Wendy's Co (WEN) 2013 Q1 法說會逐字稿

Good morning.

My name is Brandy and I will be your conference operator today.

At this time, I would like to welcome everyone to the first-quarter 2013 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions).

Thank you, Mr. John Barker, you may begin your conference.

Thank you.

Good morning, everybody.

Earlier this morning, we issued our first-quarter 2013 earnings release and we filed our Form 10-Q.

Today, we will start with comments from our President and CEO, Emil Brolick, who will provide an update on Wendy's Recipe to Win and the progress that we are making on the brand transformation.

After Emil, our Chief Financial Officer, Steve Hare, will review our first-quarter financial results and then we will, of course, open up the line for questions.

Today's conference call and our webcast is accompanied by a PowerPoint presentation, which can be found on the Investor Relations page of our corporate website, aboutwendys.com.

And for those of you who are listening by phone today, make sure you do select the appropriate webcast player option from our website and that will make sure that you can sync up the slides with our audio.

Before we begin, I would like to refer you for just a minute to the Safe Harbor statement that is attached to today's news release.

Certain information that we may discuss today regarding future performance, such as financial goals, plans and development is forward-looking.

Various factors could affect the Company's results and cause those results to differ materially from those expressed in our forward-looking statements.

Some of those factors are referenced in the Safe Harbor statement as attached to the news release.

Also, some of the comments today will reference non-GAAP financial measures such as adjusted EBITDA and adjusted earnings per share.

Investors should refer to our reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measure.

With that, I would like to turn it over to Emil.

Thank you, John.

Good morning and thank you for joining our call.

We are pleased to report solid first-quarter adjusted EBITDA following the strong fourth-quarter 2012 results.

We delivered adjusted EBITDA of $77.3 million in first quarter, a $13.4 million, or a 21% increase.

This increase was consistent with our expectations for the first quarter and in line with our adjusted EBITDA guidance of $350 million to $360 million for 2013.

Adjusted EPS increased from $0.01 in 2012 to $0.03 for the first quarter of 2013.

From a same-store sales perspective, the first quarter was up 1% and 1.8% on a two-year basis despite holiday shifts and more severe winter weather.

While the sales performance was below our expectations, we have made adjustments to our marketing calendar to better position the brand for stronger sales growth in the second half of the year.

Again, we are reaffirming that we expect 2013 adjusted EBITDA between $350 million and $360 million as the first quarter was in line with our expectations.

As a result of the refinancing we have been working on in 2013 and the expected resulting interest expense savings of approximately $0.02 per share, we have raised our 2013 adjusted EPS outlook to $0.20 to $0.22 from $0.18 to $0.20.

This represents an 18% to 29% increase over our 2012 adjusted EPS of $0.17.

Steve will discuss the financials and refinancing in more detail.

As we mentioned during our fourth-quarter conference call, the investments in key actions that we took in 2012 paved the way for the solid performance we saw this quarter and will help us set up for a successful 2013 even with softer than expected first-quarter sales.

For example, you recall that, in 2012, we conducted in-market testing to prepare for the launch of our Right Price, Right Size Menu.

This effort paid off as we introduced Right Price, Right Size in January and kicked off January with solid momentum.

We have seen improved franchise adherence to the Right Price, Right Size Menu pricing construct.

It will be key to maintain this pricing construct over time as we place increased media emphasis on Right Price, Right Size messages.

Image Activation was another area of investment for us in 2012.

We opened 48 Tier 1 reimages last year.

The average cost of these Tier 1 reimages represented a 40% reduction from 2011 concept restaurants.

The 2012 Tier 1 openings also helped inform the designs of our Tier 2 and Tier 3 Image Activation restaurants that have recently opened.

These Tier 2 and Tier 3 restaurants are producing strong sales at a considerably lower investment than our Tier 1 designs.

The pace of Tier 2 and Tier 3 openings will be accelerating throughout the year.

Additionally, we announced in January we decided to discontinue breakfast operations at certain Company and franchise restaurants.

While this decision will negatively impact our 2013 same-store sales result, as was anticipated, it will aid our earnings performance as we benefit from the reduction in breakfast advertising expense, as well as the elimination of unprofitable morning daypart operations in these restaurants.

The positive sales impact from Image Activation is offsetting the lost sales from discontinued breakfast operations.

And while growth is the absolute imperative, we remain ever vigilant in identifying cost-reduction opportunities, the consolidation of our restaurant support center from Atlanta to Dublin, our ongoing focus on G&A efficiencies and cost optimization will contribute to our 2013 results.

In 2013, we will also benefit from a reduction in beverage costs as a result of our new agreements with two of our beverage suppliers and we continue to look at all costs in our restaurants to ensure that they are adding value to the consumer experience.

However, I look at cost management as a defensive strategy.

Our brand positioning and our Recipe to Win are all about growing our brand, growing our system sales and growing system profits.

Growth is essential as this is an intensely competitive environment with modest real growth where competitive positioning is crucial to success.

Since 1969, Wendy's has been a brand that earned a unique position in the hearts and minds of consumers.

We intend to leverage this latent brand equity and we are confident that the Cut Above brand positioning is where we need to be.

It is the natural position for the Wendy's brand.

To this end, our current product, asset, marketing and operating initiatives are reclaiming the high ground in traditional QSR.

We are focused on beating ourselves for, in this highly competitive environment, we need to invent the future to stay ahead.

Our Cut Above brand positioning is brought to life through our Recipe to Win.

Our Recipe to Win is not a theoretical idea, but real marching orders that are brought to life through our Image Activation, through innovative new products, through a transformation of how our brand is presented with striking new packaging, with a contemporary update of our beloved logo and through systemwide investments in technology that will facilitate connectivity with consumers through their handheld devices.

Yes, our brand transformation is very exciting.

