Wendy's Co (WEN) 2014 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to The Wendy's Company first-quarter earnings results conference call.

(Operator Instructions).

Thank you.

I would now like to turn the call over to David Poplar.

You may begin your conference.

Thank you, and good morning, everyone.

Our conference call today will start with comments from our President and CEO, Emil Brolick, who will highlight our key initiatives and provide an update on the progress we are making with our brand transformation.

After Emil, our Chief Financial Officer, Todd Penegor, will review our first-quarter financial results and outlook.

After that, we will open up the line for questions.

Today's conference call and webcast includes a PowerPoint presentation which is available on the Investors section over corporate website, www.aboutwendys.com.

Before we begin, I would like to refer you for just a minute to the Safe Harbor statement in our earnings release.

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

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

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

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

And with that, I will now turn it over to our President and Chief Executive Officer, Emil Brolick.

Emil?

Thank you, David, and good morning to everyone.

Todd and I will be updating you on the solid first-quarter performance of our core North American business, which we continue to feel has excellent long-term growth potential.

We will also provide a current perspective on our brand transformation, which is making the Wendy's brand increasingly relevant to consumers while enhancing our restaurant economic model.

During the first quarter, we made considerable progress on all dimensions of our brand transformation, and momentum continues to build.

This momentum resulted in a strong first quarter, with 1.3% same-restaurant sales growth at our Company-operated restaurants.

As you are all aware, quarter-one same-restaurant sales across the industry were negatively impacted by winter weather.

We remain confident in the underlying strength of our business, as sales rebounded nicely in the second half of the quarter, with good sales momentum continuing into quarter two.

We also experienced solid growth in adjusted EBITDA and adjusted earnings per share, consistent with our expectations.

The cornerstone of our brand transformation is our Image Activation initiative, which began in 2011 and is contemporizing Wendy's presence and increasing our brand relevance.

The pace of Image Activation is accelerating in 2014, and we are on target to hit our growth goals.

I'm also pleased to report that we completed the sale of 418 Company restaurants to new and existing franchisees ahead of schedule.

These restaurants were part of the system optimization initiative that we announced last summer.

We believe our ongoing optimization effort will provide essential stewardship in elevating the relevance of the Wendy's brand in the minds of consumers, and improve our economic model.

We anticipate the purchase and sale of Wendy's restaurants will continue to be part of our growth strategy going forward.

Growth is the imperative for the Wendy's system.

Brands that fail to grow organically lose their relevance with consumers.

Our Cut Above brand position and Recipe to Win strategies are designed to deliver brand, customer count, sales, and profit growth.

The two keys to achieving sustainable growth across these four dimensions are brand relevance and restaurant economic model relevance.

Brands are vibrant, living entities that must be nurtured to grow and prosper, and this is exactly what our Recipe to Win is designed to accomplish.

Our Recipe to Win brings our Cut Above brand position to life through all elements of the brand experience.

Our goal is that every aspect of the Wendy's brand experience communicates A Cut Above, and customers are telling us this is what they feel when they are in our Image Activation restaurants.

Consumers are experiencing bold restaurant designs, striking new packaging, friendlier restaurant teams, and innovative menu items like our current LTO, the Tuscan Chicken on Ciabatta; as well as new menu items like our Asian Cashew Chicken Salad and our BBQ Ranch Chicken Salad.

Through the execution of all elements of our Recipe to Win, we are transforming the Wendy's brand and re-igniting latent brand equities to drive brand, customer count, sales, and profit growth.

The transformation of the Wendy's brand is essential to strengthen our relevance with the Boomer generation and to establish credible relevance with the Millennial generation.

We are extremely mindful of the importance of gaining traction with Millennials.

As you can see by this chart, the Millennial consumer, between ages 18 and 34, comprises a key component of the QSR customer base, accounting for 25% of total QSR traffic.

However, the Baby Boomer component, age 50 and above, comprise a larger percentage of traffic, at 33%.

This clearly speaks to the need to address both Millennial and Boomers through our product and marketing efforts.

Boomers and Millennials definitely have different lifestyles, different product needs, and different media habits.

However, what we have seen is that growing our relevance with Millennials has not come at the expense of building our business with Boomers.

For example, our advertising campaign featuring the Red character, a Millennial, has been very well received across demographic groups.

However, traditional broadcast is only part of our fully integrated marketing strategy and a myriad of media tools used to reach Boomers, Generation X, and Millennial consumers.

Since 2010, people have been spending more time on digital devices than TV or radio, according to eMarketer.

And we continue to evolve our marketing to drive consumer awareness, and connect with consumers via this medium.

For example, we successfully launched the Pretzel Bacon Cheeseburger with our Love Songs digital promotion, made up of consumer Facebook comments and tweets, extending audience reach to the all-important Millennial consumers at a fraction of the cost.

