the year, even though we’re getting nice tailwinds on same restaurant sales growth, we don’t see the profit fully coming through on the IA restaurants yet because of the incremental closure time as we double the amount of restaurants this year, which is 200 versus 100 company we did last year. Just to give you a sense of direction, we had in the second quarter 75% more closure weeks than we did year ago as we have accelerated our image activation activity and are doing more of them. In the third quarter, we’ll be up about 165% more on closure weeks, so it will continue to add pressure. We’ll get the benefits of the net openings, but we’ll have impact on the closure weeks as we continue to accelerate this activity as we’re trying to lead to have 85% of the company restaurants IA’d by 2017. But as we come over that hump during the back half of 2015 and into 2016, that’s when you’ll start to see the dual benefit and the return on that investment on both the same restaurant sale side as well as the bottom line flow through, because we’ll get past that hump of closure weeks. So it will be a little choppy as we think about closure weeks across quarters, but really stay focused on the year and on the longer term because we are absolutely comfortable with the returns that we’re seeing and the flow throughs that we’re seeing on our image activation activity. David Palmer – RBC Capital Markets: Great, thanks for that.

Our next question comes from John Glass with Morgan Stanley. John Glass – Morgan Stanley: Todd, could you just walk through the math on the returns this quarter from the reimaging? The gap would suggest if you look at kind of the gap as being the differential still less than 10% increases in the remodels, but I also know you take some stores out of the comp base so maybe that’s distorting it. Is that fair, or how would you describe that performance difference?

You’ll always have some distortion because we take the—they go out of the comp base for the five weeks, so we’ve got the pre-activity and the closure time. It’s out of the comp base for 13 weeks after we come back up, so we take the honeymoon period out. So it gets a little distorted because you’re always going to have restaurants coming in, coming out of the comp base. But a general indicator is looking at that delta between the company same restaurant sales and the franchise same restaurant sales, so what we’re seeing is an incremental lift from the reimaging activity. Hopefully that helps. John Glass – Morgan Stanley: But would that lift be closer to 10% than 20%? I guess that’s my question.

No, it really works across the range, and it’s really a function of what you invest and what you get. From a company perspective, we continue to look at where appropriate what investment and what upgrades do we want to put in that restaurant. Maybe we spend a little bit more, but we’re seeing much nicer lift. It’s a balance across the franchise community, depending on their risk-return profile. That range is purposely wide, but it’s not skewing to the low end of that by any measure. It’s pretty balanced across that range, depending on the investment level. John Glass – Morgan Stanley: That’s great. Then just on your 2015 guidance, is it just the $5 million of lost EBITDA from Canada that changes – I think that’s like 1% of EBITDA – or are there other factors that you have adjusted in ’15 as well?

No, that was totally attributed to the Canadian refranchising initiative, so if you think about the lost EBITDA and what we pick up then in rent, royalty and G&A, clearly there is a timing element of that, and then what happens over time is we take those proceeds and reinvest it into new restaurant growth. That’s when it becomes EBITDA accretive over the time. It will take us a little bit of time to get that new restaurant growth up and running. John Glass – Morgan Stanley: Thank you.

Our next question comes from Jeff Farmer with Wells Fargo. Jeff Farmer – Wells Fargo: Apologize for this, but just drilling down even further on the image activation, so 10 to 20%, we all sort of get that; and you’ve made the point that a lot of that is contingent upon the investment level. But as you looked at this sort of growing group of restaurants out there, you have this growing sort of sample size, what are some of the common themes beyond investment level that have driven restaurants to deliver at the high end of that 20% level or closer to the 10% or below level? What are some of the common themes there? What are some of the things you’ve learned as you just have this larger and larger image activation base to learn from?