We, however, are keenly aware that we are competing in a tough economic and consumer climate and a very competitive price environment.

In this situation, we seek to set ourselves apart by offering new QSR quality food at a QSR price.

The new Flatbread Grilled Chicken that we launched in April is a great example of this, a high-end premium product with new QSR quality at Wendy's prices.

Right Price, Right Size is another example of new QSR quality at a QSR price.

We offer high-quality Wendy's products with six items at $0.99 and eight offerings from $1.19 to $1.99.

As we say in our advertising, these price value products are so not the same.

However, the reality is we have been growing large hamburger, large chicken sandwich and salad sales, but losing share for value menu customers.

We are making refinements to our marketing calendar that will continue to place the majority of pressure against high-end messages that address value menu share loss.

From a product perspective, you will continue to see our marketing calendar reflect a commitment to innovation and to playing a different game.

Flatbread Grilled Chicken is the perfect example of playing a different game.

In April, we saw the highest level of large chicken sandwich unit sales in nine years.

In May, we introduced Frosty Cones to drive add-on sales and drive traffic in snacking dayparts.

You will see us promote Frosty Cones this month.

And while we can't provide you the details, we are very excited about our promotional calendar in the back half of the year.

Our promotional calendar is well-conceived balanced between higher-end core, promotional products and price value messages.

Marketing efforts are designed to build an emotional connection to the Wendy's brand and drive traffic.

With this in mind, we know we can't outspend the competition, so we must outthink and outexecute them.

Instead of trying to beat them at the same game, we must play an entirely different game.

As the consumer environment evolves, we are refining our promotional calendar to optimize sales, check and transaction growth with modestly more emphasis on price value to go along with our premium promotions.

The Tier 2 and Tier 3 restaurants are as stunning as the Tier 1 designs and all tiers deliver a striking street presence befitting the Wendy's brand and our Cut Above brand position.

We plan to have Image Activation solutions for 85% to 90% of our system and we are currently on track to open 200 total reimages in 2013, up from 48 reimages in 2012.

In the last few months, we have opened several Tier 2 and Tier 3 restaurants and the early sales results are very encouraging.

Investment is a bit above the target, but we have a line of sight on how to get to our targets of $550,000 and $375,000 for the Tier 2 and Tier 3s respectively.

You can see on this slide the beautiful interior of a Tier 3 restaurant in Salt Lake City.

We have significantly reduced the investment in our Tier 3 reimages from a Tier 1 and maintained many of the critical customer-facing elements.

During April, we highlighted our Tier 2 and Tier 3 restaurants as part of our spring franchise meetings, including restaurant tours.

Franchisees are stepping up as evidenced by the fact that we have received more than 100 applications for 2013 reimages.

We know that growth is an imperative and we believe that through the drivers represented in the growth pyramid, we will be able to grow our brand, grow sales and grow profits.

We are working against all layers of the growth pyramid and we are confident about the progress and growth that we will deliver in 2013, and we are optimistic that we will have more good news to share with you as the year goes on.

And one final note before I turn the call over to Steve.

As announced this Monday, Steve Hare will retire later this year and I would like to take a moment to recognize Steve for his leadership and many contributions here at Wendy's.

Most recently, Steve has provided outstanding leadership to our Image Activation program and he has been instrumental in helping us achieve significant savings through our 2012 and 2013 debt refinancing initiatives.

Steve will continue to work closely with us over the next several months to ensure a smooth transition of his CFO responsibilities.

As we announced in our news release earlier this week, Todd Penegor will be joining The Wendy's Company as Chief Financial Officer.

Todd comes to us from the Kellogg Company where he most recently served as President of the US Snacks division, one of Kellogg's most important businesses.

I am very impressed with Todd's skills and we look forward to welcoming him to our team next month.

So from me personally, and on behalf of all of Wendy's, thank you, Steve and now I will turn the call over to you.

And thank you, Emil and thanks for the kind words and good morning to everyone.

I would like to start off with a quick look at the first quarter.

As Emil had highlighted, North America Company-operated same-store sales increased 1% in the first quarter and 1.8% on a two-year basis.

Driving the same-store sales increase were a favorable product mix and the benefit of rollover pricing from 2012, partially offset by a decline in transactions.

As we discussed in January, Image Activation will have a favorable impact on same-store sales this year that will offset the negative impact on sales resulting from discontinuing breakfast in selected restaurants.

Company-operated restaurant margin improved 100 basis points in the first quarter to 12.8%.

Restaurant margin improved with the higher sales and a reduction in beverage costs from new contracts.

In addition, the elimination of unprofitable morning daypart operations in certain restaurants improved margin with a reduction in breakfast labor, food and advertising expenses.

Restaurant margin was negatively impacted by a 90 basis point increase in commodity costs.

Now let's take a look at a financial summary of the first quarter.

Total revenues increased $10.5 million, or 1.8% versus prior year.

The same-store sales increase and incremental sales from a higher year-over-year net number of Company-operated restaurants were the primary drivers of the revenue increase.

Adjusted EBITDA of $77.3 million increased 21% compared to the first quarter of 2012 and adjusted earnings per share increased from $0.01 to $0.03 per share.

As we articulated on our last conference call, we expected the first-quarter adjusted EBITDA to have the highest year-over-year growth rate with lower growth rates in the second and third quarter of 2013.

We also expect lower year-over-year profitability in the fourth quarter due primarily to the anticipated expense of about $10 million from the Company's Image Activation franchisee incentive program.

This quarterly earnings pattern is reflected in our 2013 adjusted EBITDA guidance of $350 million to $360 million.

Now let's take a look at adjusted income and special items.

Adjusted income was $13.1 million, or $0.03 per share, for the first quarter of 2013 compared to $3.3 million, or $0.01 per share, in 2012.