And now, we are extending our digital marketing to other new products as well.

The common denominator across consumer groups is that people love Wendy's food.

Our brand is strongly associated with great-tasting food, high-quality fresh ingredients, and innovative products.

We believe this represents an important competitive advantage that we intend to leverage even more intently.

We will continue to bring taste excitement to consumers through our limited-time offering hamburgers, chicken sandwiches, and salads, while also evolving our core menu.

This year alone, our marketing efforts featured our core Asiago Ranch Chicken Club; two new salads, BBQ Ranch Chicken and Asian Cashew Chicken; and two LTO products, Ciabatta Bacon Cheeseburger and our current LTO, Tuscan Chicken on Ciabatta.

LTOs will play an important role, but our core menu will also evolve to reflect the needs of the new QSR generation.

While our food is central to the Wendy's experience, technology plays an ever-increasing role in brand engagement, and in particular for the Millennial consumers.

Technology allows our marketing and media mix to evolve to reflect the entire consumer experience.

Our goal is to surround consumers with 360-degree marketing messages beyond TV, and we have become leaders in social media, mobile marketing, and digital promotions.

Technology also allows us to create a one-on-one relationship with consumers, as transaction-based information reflecting consumer behavior informs improved marketing, more targeted products and services, and highly relevant customized content.

And, finally, technology allows us to improve the in-restaurant experience.

Mobile payment, which is now in about 85% of Wendy's US restaurants, allows consumers to pay the way that they want to pay.

We believe mobile, mobile loyalty -- which we are currently testing -- will help us to track new customers, and to bring back existing customers with a unique system that personalizes content, offers, and experience.

And mobile ordering, which we are also testing this year, will help us to connect the consumer ordering experience with our operations capabilities.

All of these initiatives are directed at growth.

And growing North American same restaurant sales has been, and will continue to be, the foundation of our growth strategy.

Image Activation is key to brand transformation and to sales growth.

The Wendy's system completed or initiated more than 200 Image Activation reimages of Company and franchise restaurants in 2013.

We expect to nearly double the pace in 2014, with the reimaging of 200 Company restaurants, and 150 to 200 franchise restaurants.

We continue to target the implementation of Image Activation in 85% of our Company restaurants, and 35% of North American system by the end of 2017.

Another important element of our Growth Pyramid, Restaurant Ownership Optimization, will continue to help assure relevance for the Wendy's brand.

It will also enhance the pace of Image Activation and new restaurant growth prospects, while improving our economic model for Company and franchise operators.

Restaurant Ownership Optimization is an ongoing part of our growth strategy.

During the first quarter, we completed the sale of 418 restaurants, primarily in the West region, to franchisees as part of our system optimization.

This was part of our overall Restaurant Ownership Optimization strategy, which we expect to improve operational effectiveness, efficiency, and enhance shareholder returns.

But most of all, we believe this initiative provides an opportunity to grow our system.

As part of system optimization, our franchisees are committing to certain re-imaging and development requirements.

We believe these commitments, in turn, will help ensure that the Wendy's brand remains relevant with consumers by expanding brand access and ensuring that our restaurants convey a contemporary brand image.

Our brand transformation is focused on improving the total consumer experience; and in so doing, it will enhance our relevance to all consumer groups and drive brand, customer count, sales, and profit growth.

So, in summary, we believe we have positioned our system for growth by leveraging our key competitive advantages, including a strong brand heritage with significant latent equities; a unique Cut Above brand position which distinguishes us from traditional and new QSR competitors; a growth driver in Image Activation, which is helping to contemporize our brand image; an economic model that continues to improve; and an exceptional franchisee base that has demonstrated a commitment to growth.

We believe these advantages provide us with the leverage to achieve profitable growth for the Wendy's brand.

And with that, I will turn it over to our Chief Financial Officer, Todd Penegor.

Todd?

Thank you, Emil.

Let's start by taking a look at our first-quarter financials.

Our Company-operated same-restaurant sales growth of 1.3% in the first quarter, on top of 1% last year, represents a strong performance, especially considering that we achieved it with adverse weather conditions in January and February, as well as the negative impact from the 2013 discontinuation of breakfast in most of our restaurants.

We also reported a 30 basis point improvement in restaurant margin due to same-restaurant sales growth, fueled by our innovation.

Our adjusted earnings growth was solid, as our adjusted EBITDA grew 13%, and our adjusted EPS more than doubled.

It's also important to note that the reported same-restaurant sales growth in the first quarter doesn't completely capture the momentum we are seeing in our business.

This chart shows our last five quarters of sequential North American same-restaurant sales growth for the Company-operated restaurants.