This is Emil. Let me just comment on that and then Todd can jump in here too. I think we’ve shared pretty consistently what we have seen is that kind of the more you do the restaurants, the bigger the response that you get, and that largely explains the 10 to 20% range. As we’ve also mentioned, if you look at the performance of our scrape and build restaurants, that they even get larger numbers, and then when you look at the performance of our new build restaurants and you compare that new build image-activated restaurant to, let’s just say, several years ago and the kind of performance of a new restaurant, non-new build, we’re getting much higher volumes in the new image activated, new build restaurants. So there’s a pretty clear progression – it’s like the more you commit to it, the more demonstrative the change is in the restaurant, essentially the more dramatic the response is from a consumer perspective. I think if you just think about it conceptually, the consumer sees a bigger, more dramatic change in the brand presence physically, as you would think in those restaurants, but at the same time even at the lower end of our ultra-modern—what we call our ultra-modern standard design, if you still just do that, in many situations that we tailor that to, that is the appropriate investment response for that situation, and we’re very happy with the performance in those restaurants as well.

And what we’re really seeing is over the last three years as we’ve learned what does the consumer most appreciate around the place portion of the restaurant, both from an external and an internal perspective, we know what those elements are which really help us try to optimize investment and return. But just as important, it’s place, right? Place is going to draw in those lapsed users, it’s going to bring in those new users. Having the people component – and we’ve talked a lot about this in the past around people activation – that’s a key element of making sure that we’re going to bring back those consumers time and again. So not only do they come back that first time, but they have a great experience and become a repeat customer over the long run and then have all the great work that we’re doing on our LTOs and our core menu around food to make sure that they continue to come back time and again. We have seen that, because these lifts are sustainable over time. Now that we’ve got several years of classes, we’re seeing that that lift is sustainable, which means those customers are coming back time and again. Jeff Farmer – Wells Fargo: That’s helpful. Just one quick follow-up question – I’m just sort of curious how this works. So you image these restaurants – again, not the scrapes but just your more traditional reimage, it takes five to six weeks for the remodel process. Anyone in the local community can see that’s going on, so the word is out to them; but in terms of sort of promoting beyond sort to a broader trade area in a community, when you reopen these restaurants, what type of local store marketing, what efforts surround that opening? How do you get the word out that something is very different at their local Wendy’s?

The good news is we generally have done—have had to do very little of that, because to your point, we do close. It’s obvious to everybody and we put signage up that the restaurant is being reimaged, and because it is a dramatic change, you find there’s a lot of curiosity in the local community and there’s a lot of traffic going by. So you’re getting the core user base that come back, and my guess is they are coming back more frequently; but we clearly—you know, what our teams in the field are telling us is they’re clearly seeing new groups of consumers coming into the restaurant because of the physical change. Historically, one of the things that has been true is that if you just reimage a restaurant on the inside, you generally don’t see much, if any, response to that, and that’s why the exterior statement that these restaurants make is quite significant and we do feel that this is very much of a powerful invitation to consumers. And pretty much as soon as we reopen, consumers know and the pop you get is pretty much day one. Jeff Farmer – Wells Fargo: Thank you.

Our next question comes from Nick Seytan with Wedbush Securities. Nick Seytan – Wedbush Securities: Good morning. Thanks very much. So as you think about the contribution from the Canadian refranchising, would you be able to tell us what portion of that, or maybe just give us some more color on the rental portion of that franchise revenue stream, what portion of those stores are owned, what portion of that is leased, what gap between what you pay for the lease, what the franchisees are going to pay to you for the rent. That would be very helpful.

Okay Nick. As we look at it, there’s a couple of things. One, we own about 10% of the land up in Canada, so a little lower proportion up there but we’ll continue to retain that land as we move forward, which will help support us on the rental income side. We will probably stay on the lease in a lot of cases, and as you mentioned, there probably will be a slight spread between some of the nice terms that we’ve negotiated over the years relative to what we might do as part of the refranchising. I don’t want to get into specifics on that because that’s yet to be negotiated as we go forward on sales of these restaurants. But if you look at it, similar to system optimization in the U.S., there will be a balance across how that lost EBITDA is replaced between rental income, royalties, and the G&A savings, and we called out the G&A savings of about $8 million on an ongoing basis. That’s probably as specific as I can get at this stage. Nick Seytan – Wedbush Securities: Thank you, that is helpful. Just a clarification on the Q3 image activations – I may have missed this, but how many exactly image activation remodels are going to take place in Q3? And on the scrape and rebuilds, the 35 you’re doing this year, are you seeing sales lifts that are sort of at the high end of that 10 to 20, or are the scrape and rebuilds a little bit higher than that?