Adjusted income for the first quarter excludes a $9.1 million after-tax impact for depreciation of assets that will be replaced as part of the Image Activation initiative, as well as $1.9 million in facilities relocation and other transaction charges.

The Wendy's Company reported net income for the first quarter in 2013 was $2.1 million, or $0.01 per share, compared to $12.4 million, or $0.03 per share, in 2012.

As a reminder, the first quarter of 2012 benefited from an $18 million, or $0.05 per share, after-tax net gain on the sale of an investment.

We want to provide you with some detail on our methodology to calculate the incremental depreciation charges related to Image Activation and what you can expect going forward.

At the beginning of 2013, we accelerated the depreciation of the assets that we will replace in the 100 Company-operated restaurants scheduled for Image Activation this year.

The book value of these assets is depreciated until each restaurant's closure on a straight-line basis.

So in the first quarter, we incurred depreciation expense for all 100 restaurants that we expect to open in 2013 for a total of $14.5 million, or approximately two-thirds of the depreciation adjustment for the entire year.

In the second quarter, we will incur depreciation charges for 73 restaurants, dropping to 29 in Q3 with a quarterly depreciation adjustment to scale down accordingly.

We have also refined our total estimate for depreciation of assets to be replaced with Image Activation to a range of $20 million to $25 million, down slightly from our original estimate of $20 million to $30 million for the year.

During the first quarter, we generated net cash flow from operations of $32.6 million.

Capital expenditures were approximately $40 million for the quarter and included $20 million for Image Activation restaurants.

The net decrease in cash for the quarter was approximately $24.7 million and included dividends of $15.7 million, or $0.04 per share and debt repayments of $6.5 million.

The quarter-end cash balance was approximately $429 million.

Now let's look at a few selected balance sheet items.

We continue to maintain a substantial cash balance for financial flexibility purposes and which far exceeds our liquidity requirements to manage the business.

At the end of the first quarter, total debt was $1.46 billion and net debt was approximately $1 billion.

Based upon our trailing 12-month adjusted EBITDA, our current net debt multiple remains at 3 times.

As we announced last month, given favorable market conditions, we have entered into an agreement to refinance a portion of our debt to realize interest expense savings.

We expect the 2013 refinancing to produce approximately $20 million in annualized interest expense savings.

Of the total interest savings, we expect to realize about $12 million of this savings in 2013.

Highlights of the 2013 refinancing, which is expected to close on May 16, include we are refinancing $350 million of the $1.1 billion senior secured term loan B into a new senior secured term loan A. We are also repricing the remaining $769 million of term loan B balance by reducing the interest rate margin and floor and we are extending the maturity of the $200 million revolving credit facility.

Interest savings from the current refinancing, along with the $30 million in annual interest savings from our 2012 refinancing, generates total annualized interest expense savings of approximately $50 million compared to 2011.

We continue to be encouraged by the results we are seeing from our most recent reimaged restaurants.

Our initial class of 2011 concept restaurants generated a first-year sales lift of more than 25% with a sustained sales lift of approximately 20% after one year.

For the Image Activation class of 2012, we have seen an average sales lift exceeding 25% since reopening with sustained sales lifts of about 18%.

These substantial sales lifts generate high incremental profit flowthrough and combine to produce higher restaurant profits with attractive returns on investment for the Company and its franchisees.

We are also pleased to see the expansion and application of Image Activation both systemwide and globally.

As these photographs highlight, we recently opened a restaurant with Image Activation elements in Japan as part of our joint venture with Higa Industries.

The first franchise reimage of 2013, a scrape and rebuild, recently opened in San Antonio and for those of you in New York, by next month, we will open two in-line restaurants for you to visit with two other reimages to follow later this year.

We also continue to be enthusiastic about our progress with Image Activation and expect 200 total reimages in 2013.

In 2014 and '15, we expect our Image Activation efforts to accelerate.

We believe that one-half of our Company restaurants and about 20% of the system will have completed Image Activation reimages by the end of 2015.

To help accelerate Image Activation across the system, we have unveiled a franchise financing program with GE Capital.

The program is specifically designed for reimaging of existing franchisee restaurants at competitive rates with credit support provided by Wendy's.

Over the next three years, we expect to invest $440 million to $500 million in Image Activation, including $145 million in 2013.

With more than $400 million on the balance sheet and ongoing cash flow generation, we have the financial flexibility to fund these growth initiatives and also return cash to our shareholders.

During the fourth quarter of 2012, our Board of Directors authorized a 100% increase in the quarterly cash dividend rate from $0.02 to $0.04 per share.

On May 2, Wendy's declared its regular quarterly dividend of $0.04 per share payable on June 17 to stockholders of record on June 3.

Our Board also authorized a share repurchase program for up to $100 million of our common stock through the end of 2013.

We did not repurchase any shares during 2012 or in the first quarter of 2013.

Since the beginning of 2010, we have returned more than $445 million to shareholders in the form of both share repurchases and dividends.

Our goal of 5% to 8% adjusted EBITDA growth compared to 2012 is based primarily upon core growth from our North America business, investments in important initiatives we developed in 2012, as well as incremental contributions from Image Activation.

Due to interest savings from refinancing, we now expect 2013 adjusted EPS in the range of $0.20 to $0.22, an increase from our original estimate of $0.18 to $0.20.

The new adjusted EPS range represents an 18% to 29% increase compared to 2012.

When we look longer term, our goal is to sustain high single digit to low double-digit range growth in both adjusted EBITDA and adjusted earnings per share.

This higher long-term growth rate includes the anticipated positive effect from the expansion of Image Activation.

And now I would like to turn the call back to John Barker.

Thanks, Steve.

Just before we open up the line for questions, I would like to take a moment just to go over some of our upcoming events on the Investor Relations calendar.

On May 23, we have our annual meeting for stockholders in New York City.