As you can see, growth accelerated to more than 3% in the back half of 2013, and we started 2014 with 1.3% in the first quarter.

The right side of this chart shows that the first quarter was clearly a tale of two halves, with negative comparable sales in the first half and strong positive sales in the second half, as weather improved.

We saw comparable sales improvement of more than 500 basis points in the back half of the quarter.

As Emil mentioned, this positive momentum has continued into the second quarter, as we are currently seeing comparable sales trends similar to what we saw in the third and fourth quarters last year.

Now, let's take a look at our financial summary for Q1.

Total revenue decreased 13.3% versus the prior year.

The decrease was a result of lost revenue from the sale of Company restaurants to franchisees from our system optimization initiative, partially offset by higher same-restaurant sales.

Revenue also benefited from increases in technical assistance fees, rental income, and franchise royalties.

Adjusted EBITDA of $87.3 million increased 13% compared to the first quarter of 2013.

The first-quarter 2014 results include a gain of $12.1 million, which includes an $8.6 million gain on the sale of restaurants, and a gain on the sale of surplus properties.

For reference, we recorded $4.7 million of such gains for full-year 2013.

And we expect that gains and losses on the sale of restaurants and other assets will recur over time, with the net impact affecting the other operating income expense net line of the income statement.

As Emil mentioned, this is a core part of our Growth Pyramid.

I'd also like to call your attention to two line items, G&A and operating profit.

General and administrative expense was $70.4 million compared to $65.3 million last year.

This increase is primarily the result of higher equity compensation expense and investments in consulting fees related to our international growth strategy, partly offset by cost savings related to our system optimization initiative.

As a result of our system optimization initiative, we are delivering an improved quality of earnings.

Operating profit was $89 million compared to $22.5 million last year.

This year's results include the $12.1 million gained on the sale of assets included in adjusted EBITDA, in addition to a $44 million net gain from our system optimization initiative.

And last year's operating profit included $3 million from facility actions charges.

If we adjust our reported numbers for these items, we still show healthy operating profit growth of more than 25%, which speaks to the improved quality of earnings in the quarter.

Adjusted EPS increased from $0.03 to $0.07 per share despite a significant year-over-year increase in income tax expense, as this quarter's tax rate of 39.5% reflects a more normalized rate compared to last year's effective tax benefit rate.

First-quarter 2014 net income benefited from an $8 million year-over-year reduction in interest expense as a result of our 2013 debt restructuring.

Our reported EPS increased from $0.01 in the first quarter of 2013 to $0.12 in the first quarter of 2014.

In the first quarter, we generated cash flow from operations of about $15 million.

Note that this does not include system optimization proceeds of $95 million, which are in investing activities.

Capital expenditures were approximately $53 million, which includes $38 million for Company Image Activation reimages and newbuilds, as we accelerate our pace.

We ended the quarter with approximately $385 million in cash, which is down from $580 million at year-end, primarily due to our $275 million Dutch tender share repurchase completed in the first quarter, through which we repurchased nearly 30 million common shares at an average price of $9.25 per share.

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

At the end of the first quarter, total debt was approximately $1.5 billion, and net debt was about $1.1 billion.

Based upon our trailing 12-month adjusted EBITDA, our current total debt multiple is 3.9 times, and our net debt multiple is 2.9 times, which we feel is a comfortable level for us.

Our system adoption of Image Activation is accelerating for both Company and franchise restaurants.

With the solid economics of our Image Activation business model, we are seeing the franchisees follow our lead, with a goal to have 35% of the total system reimaged by the end of 2017.

We plan to achieve this goal by continuing to improve the economic model to provide our franchisees with solid returns, and also by offering financial incentives; joint market and capital planning, to assist franchisees in formulating their long-term Image Activation strategies; turnkey development programs; and construction coaching support.

In our commitment to improving our economic model, we are focused on our key growth drivers, including our $2 million AUV target, which includes several key elements, including building check rather than price through our high/low strategy; the acceleration of Image Activation, which helps ensure that our brand remains relevant to a younger generation of consumers, as well as Boomers; building loyalty through people activation and customer service; leveraging technology through mobile pay, mobile ordering, customer relationship management; and margin activation, which provides fuel for reinvestment.

As we look at the remainder of 2014, we are reaffirming our guidance for adjusted EBITDA and adjusted EPS.

We continue to expect full-year same-restaurant sales growth of 2.5% to 3.5%.

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 in 2014.

In addition, we are adjusting our restaurant margin outlook for the year to a range of 16.3% to 16.8% from our initial outlook of 16.8% to 17%.

This change is due to our revised commodity forecast, which now calls for higher-than-expected beef costs for the rest of the year, primarily in the second and third quarters.

And, finally, 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.

A key component of our 2014 outlook is our commitment to realizing $30 million in G&A reduction from our system optimization initiative.