Yeah, so two pieces. One, we’re about 3x the amount of restaurants that we’re reimaging in the third quarter, and what I just said a little bit earlier is closure weeks will be up about 165% from last year’s closure weeks, which is more meaningful in the impact that it would have on an EBITDA basis. So that is where our activity really peaks, is we double down on the activity to 200 company restaurants versus 100 last year. On the scrape and rebuild, we continue to see, as Emil mentioned earlier, as we put more bells and whistles and there’s a little more wow into those restaurants, we are seeing lifts which we’ve talked about in the past of 25 to 35% range on a scrape and rebuild. So we continue to see that and feel very confident that that’s a nice return on investment for the company. Nick Seytan – Wedbush Securities: Thanks very much.

Our next question comes from Andrew Charles from Bank of America. Andrew Charles – Bank of America: Good morning. Emil, can you give us some perspective on the brand’s positioning in the Canadian market? I believe about 100 of your stores are co-branded with Tim Horton’s and there are at least three entrenched competitors with over 1,000 stores, so maybe also talk about your confidence for franchisees’ ability to find sites and grow sales in a very competitive market.

Sure. I think consumer perceptions of the Wendy’s brand in Canada are very similar to those in the United States, and one of the reasons that we felt comfortable initiating the original relationship with Tim Horton’s, and I was at the Wendy’s brand at that time, was because Tim Horton’s, of course, has a fabulous image in the Canadian market so we felt that that was a very powerful combination. But one of the key motivations behind us entering into this situation of selling our restaurants to spur the growth in Canada is essentially our restaurant counts in Canada have been stagnant – in fact, for the past 10 years. They peaked in 2004, while we have seen other competitors in the marketplace continue to grow. We feel that some of the initiatives that Todd is talking about in terms of reinvesting in the marketplace is going to be key to driving our expansion. So over the years, we’ve lost share of marketing voice, and we know that you can’t continue to do that and be an effective player in the marketplace, but brand positioning is very, very strong. We see with the limited image activation that we’ve done in Canada that we’ve gotten excellent response to that as well, so we have a lot of confidence that we can continue to grow in the Canadian market; and quite honestly, the Canadian market is very much of a—it enjoys a beef profile and they are great consumers, so we’re very excited about the opportunities we have in Canada. Andrew Charles – Bank of America: Okay, and if I could just follow up, is Canada the first step in reinvigorating international development? I know you did a study with consultants early in the years. Maybe provide an update on the international strategy, please.

Sure. Yeah actually, they are not directly related, but we did do that study and in fact at the most recent board meeting, we had quite an extensive presentation on our thought process about our global strategy. We feel that we have tightened that up quite significantly and we are in the process of executing against that. It’s going to take a couple of years before that begins to pay off in terms of increased EBITDA profile, but we clearly have a line of sight on how to bring that into play, and clearly we want to be a stronger global player than we are today. But as it relates to Canada, one of the motivations for the sale of the restaurants is we do feel that as we look back in time that we’ve probably been guilty of treating Canada as too much like America in executing it that way, and we realize that Canada is a tremendous, certainly close ally of America, but also the competitive set is different there and we do feel that by putting these restaurants in the hands of our franchisees, that that is one of the things that will make us more successful in the marketplace because they do have a better understanding of the Canadian consumer and the Canadian marketplace. Andrew Charles – Bank of America: Thank you.

Our next question comes from Chris O’Cull with Keybanc. Chris O’Cull – Keybanc: Thanks, good morning guys. Emil, do you expect the promotions to continue to be higher in products, or will we see some more mid-tier price promotions?