In June, we will introduce a new layer of our IR outreach for the investment community.

We will host some Image Activation restaurant tours in select markets where we have a good Image Activation presence, perhaps all the tiers and we will work on, with the sellside, to host and communicate these events and look forward to seeing you out at some of those in the near future.

And then just for your planning purposes, our next reporting period for earnings is on Wednesday, August 7, where we plan to release earnings for the second quarter of 2013.

Now, Brandy, we are ready to open up the line for questions if you can give instructions again, and let's start the Q&A.

(Operator Instructions).

Mitch Speiser, Buckingham Research.

Good morning.

Thank you very much.

My question focuses on the Right Price, Right Size Menu.

Emil, you mentioned in your prepared comments that the price value component represents a challenge.

I was wondering if you could maybe just go through the first quarter.

It seemed like things started off pretty strong in January, then maybe softened throughout the quarter.

I guess a couple of parts.

Can you maybe break out maybe what the weather and holiday shifts were and maybe just give us the experience of the Right Price, Right Size Menu?

Did it start off at a higher mix and then tail off?

Did you see tradedown to the Right Price, Right Size or did you see -- it seemed like with traffic down that you may have lost some value customers.

If you could maybe just give us a little more granularity on assessing the performance of Right Price, Right Size through the first four months it has been out or so.

Thanks.

Okay, sure, Mitch.

What we had shared previously was absolutely accurate that we had a very nice start with our Right Price, Right Size Menu.

And then you will recall in the first quarter, just as a reference, we moved into two weeks of promotions starting February 11 with a fish promotion, obviously, to kick off Lenten season and then we moved into what was a five-week window of a local marketing window with a variety of messages out there.

And basically what we saw is a definite softening in the business at the end of that Right Price, Right Size pillar and so that change occurred predominantly underneath the fish message and then specifically, most importantly, underneath that local message.

We looked at the holiday shift and it is very difficult to pin down the weather.

That holiday shift and some weather, probably at least 0.5% impact there and it clearly was a very challenging winter for us, particularly when you consider how non-winter weather we had in 2012.

The other thing I would say, Mitch, as we looked at our marketing calendar, I mentioned some refinements.

We feel that we have evolved to a situation where we have more continuity against a price value message out there as opposed to having a pillar approach.

And just because there is so much pressure against price, we don't want to move away from our high-end messages because they are serving us extremely well.

As I mentioned, we are building our large hamburger, our large chicken sandwich and salads business, but it is the price value.

And so we have to make sure that we are addressing that consumer.

And I will also point out that, while we have some limited use of coupons, that the value menu consumer is a different consumer, generally speaking, than the coupon user.

So you have to have both of these tools out there to attract those different price value consumers.

So I hope that helps a little bit.

Joseph Buckley, Bank of America-Merrill Lynch.

Thank you.

Can I ask for a little bit more clarification on the sustained sales comments around the 2011 concept stores and the 2012 Image Activation stores?

So when you say the 2011 class sustained up 20%, 2012 sustained up 18%, I guess in the case of 2011, does that mean they comped up the second year or are they up 20% off the initial starting point and maybe after the honeymoon period, we are actually a little bit lower?

No, they are -- what that indicates is the -- the 25% refers to the full year, including the opening phenomenon of those.

The 20% refers to a steady state.

So if you would go back to a pre-opening period, what we are indicating is those restaurants are 20% above that pre-opening period.

Okay.

Does that answer the question, Joe?

Yes.

But there is no like year two benefit?

I mean I realize you are going to get a honeymoon period, but is there no year two benefit where they might comp up better than the average again?

I mean not at strong double-digit rates, but maybe better than the averages?

Well -- but when you have added -- I would say that there is definitely a year two benefit when you have added -- the average volumes of these restaurants are up 20%; that is a big number.

Sure, yes.

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

Okay.

And then just a question on the GE Capital financing.

You mentioned with credit support from Wendy's.

Could you elaborate a little bit on what you are doing with that program?

Yes, Joe, this is Steve.

What we are doing is working with them and we will provide some credit support in the way of some -- really some first loss protection on that program, just in the early stages.

Before we have a complete database of experience on this loan portfolio, we are glad to backstop it because we think given the returns we are seeing, we think that is going to be a fairly low-risk loan portfolio.

So we are working with them in the early stages.

We wanted to have something early on and on the table because our franchisees are looking to move now.

So we were glad to provide that kind of credit support to help provide an early adopter financing program.

Jeffrey Bernstein, Barclays.

Good morning, Emil.

A couple of questions.

Just one to follow up on the last one with regards to the financing and the backstop.

So the idea being if they don't achieve the desired result, so let's say they don't achieve the 15% lift on a Tier 2 or the 25% on a Tier 1, you guys then jump in?

Or how do you determine when you are legally responsible for a portion of that?

No, Jeff, we are talking about loan losses.

So if there were actual losses on the loans, we would backstop those.

There is no implied guarantee of performance.

Got it.

Okay.

And that starts in '14?

Is that --?

We announced it -- actually we just did our franchisee roadshow in the last couple weeks and GE was on stage with us and announced the program.

So it will take effect here in the next couple weeks.

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

So they are taking a very aggressive posture on this.

Got it.

And then just to follow up on the Right Price, Right Size, it seems like it obviously has a pretty strong $0.99 component.

So it is, I guess, somewhat surprising I guess that the higher end is doing well, but maybe the lower end is not doing enough for you.

Can you break out how the menu plays out in terms of what you are seeing mix shift wise or however you can break out the $0.99 versus the higher priced items?

Well, Jeff, I think the key is if you even go back and look at the advertising, we basically positioned this as a way of starting at $0.99 and that really struck the chord of differentiating the quality of our products from this.