We are on target to achieve the $30 million reduction, although higher equity compensation will partially offset these savings.

The tables on these two charts show the savings compared to our 2012 and 2013 actuals.

As you saw in the release, we are reaffirming our previous long-term outlook of high-single-digit to low-double-digit adjusted EBITDA growth, as well as mid-teens adjusted earnings per share growth.

This guidance assumes annual same-restaurant sales growth of at least 3% beginning in 2015.

The outlook includes adjusted EBITDA growth in the high0single-digits for 2014 through 2016, when Company-operated Image Activation activity peaks, resulting in an increase in lost operating weeks and a temporary increase in growth-orientated capital.

We also expect adjusted EBITDA growth in the low-double-digits beginning in 2017, when the number of Company-operated Image Activation restaurants exceeds the number under construction.

At that point, we would expect our capital needs to decrease.

And, finally, let's look at our cash priorities.

Given the strong free cash flow profile of our heavily franchised business model, we have the ability to both invest in organic initiatives such as Image Activation, and also use our strong cash flow for shareholder capital returns, such as dividends and share repurchases.

We ended the first quarter with $385 million in cash.

We believe our strong cash position supports our growth initiatives and enables us to provide income to investors, as well as continue to focus on driving total shareowner return.

And with that, I will turn it back to David Poplar for the Q&A portion of our call.

(Operator Instructions).

Andrew Charles, Bank of America Merrill Lynch.

Todd, how much did reimaging incentives for franchisees total in 1Q?

And do you still expect to spend about $8 million in total on incentives this year?

Yes, in the first quarter, Andrew, we had about $900,000 of franchise incentives that had come through the P&L.

And remember, on a full-year basis, we are targeting $8 million, but the mix is a little bit different.

We've got about $3 million of true cash incentives.

We've got about $3 million of royalty relief.

And then there's a couple of million dollars around construction support, which is just the G&A initiative that we have internally to support them to continue to build the restaurants.

Thanks.

And if I could slip one more.

Emil, with most restaurants featuring mobile ordering, can you talk more about the insights you're learning from the technology, particularly any improvements be to service and what percent of guests are utilizing the payment?

Well, we've just implemented it.

So it's fairly early as far as a percentage of uses, but I can tell you that it's right on track with the test market we've seen.

But, clearly, we're very excited about this because we do believe that this represents some operating efficiency potential; as well as, most importantly, it really gives us the opportunity to establish a different kind of relationship with our customers in a much more individual relationship.

And, clearly, we've seen that this has been very successful for a number of brands who are further along in this process.

So we're very excited about it, and we're getting tremendous support from our franchise community.

And is the new POS system a precursor to the mobile payment?

No, it is not.

Not from a mobile payment perspective.

So we are already out in 5800 stores, active on mobile payment right now, Andrew.

Thank you.

John Glass, Morgan Stanley.

First, Todd, can you just clarify the guidance with the gains?

There are certain gains you are now including in that.

How much -- can you dimensionalize how much is included in that $390 million to $400 million?

Yes, so what we have contemplated in the outlook is the 12 point million (sic - see press release, "$12.1 million") gain that was actually recorded here in Q1.

So as we've talked about consistently, our ongoing restaurant optimization initiative will drive us to continue to look at our restaurant ownership.

There will be opportunities to buy restaurants as well as sell restaurants.

And including those gains, we still have ourselves within that guidance range, John, if you include the gain, or if you exclude the gain.

So we're still within the guidance, whichever way you wanted to look at it.

But just be clear, you're not contemplating more than what you've already recorded this quarter, is that correct?

We would not expect anything of that magnitude, but potentially some smaller transactions along the way.

Okay.

And then just why didn't restaurant level margins lever more, given -- I would've thought re-franchising might help improve a cosmetics of that.

Was it just because the restaurants you sold were roughly equivalent margins to those that are still in the base?

No, the sale of the restaurants -- and a lot of them, remember, started to happen later into the first quarter -- but there was some favorable impact to selling the lower-margin restaurants west of the Mississippi.

But when you look at where we actually performed -- food, paper -- we had some nice performance on margin expansion because of those items.

But it was really throttled by some of the weather impacts that we had along the way, with higher maintenance expenses as we were working to continue to clear parking lots and support the business through the tough winter.

Got you.

Thank you.

Jason West, Deutsche Bank.

Just one -- can you remind us where we finished up on the technical assistance fees for the quarter with the system optimization?

Yes, so, within the quarter, we ended up with about $6 million of technical assistance fees from system optimization.

And that compared to the $7 million that we realized on a full-year basis in 2013, all specific to system op.

Got it, okay.