Yeah, you know, we believe that the high end of our calendar will continue to be higher end items. Now as I mentioned earlier, not all of those will necessarily be new product innovations because we do feel that we have confidence in being able to promote products like our spicy chicken sandwich, which is our number one selling chicken sandwich, or things like Asiago ranch chicken club or maybe a Baconator product. But we do see the high end of our message being dominated by a higher end message, but at the same time we do have a second tier of media that we use in the marketplace which is generally reserved for what we call price value messages, which could include $0.99 prices as well as items that let’s just say are generally $1.29 to $2, but more value-end items. We’ve seen fortunately over the last couple quarters that we’ve been able to make progress on both the high end part of the business as well as the price value message, and we do think that that is important because if you look at, Chris, data, about 25% of the purchases people do characterize as value based purchases, so that’s an important part of the marketplace and we do want to be sensitive to that. Chris O’Cull – Keybanc: Are you finding that the mix of your—I don’t want to call it the dollar menu, but the value menu, are you finding that the mix of that is falling as you promote more of these premium products?

No, actually it’s really been quite steady. We haven’t seen a significant change one way or the other, which is really what we want to have happen. As Todd mentioned earlier, one of the things we believe that by managing mix levels and by having these promotional products that are at a more premium price point, it is one of the more effective ways to, you might say, take a price increase in check or an increase in check that the consumer controls versus us necessarily always having to take it in the form of price increases on core items. We believe that we can continue to do that for the foreseeable future. Chris O’Cull – Keybanc: Lastly, when do you expect to make a decision about ad contributions for next year, national ad fund contributions for franchisees, that is?

We would not expect to see any change in that for next year at this time. Chris O’Cull – Keybanc: Okay, great. Thanks guys.

Our next question comes from Keith Siegner with UBS. Keith Siegner – UBS: A quick question for you on the strategic initiative to resume the net unit growth in the U.S. Todd, I was just wondering if you could talk a little bit about maybe where the commitment pipeline is as of now, how many are in that commitment pipeline, how maybe you see that unfolding. I know you said by 2016 at the latest, but maybe just a little bit more of the expectations there. Then as part of that program, what incentives are there, if there are any, in place right now either on a fee or royalty basis? Some data or color on that would be very helpful. Thanks.

Yeah, so I guess a couple of things. If you think about 2014, we do have incentives in play. We’ve talked about $8 million or so of total dollar-based incentives. A portion is royalty relief, a portion is straight incentive, and a portion is construction support that we’re providing along the way. We’ve very confident that the range of 150 to 200 restaurants, we’re right in that from a franchise perspective on how many restaurants will be reimaged this year, and we’re just working through those in the various stages of the construction management process. The real focus now is to build that pipeline for 2015, and what we’re seeing is a strong pipeline getting built up for 2015, and at this stage we don’t have any incentives per se outside of new builds for 2015 but it’s something that we’re going to continue to reevaluate and take a look at and what do we need to do to continue to lead and stimulate continued reinvestment in the brand. The key for us is to continue to drive the restaurant economic equation to make sure that we’ve got that right balance between investment and return, and we’re going to continue to partner with the franchise community, as we’ve said in the past, to do joint capital plans, joint market plans to really make sure that we optimize their balance sheet, their portfolio of restaurants to get the absolute best level of return for the investment that we expect them to make. The good news is the economics are starting to speak for themselves and have been proven out over many years, and we’re really seeing that pipeline strengthen. I won’t get into the specific numbers, but we’re pleased and feel very confident in the direction that we’re going in continuing to reimage to get to 35% of the system reimaged by the end of 2017. Any other thoughts, Emil?

Well no, in fact if we look at where we’re looking into the—where we end up this year on new restaurant development for our franchisees, it’s going to be one of the strongest years we’ve had in a long period of time, so we’re very encouraged by what we see. For our franchisees, we understand that that core restaurant economic model at the restaurant level is the key that drives their thinking, and it continues to get better and better and we’re going to continue to make progress on that front. We think that’s the key to getting new restaurant development. Keith Siegner – UBS: Maybe one other quick one, if I could sneak it in. As you run through the beta testing of these various digital initiatives, have you thought about loyalty? Can that play a role in this? Have you tested anything on loyalty? I’d be very curious to see how you’re thinking about loyalty playing a role in the digital transformation. Thanks.

Yeah, there’s absolutely no doubt that loyalty is going to play a very, very important role in this; and believe me, we are very focused on getting to this as fast as we possibly can. It’s not lost on us the success that some other brands have had on building this relationship, and we know that particularly for the millennial generation, building these one-on-one relationships is extremely important and is the dominant way that they look at communications and building a relationship with a brand. So we have a very specific thought process on how we’re going to go after this, and we’re going to be very, very aggressive in this space. Keith Siegner – UBS: Thank you.