And again, when you look at the price value consumer and the consumer that, just because of their economic situation, needs to shop for $0.99 items, we feel that there is some messaging that needs to be sharper against specifically a $0.99 price point for that consumer just because their economics basically dictate that they have to be shopping for $0.99.

And having more continuity against that we feel will help give us the balance that we need in our messaging.

But, again, the majority of our messaging as we look at our entire calendar for 2013, we will still have a much stronger portion of this against high-end messages.

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

Well, actually, as we reported, what we saw is that we have actually, in the first quarter of the year, had a positive mix shift as a result of Right Price, Right Size Menu and it had some positive margin effect along with that.

Now that is a significant point because, remember, we moved from a situation when we had our My $0.99 menu where we did not have a lot of continuity across the United States in terms of franchisee support.

We now have significant support for this pricing structure of six items at $0.99, eight items above, between $1.19 essentially and $1.99.

And what that has done for us is given our franchise partners some pricing flexibility on those eight items and got them more comfortable with having more continuity in terms of this position.

But again, we do feel the need to put more emphasis upon the pure $0.99 portion of this.

Thank you.

John Glass, Morgan Stanley.

Good morning.

First, if I can just go back to the question asked earlier about the lifts on the Tier 1 remodel, when we talked initially about 25%, I think we all assumed that would sustain at that level and then maybe build over time, maybe not at the rate of overall comps, but build.

Now you are saying it sustains at a lower level.

Was that what you initially expected or is this maybe lower than you had thought?

No, I think this is in the -- for those 2011 restaurants, I think this is in the territory that we thought it would be in and I would assume that these restaurants will comp at a similar rate to the overall system comps and continue to grow.

We are not suggesting that they won't grow.

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

Well, John, what we really anticipate as we look at Image Activation is that if you look at, first of all, scrapes and rebuilds and new restaurants, the focus of the Tier 1 will be against that.

But when I speak of Tier 1, we are continuing to learn from the Tier 2s and 3s and we feel that there are things in the Tier 1, costs that we simply don't need to have there.

They may be nice to look at, but they don't necessarily make a difference in terms of either the consumer experience or sales.

So we think that we can get that Tier 1 down lower and use that for new restaurants, as well as scrapes and rebuilds.

And we really believe that the Tier 3 is going to become more the workhorse of the system for the Image Activation because, as we look at the early results the Tier 3 restaurants are achieving in terms of sales is very attractive.

And by the way, the flowthrough in the Tier 3 restaurants, just because of some labor staffing issues, is also nicely above what it is in a Tier 1 Image Activation.

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

John, really, it is way too early to put any numbers on that.

We will obviously share as we get some more experience with these and we are opening quite a few of these this year.

So hopefully later we will be able to do that.

But all I am saying is that, based upon the early results and just the patterns we have seen in the past of how these hold up, we are very encouraged by the response we get.

And as some of the graphics show you, when you look at the street presence of a Tier 2 and 3 restaurant, for most people, I would defy you to tell the difference between a Tier 1 and Tier 2 and Tier 3.

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

Yes, I think the back-loading is probably more realistic to look at that.

It obviously, as I mentioned, is an interesting environment out there that you are seeing it in the reports from a lot of people.

This was below our expectations, but we are making adjustments to recognize that.

But we do believe that fundamentally Right Price, Right Size and the approach we are taking to our business is a sound approach.

And we will gain from a strong calendar and we have got several really what we think are exceptional products coming later in the year.

All right.

Thank you.

Michael Gallo, CL King.

Good morning.

Congratulations on the good results.

A couple questions, a question for Steve.

The G&A obviously has come down significantly.

I know some of that is the breakfast spend, but that $65 million or so area that we saw in the first quarter, is that a sustainable kind of level going forward?

I mean I guess if I look at the cadence first three quarters, really four quarters of last year was relatively similar.

Yes, no, I think if you look at patterns, I would say G&A in the first quarter tends to be a little bit lower just on a seasonal basis versus -- just like sales are lighter in the first quarter.

I think if you look at the difference of the $65 million or so that we ran G&A in the first quarter versus last year, what you are really seeing, and there is nothing unusual in there, but I would say there is sort of a mindset here that, in the environment we are in and recognizing how tough it is from a sales and pricing standpoint, we know we have got to run a tight ship here.

And I think what you're seeing is a couple things.

I think, from a G&A standpoint, you are seeing us run I think from a staffing standpoint a little tighter.

We have completed the move from Atlanta to Dublin and the consolidation here, and so I think we are getting -- being able to realize some efficiencies from having that behind us at this point in time.

We really are taking a hard look at some of the outside services that we are using and so you saw some of those savings, but nothing of an unusual or a one-time nature.

I really think it is a discipline we have put into the business that frankly we are going to have to sustain for the full year.

Great.

And then just a follow-up question on the reimages.

I know it is early on the Tier 2s and 3s, but I was wondering if there is anything you are seeing in terms of the patterns or the consumer feedback?

Again, I think we have talked about that, at least from the street, the stores look very similar and a lot of your asset base certainly is old and you have some of these markets that haven't been remodeled in some time.

So it would just seem that the consumer might not notice a lot of the difference.

I was wondering if you see any pattern changes in terms of the dine-in component of the business versus the drive-thru where I think that you would probably see the least difference in terms of the pickups.

And then from the standpoint of returns, it would seem early on given that difference that the returns on the Tier 3s should be dramatically better than what you have seen on say the Tier 1s.

I was wondering if you could give us any further color on that.

Thank you.

Sure.

My sense is that the consumer response to the Tier 2 and Tier 3 is very similar to the response we saw on Tier 1. And remember, Michael, that for those of us who have been in all three tiers, we can see some difference.

But for a customer that has been let's say visiting very consistently a 25-year-old Wendy's restaurant, you walk into one of these and what we hear is, oh, my gosh, I can't believe the difference.