And then on the Image Activation, just given how important that is in terms of the growth outlook, can you remind us what you're seeing in terms of the sales lift from those projects, and where the average costs are coming in?

And if you can talk about how those sales are sustaining, as some of these projects are now getting into year two.

Yes, certainly, Jason.

So as we look at the performance of the restaurants, and really hone in on not only the 2012 class, where we continue to see sustainable results in that range of the 10% to 20%; but also looking at the 2013 class of restaurants that just came on board, from both a Company and a franchise perspective.

We are continually seeing the lift of 10% to 20% on the re-imaged restaurants.

And then on the scrape and rebuilds, as we've talked about previously, we are seeing the lifts continue to be in that range of 25% to 35%.

From an investment perspective, a scrape and rebuild, much higher -- $1.5 million to $1.9 million.

But on the re-images, the range that we've been talking of $450,000 to $650,000, we are coming right into that range.

And it really depends on what customizable upgrades we're choosing to put in that restaurant to make sure that it's competitive in the trade area that it competes in.

Great, thank you.

John Ivankoe, JPMorgan.

Good morning.

It's actually [Amod] on for John.

I guess a couple questions.

The first is just related to the previous question.

It would seem like if you've Image Activated, I think, about 10%-plus of Company units at maybe an average 15% sales lift, that the gap might be a little bit bigger between Company and franchise than it was in this quarter.

So if you could help us understand maybe how the first quarter was versus the internal expectations, and whether there might have been some other moving pieces in terms of the difference in the comps.

Yes, certainly.

I think when we look at the gap between the Company and the franchise community on same-restaurant sales growth, it's largely as we expected from the tailwinds that we would be seeing from Image Activation benefit to the growth.

And so a lot of that is, you've got to remember, a lot of the IA restaurants were really done in the late part of last year.

So that next big class of 2013 restaurants were done late third quarter, early fourth quarter.

And some of those are just going to start to come into our comps, because we take them out of comps for the first 12 weeks, post-opening.

Okay, that's helpful.

And then just secondly, with the successful completion of the 425 units sold to the franchisees -- I know you touched on a little bit in the prepared remarks -- but could you just help us maybe with what kind of internal considerations there are around -- or conversations there are around the timing and/or magnitude of further re-franchising?

Yes.

As we mentioned, and we've said pretty consistently, that this concept of system optimization is something that is part of our Growth Pyramid, and we're always actively looking at.

And one of the things that's important on that perspective is we look at our business.

We really feel that The Wendy's Company has to be a driver of continual growth and vibrancy and relevance in the brand.

And just like we've led in Image Activation, and just like we're leading with the Aloha efforts.

And so we feel having some base of Company restaurants is important.

But as we seek to get the optimal combination of restaurants, as Todd mentioned, we're going to be continually looking at the level of ownership in the purchase and sale of restaurants to get our system to where we think is the most efficient level.

So this is something that is under ongoing, active consideration.

Thank you.

Chris O'Cull, KeyBanc.

Emil, the guidance suggests pretty healthy comp acceleration in the remaining quarters, as you lap some -- obviously, some successful products from last year.

Can you give us a little color as to what gives you confidence that the comp will accelerate through the course of the year?

Sure.

Well, first of all, one of the things, as Todd mentioned, is we look at even the first quarter, we saw it definitely was the tale of two halves here, and so we had very nice momentum once we got into some spring weather.

And that momentum has continued into the second quarter, which certainly gives us encouragement.

And then, also, as we look at the marketing calendar, which essentially we know what that looks like for the remainder of the year; and we have -- all of these items have been through a certain level of in-market testing and experience.

And so based upon that, we feel confident in the guidance that we've provided for sales.

And, obviously, we knew that we would have to roll over the Pretzel Bacon Cheeseburger and Bacon Portabella Melt on Brioche, and we've comprehended that in terms of how we're thinking about our business.

And so we feel very confident in the patterns that we're seeing.

Do you feel like the growth will come from a balance of transactions and check?

We do.

And that's one of the nice things we're seeing, is we're seeing some nice growth in customer counts as well as check.

And we feel that is dual-layer strategy of having our higher-end messages, as well as some other messages against our Right Price, Right Size menu is providing a nice combination.

But also, our limited-time-only products typically carry with them a higher transaction value.

And that way, we're able to elevate our average check, but do that without specifically, necessarily a price increase.

And we feel that that's the most positive way to approach the consumer.

Great, thanks.

Jeff Farmer, Wells Fargo.

Just somewhat of a follow-up to that last question.

I am curious, in the past, how you guys have -- I guess when you've had some promotional and marketing strategies that have been extremely successful, how do you plan to lap that?

What is the game plan there?

How can you make that essentially back-to-back years of pretty successful topline growth?

Well, we believe as we look at message, media, and creative that we have to approach all of those.