Our next question comes from Paul Westra with Stifel. Paul Westra – Stifel Nicolaus: Hey, good morning. Just a general question. I was curious if you could talk a little bit about your performance between dine-in and the pop you’re seeing with the image activation, and maybe how that segues into intermediate term opportunities for the dinner depart where I think the new QSRs are having generally good success, and then even more about late night and 24-hours and maybe how the image activation is maybe opening up opportunities in each of those efforts.

Sure. Well Paul, you know the great news is as we look across the three channels of dine-in, carry out and drive-through, we are seeing increases in all of those with our image activated restaurants. Proportionately, the dine-in is experiencing the greatest increase, as you’d probably expect because in a way, that’s where the most dramatic presence takes place. The other good thing that we see happening as part of this is that we’ve seen some improvement in family businesses, and that’s very important. We also believe that we’ve seen increases—definitely seen increases and strength in our late-night business in recent quarters, and so I’m saying it’s working across all of these fronts and we believe that it’s going to continue to do that. We’ve seen these increases sustained across all these channels of distribution, so we don’t just get an initial pop in dining room business and then it goes back to where it was initially. So we consider this very, very positive, and as we get to devices like the mobile ordering, we’re making sure that our restaurants in a good position are set up in terms of the ordering process where we’re separating the ordering process and the pick-up process, and we’re doing that in anticipation that at some point in time of having a significantly higher level of mobile orders where people are going to be able to just come into the restaurant, they’ll see their name on a screen, they’ll be able to go up and pick their order and be out of there, or do the same thing at the drive-through. So we’re trying to think in a third derivative way as we think about the layout of the restaurant as well. Paul Westra – Stifel Nicolaus: Great, that’s helpful. Anything on the 24—is 24-hours another thing you’re thinking about later once you get more image activated stores, or what’s the latest there?

We think in terms of the priority of initiatives and the things that are most profitable for the business, Paul, that’s not something that is close in on our radar. Paul Westra – Stifel Nicolaus: Fair enough. Then just a modeling question for Todd, maybe. On the depreciation line, I know a ton of moving parts, especially now with the Canadian business, and I know it’s obviously going to get a little hike up with more and more image activation stores, but any thoughts going forward on the ranges we should be thinking about on that number?

Yeah, I think what we’ll end up doing is it will be a little bit more balanced later in the year when we provide full-year guidance so we can take into account what’s happening in Canada, how we’re feeling about the pipeline, are we going to accelerate some activity to get closures set in the fourth quarter to set up 2015 to have all these IAs done. So I would rather not give you a specific range at this stage other than what you have out there at the moment, and we’ll follow up more with specifics once we lock down our plan for 2015. Paul Westra – Stifel Nicolaus: Great, fair enough. Congrats on a good quarter. Thanks.

Our final question comes from the line of Jason West from Deutsche Bank. Jason West – Deutsche Bank: So just going back to the comp momentum you guys have seen, and it looks like you’re doing a good job of getting a nice balance of premium and value, being able to find that balance today versus historically, I think the company struggled with that. What do you think the biggest key has been for you guys? Is it really just the innovation has been very strong, or maybe the competitive set is not doing as well in the past? Any thoughts on that would be helpful.

I think one of the biggest things is that, one, the product innovation pipeline has clearly been stronger, and I think also more demonstrative. The magnitude of the innovation, I think is clearly much more distinctive. The other thing is that we’ve gotten a lot of support on our right price, right size menu and continuity in our franchise community, and that is something that is very important. So when you’re out there advertising this and promoting it, consumers have an expectation that they are going to be able to find this in the restaurants, so we’ve seen a lot of adherence to the $0.99 price points on the right side of the menu on the six items, and then the eight items on the left side of the menu, there is the flexibility and largely most people are priced between $1.29 to $2 on those items, which is the way that the menu was designed. Having that continuity against that, I think has been very important in getting those messages across to consumers, and it’s becoming more reliable to them. Jason West – Deutsche Bank: Great, thank you.