And we are also generally seeing -- and again, it is early -- but the same kind of pattern where we see a very nice lift in our dining room business, but dining room, drive-thru and carry out are all growing.

And, again, I think there is -- it is a particularly powerful testament to what the Image Activation does when your drive-thru business also increases because, again, essentially that experience is very similar to what that used to be, other than you are pulling up to a restaurant that just looks fantastic.

But it tells you how important that is to the consumer.

The other part of this I will emphasize is we continue to go through the people activation piece of this and so we are working very, very hard to make sure that that people experience that is taking place in these restaurants is very positive.

And I will tell you that, in the spring franchise meetings, which we held two in Columbus, Salt Lake City and Philadelphia, has been -- in Toronto -- but in all the cases with the exception of Toronto, we had a Tier 2 or 3 restaurant to visit for our franchisees and we had strong turnouts for those visits.

They were very surprised at just how attractive these restaurants were outside, inside for the significant reduction in investment.

And then lastly to your point, yes, we do believe that the returns on the Tier 3 restaurants are going to be considerably stronger.

But, by the way, we feel good about the returns on all the tiers, but we feel that the Tier 3 is going to be even considerably stronger.

Will Slabaugh, Stephens.

Thanks, guys.

I wanted to ask you about the reception of your new flatbread and you mentioned that was successful in your release this morning.

And then also just in the context of your comment around the price value relationship there being a little bit challenging in the quarter.

Well, yes, and that is the interesting dynamic that we are seeing is that as you look at the consumer environment out there, that we are probably seeing an increasing bifurcation of consumers where you still have consumers that have the capacity to spend on higher-end items.

And as I mentioned, when you look at units of our large chicken sandwiches, which we would put flatbread in that, they were at a nine-year high.

So that says something about the results of that.

But at the same time, we have lost share in the price value arena, but basically have not had pressure against price value message since go back to the launch of Right Price, Right Size Menu in January.

And that is why my earlier comment about it is apparent to us that, to this core group of $0.99 price shoppers, they are heavy users often of quick serve restaurants and you need to continually remind them that you have products available for them every day just because their economic situation necessitates that price point.

Got you.

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

Well, as I say, our approach to this is really what we call the power of the and.

It is not stepping away by any means from the high end because you will see that we have some outstanding products coming into the pipeline.

But we feel we also have to have ongoing pressure against the price value end, which was my earlier comment about thinking about price value less in a pillar sense and more in a continuity sense.

It is almost like for some of the price value shoppers, it is out of sight, out of mind.

And if they are not -- if you are not constantly reminding them about your offer, because, let's face it, there are a lot of other people who do have pressure against these ideas and they need to be reminded of this on an ongoing basis.

So we feel our strategy has to continue to put pressure against those high-end items where we clearly can differentiate ourselves, but also recognize that probably 20% of the overall business out there in quick serve is that price value shopper.

Thank you.

Michael Kelter, Goldman Sachs.

Well, I guess, first off, I just want to clarify what exactly you have been trying to convey with the various comments about flatbread being a solid launch, but price value remaining an issue.

Does that essentially mean that even though you sold a lot of flatbread sandwiches that same-store sales haven't ticked up at all?

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

And then you mentioned earlier that sales softened when the Right Price, Right Size messaging rolled off, and I guess my question is how do you disaggregate how much of the deceleration was simply because you reverted to a more normal run rate of ad spend versus the large amount you spent in January to support the initiative?

And I ask because, as you suggested in your prepared remarks, you can't necessarily shout as loud as the larger competitors on a sustained basis?

My instincts are, Michael, that, yes, there were some differences in media spend, but I think it was also -- the message to me is the key thing.

So if you look at the three components of promotion -- message, media and creative -- far and away from a consumer point of view the most important thing is the message.

You can take a C piece of creative and put it against an A message and you're going to get great results.

But if you have a C message, even with an A piece of creative, it is not going to get the job done.

So the message is very important and I think when we hit some of that local pillar, I just feel that the messages didn't carry the day.

And by definition, you are more fragmented because the local DMAs are given options to run three, four or five different messages as opposed to having the continuity of a national message.

And then, Steve, I mean you mentioned on G&A because it was much lower this quarter that a lot of it was just having a mindset about running a tight ship and that is great.

Could you break out the $7 million of delta this year versus last year first quarter, kind of what the big buckets of difference are so we understand what the moving pieces are within that?

Sure, Michael.

$3.8 million of the decrease was in the category of employee expenses, so that is where I talked about running at lower staffing levels.

I think that is where you are seeing some of the efficiencies bringing the Atlanta support center together with Dublin and sort of having that whole process behind us, we are now able to focus on efficiencies around staffing.

So that is about half of the change.

When you look at sort of outside services consulting expense, we have been taking a hard look at that.

Outside legal services, we have been doing some management of that in terms of in-house versus outside.

And so about $1.5 million of that $7 million I would say would be in the professional services arena and then another $1.7 million is really just a lot of small items that net up.

But I think it just brings to light the internal process.

We really started last year, which was really trying to look at G&A spending overall and try to bring that into more of a best practices approach to looking at our total G&A, recognizing we have got pressures at the top line.

Yes, and I will add, Michael, that we also do some competitive benchmarking and we look at our G&A as a percent of revenues or on an average restaurant basis and things like that and we felt that it is a little bit above where it needs to be just as we look at it even in a competitive context.

And so we feel that we can't be out of whack with where other people are in the business.

Thank you very much.

John Ivankoe, JPMorgan.

Hi, thank you.

The question is on the Image Activations and I am just wondering if you are targeting a sales to investment type of ratio that we can think about, especially for the Tier 2 and Tier 3. I mean it does seem like -- I mean you're not -- obviously, you are not seeing a commensurate sales drop based on the investment costs that you are spending in the Tier 2 and Tier 3, but what is it that you are targeting and what do you think an acceptable level is for franchisees to invest?