And particularly today, when you have digital marketing efforts and social marketing efforts and traditional broadcast, we're utilizing all of those.

And I remain very close to all those things.

And I will tell you that we have some outstanding things planned for the remainder of this year.

In fact, I've already seen a marketing calendar for what 2015 might look like, and so we're trying to stay well ahead of the game.

And when you get in a system where you're producing good comp restaurant sales growth, that you have to plan ahead, and you have to make sure that you do have a pipeline of ideas that can comp other ideas that have been strong.

And that's just part of the nature of the thing.

But I think it's also one of the things, when we talked about the latent brand equities that Wendy's has, one of the wonderful things that is happening today is that consumers are very, very engaged in food.

And you're seeing this in the grocery business; you're seeing this in the restaurant business.

And we have very strong brand equities, latent equities, in food.

And I think that that gives us a distinct advantage to introduce high-quality, high-end items that people have a natural gravitation toward that others may not be able to do that as successfully.

All right, that's helpful.

Then just one follow-up in a similar ballpark.

So your peers have clearly seen the success you've had with some of these premium sandwiches, and, at least to some extent, have begun to follow suit.

So in the past -- and this might be going back to the early 2000s, mid-2000s -- but when your peers have tried to replicate some of your successful products, what, if any, impact have you seen on your business when they do follow suit pretty closely?

Yes, well, we appreciate the compliment that's being paid to us by them.

Look, we expect competitors to continue to take up their game, and we're doing the exact same thing.

And so as you look at the kind of products that we launched -- Pretzel Bacon Cheeseburger, Pretzel Pub Chicken, Portobello Melt on Brioche; and you look at the two salads we just launched, an Asian Cashew Chicken Salad and the BBQ Ranch Chicken Salad -- these are outstanding products that you can -- to find that comparable quality, you've got to go to one of the quick casual restaurants to get that.

And, again, we got to remember -- people first purchase a brand, and then they purchase a product.

And our brand has tremendous product equities.

And this is one of the beautiful things that Dave Thomas gave us, that he has the heritage of quality and the heritage of innovation.

And I think that that gives us a distinct advantage.

And as long as we can continue to deliver these outstanding products, I think we can build on that.

I also mentioned that one of the things we're going to do is we are going to evolve our core menu as well.

Because we want to not only make the investment in things that are here on a limited time offer, but we want to make sure that people can come in every day and get items that they are very, very excited about.

And that's why these two new salads, for example, are permanent menu items.

Great.

Thank you very much.

Michael Gallo, CL King.

Couple questions.

Emil, can you update us on what you saw in value transactions in the quarter -- whether you've been able to make some progress in stabilizing that?

And then also you mentioned some higher spending on international and G&A in the quarter.

I was wondering if you can give us some further detail on what your plans are, what the spending was around, and what some of the longer-term potential is, as international becomes a bigger focus down the road?

Thank you.

Sure.

Michael, on value, we continued to see progress throughout the quarter.

I'll tell you that I still feel that we're not ultimately where we need to be.

But the nice thing is that the line continues to point in the right direction.

And our value transactions, if you look at the past three quarters, are up significantly, along with the fact that we're building share in the high end of the business.

So we've got that rhythm going in the right direction, and we just want to continue that.

So I'm pleased with what I'm seeing, but I'm never going to be satisfied about it.

So, on the international, as we mentioned previously, Michael, we had engaged a nationally known, prominent consulting firm that has extensive experience in the restaurant business as well as extensive experience internationally, to help us sort through our growth strategy internationally.

And we believe that they've given us some very important insights on that.

And we do feel that the international business can be an important contributor to our growth in earnings over time.

But we also feel that that's several years down the road.

And that's why we continue to emphasize the important opportunity that we have in North America.

And we feel that we can definitely add incremental new restaurants in terms of growing our access to the brand; as well as, we've set a very bold goal that we think is achievable in getting to these $2 million average volumes.

So the point is that we have great confidence in our ability to grow North American business.

But we also believe that, several years out, we'll also start to see incremental contribution from international.

Very much.

Jeffrey Bernstein, Barclays.

A couple of questions.

Just first on the margin outlook, at least for this year.

First quarter, obviously hurt by weather, looks like the margins were up 30 basis points or so.

And even with your reduction in your guidance for this year, it is still calling for 100 to 150 basis points, and that's despite what now seems like elevated beef.

So I'm just wondering your confidence and your -- what you're seeing in terms of margin for the rest of the year that gives you the confidence that we should see that meaningful acceleration.

I don't know if there's particular line items that we are underestimating, or perhaps what percentage of it is driven by just the re-franchising of some pretty weak units.

How should we think about that?

I guess there's a couple of elements, Jeff.