In other words, do you spend $1 -- I mean I guess do you spend $3 in investment cost to get $1 of sales, for example?

How are you thinking about it?

Yes, John, this is Steve.

Let me take a crack at that.

I think what we have really been focused on is, as we have selected the Company restaurants for Image Activation, taking a broad spectrum of restaurants at different AUV levels, different markets across the country and really seeing how the concepts work with both consumers from a reaction standpoint and then really focused on this sales lift.

And as we start transitioning and talking about as we have more experience the sustainable sales lift I think is really the key I think as a starting point in looking at the overall returns on investment.

When we talk about sustaining a sales lift in that 18% to 20% range, the incremental profit flowthrough on that kind of sales lift is certainly well above our average restaurant margin.

So it really does produce a nice flowthrough on that existing asset, and we think it is hopefully something that can be sustained over a long period of time given the dramatic change in these restaurants, as Emil has talked to you.

When you see even the Tier 2s and 3s, it is a dramatic change from the condition of the restaurant if it was an average 20-year old restaurant.

So we think from an overall financial return attractiveness standpoint if we can sustain those high teens of sales lift, really get a high incremental margin flowthrough on that sales lift overall and continue to bring the cost of these investments down so that we can get that Tier 2 and 3 down to very attractive levels, we think that is a compelling financial case.

It is a classic way to look at least at new unit development and I think remodels as well like the sales to investment ratio, but if you are not ready to talk about that yet based on your experience, I guess that is fine.

We tend to look at that more on the new units, so we could talk about that.

We have got some Image Activation new units as well.

I would like to get a little more seasoned sales data and then we could talk about that maybe on the next call.

The other reason is that, when you are providing incremental sales like this, the flowthrough on those incremental sales is different than if you are building a new restaurant.

So that does make a big difference in the calculation.

Of course, which is why I even phrased it the way I did.

Maybe it is $3 of investment for a $1 of sales and given your flowthrough, that would probably still make sense.

Can I ask something else, maybe just to clarify?

What level of income statement G&A do you expect for 2013?

I mean some of the comments that I think you have been making to a variety of questions suggests that first quarter is more or less carryforward, maybe with the exception of the fourth quarter given the incentive.

I mean what should we expect from an income statement G&A perspective for '13 that [puts] with your guidance?

We have not broken that out as part of our overall guidance.

I mean you do know that we are going to have about $10 million of incremental G&A just from the franchisee incentive program.

So in the fourth quarter, we have highlighted that will impact our quarterly flow of EBITDA and that expense runs through G&A.

I would say other than that, what we are trying to do, as I have said, sort of tighten our belt versus last year and hopefully we can show a small decrease year-over-year on the core G&A, but recognize we will have that $10 million addback in the fourth quarter.

David Palmer, UBS.

Hi, this is actually Eric Gonzalez in for Dave Palmer.

I think you mentioned in the prepared comments that the absence of breakfast might negatively impact comps in 2013.

I was wondering if you might quantify the impact that it had on 1Q in both sales and margins.

And then just real quick on reimaging, what impact is reimaging having so far on Company same-store sales and given the outlook for reimaging, how might that ramp through the rest of the year?

Well, what we have shared previously, and we are not giving specific comps on the breakfast impact or the Image Activation impact, but what we have shared previously is that, for this year, we expect to have the impact of breakfast removal about offset by Image Activation and we saw that basically taking place in the first quarter of the year.

So in other words, they are almost identical.

Chris O'Cull, KeyBanc.

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

No, I did not.

I did not go into that.

What we have got is we are probably up to about, after going around the country on this franchisee roadshow and having the Tier 2s and 3s open where people can touch these restaurants and see exactly what Emil talked about, is that it is hard to tell the difference in some cases between the 1s and the 2s and the 3s.

I think that has added some enthusiasm out there, so we are up to about 130 franchisees now that are signed up.

In terms of actual openings, it is not a big number.

We had two last year, we have had two open already this year and we have got two that I think are very near completion.

But it is a little bit hard.

It's through the construction process.

I think that we are probably, if I look at the pipeline we are working through now, we probably have 25 that are in the early stages of the permitting construction process and as we have said, we are working very hard to try to get 100 Company restaurants done and 100 franchises done by the end of this year.

I think that is the key is that we are still committed to the 100 Company and the 100 franchise.

Okay and then just as a follow-up to the remodel economics we talked about earlier, it looks like, just using some simple math, that Tier 1 remodels are boosting pretax cash by maybe $90,000, I am assuming a 35%, 40% flowthrough.

So if they cost $700,000, is it reasonable to assume a payback could be 10 years?

Yes, Chris, we have gone through those economics with the franchisees.

I think when you look at the cost of the Tier 1s, and I think that is what Emil was alluding to, we have got to continue to bring the cost down.

We have got a lot of features in those restaurants and I think there are some opportunities to continue to bring that cost down.

The other opportunity we have got is around the flowthrough on those restaurants.

That $90,000 of cash flow, for example, would assume an incremental lift of around 30%, I think, if I am following your math.

And that is generally below the kind of incremental flowthrough we would like to see for that kind of sales lift.

So I think there is an opportunity, especially as we come down the learning curve on how to manage and operate these Image Activation, we are having some higher operating costs initially.

Part of the learning we are gathering as we go through and do more of these is how to operate these even more efficiently.

So I think the flowthrough will go up over time and make it I think a more attractive return.

However, your point is well-taken.

I do think that the opportunity here is for the Tier 2s and 3s to have even higher relative returns than the Tier 1s.

Okay and just one last one.

Has GE Capital agreed to provide financing for all three tiers?

Yes.

Okay, great.

Thanks.

Sara Senatore, Sanford Bernstein.