So, as the transactions and the business picked up during the tale of two halves in the first quarter, we did see margin acceleration, which gives us the confidence as we go into the rest of the year.

Yes, commodities impact is a little more pronounced than we had anticipated.

Originally we had guided to flat for full-year, with higher beef offset by lower chicken.

We're now thinking that the higher beef will probably have the commodities impact to be about 50 basis points on a full-year basis.

So that's what we really built into this long-term -- or the guidance for the rest of this year, which took us from that 16.8% to 17% down to that 16.3% to 16.8%.

But as we look at the rest of the year, with now system optimization behind us, we've always talked about 50 basis points of tailwind that we're going to see from that.

We'll see that into the back half.

As the business continues to accelerate, and grows closer to our long-term guidance of the 3% number; plus, we'll see a lot of leverage that comes through the restaurant that will continue to drive margin expansion for us.

And then just a lot of work on ongoing productivity initiatives and cost-saving initiatives, which we're going to start to see the benefit of all of those things come through over the last three quarters of the year.

So we feel very good that, despite a little bit of headwind on the commodity front, and the start that we had because of weather, primarily in January and February, that we're still on track for that guidance range that we just provided.

Got it.

And then just on the G&A and the savings of $30 million, just wondering what you'd bucket as the biggest driver of that, and whether there's future opportunity on that front.

Or maybe how much of that we should assume in the current 2014 -- what's your dollar assumption for full-year G&A for 2014?

Yes, well, we gave very specific guidance on G&A, that $275 million, kind of is our point estimate on total G&A.

So I think we're probably as clear as we've ever been on that front, Jeff.

The big buckets, when you look at the savings, a lot of it was people-generated.

So we always talked about the $20 million of savings that come from field G&A, largely driven by people.

And a lot of those people have transferred away from the Company over to the franchise community.

And then another $10 million of savings that we realized within the Dublin Restaurant Service Center, and a big chunk of that was people-generated savings, too.

And we saw some of those come through in the first quarter; so when you think about the first quarter, yes, we did have higher equity incentive comp.

There was some other what I would characterize as one-time discretionary G&A investments.

But that was offset by about $3 million of savings that we saw, directly attributable to the system optimization initiative within the quarter.

And we had gone on to starting to get some of those savings in 2013.

We're going to see some more in the rest of 2014, really a year to go.

And then a little bit of the savings will still trickle in, in the first quarter of 2015.

Got it.

And then just lastly, should we assume that EBITDA growth skews more to the fourth quarter, rather than the second and third?

Just one, the beef; but two, the lap of the incentive fees to franchisees?

Is it more flattish in the second and third quarter, really accelerating in the fourth?

Is that how -- directionally?

That would be directionally correct.

Yes, Jeff.

You'll see that is specially as we lap up against some of the higher commodity costs that we talked about a little more pronounced in Q2 and Q3, and then you really start to pick up the impact of the continued work that we're doing around Image Activating our restaurants.

And that will start to take hold in the later part of the year.

Great, thank you.

Sara Senatore, Sanford C. Bernstein.

This is Jonathan for Sara.

Just wanted to come back to the long-term outlook for high-single-digit to low-double-digit adjusted EBITDA growth.

You mentioned that baked into that algorithm is at least 3% comps, beginning in 2015.

Can you provide a little more color on the composition of that algorithm in terms of unit growth, margin expansion?

Thanks.

Yes, I think as you think about unit growth, we're probably still in a position where we're not in net positive unit growth in 2015.

Clearly, as we start to get into the longer-term growth algorithm, as we get into 2016, 2017 -- you will see net new unit growth.

Emil is very clear about that, as we work on our plot moving forward.

And I would expect as we continue to drive initiatives, whether they're productivity, whether they're cost savings; but, importantly, as we continue to drive leverage across our restaurants, driving same-restaurant sales comps up north of 3%, both from our core initiatives, leveraging technology as an enabler to drive margins going forward; and then, ultimately, with IA acceleration kicking in.

All of those things will provide a lot of leverage across the P&L, where we'll continue to see some margin enhancement as you get out into 2015, 2016, 2017.

Got it.

And just a quick follow-up on commodities for 2014.

You had mentioned the beef prices are providing some pressure.

Are there any commodities that are providing offsets, or things that you can do in terms of the purchasing co-op to find some additional savings?

Well, the purchasing co-op continues to work on sourcing strategies to figure out how we mitigate the inflation pressure that we see out there.

And then, internally, we'll continue to look at what other initiatives do we need to do across the whole P&L to manage margin.

But the big offset as the beef increases is we still see some deflationary pressure year-on-year in chicken, a little bit on pork, but that's starting to increase a little bit.

But that's been contemplated in our outlook, so that's that mix.

And as we look out, our composition of our LTOs and our product offerings during the course of the year, we have the ability to not just play on the beef side of the equation.

People tend to forget that, of our total commodity mix, only about 20% of it is beef.

So we have a lot of options across our portfolio to really manage mix, not only from a topline perspective, but from a bottom-line perspective, too.

Great.

Thanks, guys.

Will Slabaugh, Stephens.

So, wanted to ask you about revenue in the quarter, which came in nicely ahead of where we were modeling.

So my question is, if that was the case with your own internal model as well?

And maybe if that was more or less affected by when you sold the units in the quarter, or is it the case that maybe some of the units that you're keeping for the Company side did have materially higher AUVs that could help that number going forward?

I think you've got a little bit of both going on in there, Will.

I think when you think about where average AUVs are, they were a little bit lower in the West versus where we are in the rest of the country.

That said, revenue largely came in on our expectations, so we had really timed the restaurant sales to happen into February, into March.

And that's what ended up happening at the end of the day.

Great.

And I don't know if you have this in front of you or not, but can you update us on the AUVs of your Company stores versus the franchise stores in the system?

Company versus franchise?

I think we ended the year at [15 30] system average AUV.

I don't know, Emil, do you have it off the top of your head the -- Company would've crept up, approaching --.

Let us get back to you with the specifics on that, Will, just so we're dead accurate on that.

Great.

No problem.

Then just one quick follow-up, if I could.

When I'm looking at D&A, I think you talked previously about that coming down around 10% or so for the full year.

Does that still sound like a reasonable estimate?

Does it maybe come in below that?

It looks like that trajectory dropped a little more than I expected this quarter, so just sort of D&A thoughts for the year.

Yes, no, I think that's still a good assumption, Will, as you go forward.

And you've got to remember that, especially when you look at some of the accelerated depreciation, we got onto the Image Activation journey earlier to set ourselves up for 2014, as we get a lot of that D&A accelerated into 2013 last year, which gave us the confidence that our re-images will happen more consistently across the year rather than back-loaded, like they were the year ago.

So that will distort the comps between 2013 and 2014.

You'll naturally start to see some D&A depreciation drop off, as we've sold the restaurants as part of the system optimization initiative as well.

Thanks, guys.

David Palmer, RBC.

Just to follow up on that topic of the AUV growth versus same-store sales growth.

That AUV growth being higher lately than same-store sales growth, it does seem like that would have something to do with the accounting treatment around Image Activation.

And I wonder, as these Image Activation stores get added back to the comp base, if that might help you three months later?

In other words, the AUV gap to same-store sales might be somewhat of the secret sauce that gives you confidence that same-store sales can remain high, a quarter or two from now.

Am I onto something there, or am I --?

You're thinking about it right, Dave.

I think there's a couple of pieces.

And we'll get the specifics, as Emil mentioned, on the deltas and the trends on AUVs between Company and franchise.

But as you think about same-restaurant sales composition, knowing that we did a lot of Image Activation restaurants last year into the fourth quarter, the full impact of those restaurants would not have been reflected yet in the same-restaurant sales composition throughout the entire first quarter, because they weren't in the comp base.

They were in the absolute, but not in the comp base.

So as we start to get past that 12-week post-opening cycle, they will roll into comps.

So I think you're thinking about it exactly right.

We'll get some benefit of some of that fourth quarter IA work in the second and third quarter.

As an aside, I was wondering if you could comment just on the different versions of value being put out there.

You see the two sandwiches for $5 being done by Burger King.

There's been some shifts away from the definition of value of at $1.

What is your overall statement about just the value push by competitors out there?

And do you think that you are getting your fair share of the value users?

Thanks.

Sure.

Well, David, we definitely are seeing shifts in how, particularly, the Millennials think about value and how they use different value menus out there.

And I would say -- and I'm not willing to characterize it specifically -- but I think we have a very good sense of what's working and what's not working out there.

And we have the capacity, through CREST data and other things, to track that with a fair degree of intimacy.

As I mentioned earlier in a response to a question, what we have seen is we have changed from the value bucket being a leaky bucket four quarters ago, to a steady progress on that, virtually every single quarter.

And so we feel through our Right Price, Right Size menu, we've been heading in the right direction.

But I continue to see upside potential there, as we continue to refine this model of our high-end messaging, as well as our low-end messaging out there.

But value is something that is definitely a bit of an evolving thing in the marketplace, I think, in a lot of ways because of how Millennials are a bit shifting their approach.

Thanks, and congratulations.

Thanks.

Thank you, I appreciate it.

Any other questions there, Molly?

There are no further questions at this time.

Thank you.

Thanks, everybody.

I know we've got some follow-up calls.

So we'll be looking forward to some additional conversations throughout the day.

Thanks, everyone.