Good morning.

I just had a few follow-ups and a couple of tactical and one maybe strategic.

From a tactical perspective, when I hear what you are saying about marketing, it sounds like when you do mobile marketing, it is not as effective.

And I think we heard that in December also.

The franchisees maybe weren't quite as much on board with the value.

You lost some traction there and then regained it in January.

So is there any opportunity for you to shift the marketing spend to be more national or just to be more consistent?

So that is part one.

And then I had another question about commodities, which seem like they have come in.

Is there any potential that there is an offset there if top line is lighter than you expect?

So first of all, in regard to your question on shifting from local to national, the March pillar is the only local pillar we have, but DMAs do spend some money on a local level, which typically is in support of the national message.

And one of the things that we are looking at is asking them to spend more of that money against a more targeted price value message to have more continuity against price value, as I spoke about earlier.

And certainly, there is the possibility of us also having a conversation with them about converting that local pillar and taking those dollars and converting that to national and that is something that is under consideration.

And I'm sorry, what was your second question, Sara?

Just about commodities.

Well, we saw 90 basis points of commodity impact in the first quarter and if you look at our guidance for the year that we had projected 90 to 120 basis points and so, obviously, it would be wonderful if it can continue to come in at the 90 basis points or even lower than that.

But I think it is too early in the year really to know exactly.

Okay, thanks.

And then just one sort of strategic question and that is just in terms of thinking about the overall, you get a lot of questions about capital use, with respect to the portfolio of owned versus franchised or Company-operated versus franchised, recently you have actually been buying in some franchise units to turn them around.

Would you think about maybe refranchising a little bit more aggressively given how tough the demand environment seems to be and the kind of sort of high levels of capital you need for the reimaging?

Yes, Sara, as we look at our growth pyramid, we have got that one piece of that, which talks about system optimization and that is something that we do have an active thought process around and we do want to optimize the system.

And as we mentioned that over time we expected to probably have 400 restaurants fewer than we do now, but do that in a way that really works extremely well for franchisees, use that as an opportunity to put those in the hands of some great operators and some of those operators may be inside the system currently, some may be outside the system.

And also make sure that what we are thoughtful about as we do this that we do this in a way that encourages both new restaurant development, as well as Image Activation.

So should we expect to see that in the near term or that is more of a medium-term goal?

I think that we are going to continue to work on that and I think you will see activity on that yet this year.

Great, thank you.

Jason West, Deutsche Bank.

Hi, good morning.

Just one thing back on the Tier 2s and 3s.

I believe those have just opened in the first quarter, the first couple of those.

I may be wrong on that and then how many of those do we have open so far?

Yes, those were opened in the first quarter of this year.

We did not have any open and Steve, I don't know, do you have an exact count on those?

Let's see.

Give me a second, Jason.

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

Okay, got it.

So it really (multiple speakers).

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

And Jason, we are really right -- in the next couple of weeks, we will open up --

We've got an explosion.

-- we have got a fair amount of these, so we will begin to get a lot of data coming from these very quickly.

Okay, got it.

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

The program itself, I think, is going to start at, in total, a $100 million program, but we would expect that to be increased depending on demand for this particular loan product.

Our backstop, we are providing a partial credit support to this, which is really not material from a financial standpoint to Wendy's, but I think it is important from a timing standpoint.

I think it was a helpful piece of the puzzle to get GE to commit early in the process, which was important to us.

Okay.

So your at-risk capital is some fraction of the $100 million?

Exactly.

Okay.

And then on the D&A guidance of 15% to 20% D&A growth, it was obviously a lot higher than that in the first quarter.

Does that exclude the reimaging piece or is that the actual GAAP guidance?

Yes, so let's spend a minute, because I know that depreciation is a little confusing because of the Image Activation impact, but what we had talked about is that, if you look at our D&A from last year, we reported $146 million of depreciation and we have said in the earnings release just to give you some guidance because of this unusual sort of one-time write-offs as we go through Image Activation that that increase should be around 15% to 20% for the year.

So say $20 million to $30 million of higher total depreciation, but, in that one table, you can see we recognized $14.5 million of call it this accelerated depreciation on just the Image Activation piece.

And for the year, we think that will be at $20 million to $25 million.

So of the $20 million to $30 million increase, $20 million to $25 million of that will be related to these write-offs that we take when we renovate these restaurants.

Okay, got it.

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

Yes, so $20 million, $25 million is our number this year on 100 remodels.

We are going to shoot for 200 next year.

So it may not completely double, but it will move in that direction and the reason it may not completely double is when you drop down to a Tier 3 remodel, less of the assets are replaced, so the write-off will be a little bit lower on a per restaurant basis.

Okay, very helpful.

Thank you.

Keith Siegner, Credit Suisse.

Good morning.

Just one quick one to cap this off.

We have talked about the barbell strategy, we have talked about Right Price, Right Size and tying that into the strategy.

What about on the core menu, the bulk of the sales, tying that into the commodity question from before?

Where is the pricing on the core menu now?

How are you and the franchisees thinking about pricing in this environment on the core menu?

Thanks.

Well, as we mentioned, there is some carryover pricing that is in the numbers for the first quarter.

But as we put together our annual operating plan, we really didn't assume a lot of incremental pricing beyond what was carryover in part just because of the competitiveness of the environment out there and that we felt that the most effective way to get price increase is quite honestly through our higher-end promotional products that cause a positive mix shift and increases in average check and accomplish it that way.

And it is still our intent to have that be the predominant way in which we get incremental check impact.

Does that help, Keith?

Hello?

Operator, since that is our last question, we appreciate that.

Thank you all for joining today.

Later this afternoon, Steve Hare and us will be talking to many of you as follow-up and look forward to catching up and thanks for joining today.

Thank you.

That concludes today's conference.

You may now disconnect.