Wendy's Co (WEN) 2014 Q3 法說會逐字稿

Good morning. My name is Ginger and I will be your conference operator today. At this time, I would like to welcome everyone to The Wendy's Company third-quarter earnings results conference call. (Operator Instructions). Thank you.

Mr. Dave Poplar, you may begin your conference.

Thank you, and good morning, everyone. Our conference call today will start with comments from our President and Chief Executive Officer, Emil Brolick, who will highlight our key initiatives and provide an update on the progress we are making on our brand transformation. After Emil, our Chief Financial Officer, Todd Penegor, will review our third-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 of our website, www.aboutwendys.com.

Before we begin, I'd like to refer you for just a minute to the Safe Harbor statement in our earnings release. Certain information we may discuss today is forward-looking. Various factors could affect our results, and cause those results to differ materially from the projections set forth 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 measure.

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

Thank you, David, and good morning. Today we reported third-quarter results, reaffirmed our adjusted earnings per share outlook, announced that we expect full-year 2014 adjusted EBITDA of approximately $390 million, and announced a 10% increase in our quarterly dividend. We also encountered headwinds during the quarter, including absorbing higher commodity costs and achieving the proper balance of high-end and price-value marketing messages. However, our strategic initiatives supporting our brand transformation remain on track and are moving forward as planned.

We also announced a plan to realign and reinvest resources in restaurant development and consumer-facing restaurant technology to drive our long-term growth. As part of this realignment, we plan to reduce general and administrative expenses by approximately $30 million, which includes the previously announced $8 million in savings from the sale of our Canadian restaurants. This action is consistent with our system optimization plans, and will allow us to more effectively serve greater concentrations of franchise restaurants.

We have taken these steps as part of our commitment to grow an ever-more vibrant Wendy's through increased brand relevance and economic model relevance for our franchisees and our shareholders.

We continue our vigilant pursuit of growth through our Cut Above brand positioning and our Recipe to Win. Yet, as cost, consumer, and competitive environments evolve, we too must evolve how we bring our strategies to life. As we look at our Growth Pyramid, driving North American same-restaurant sales has been, and will continue to be, the foundation of our core organic growth, along with Image Activation and new restaurant development.

Image Activation is key to our brand transformation and sales growth. We remain on track to re-image 200 Company restaurants, and now expect 175 to 200 franchise restaurants in 2014. We also expect 15 new Company restaurants and 45 new franchise restaurants in 2014, and we continue to target the implementation of Image Activation in 85% of Company restaurants and 35% of North American system by the end of 2017.

Returning our North American restaurant system to positive net new restaurant growth in the near future is a key component of our strategic plan. As a result, we are realigning our resources to focus on investments and accelerated restaurant development to drive growth. Our franchise system plays a central role in this, and we are structuring programs to support their growth.

Another important element of our Growth Pyramid is system optimization, which will also enhance the pace of Image Activation and new restaurant growth. System optimization will continue to evolve the ownership structure of Company and franchise restaurants in terms of numbers and geographic concentration.

We believe that geographic concentration supports efficiency and effectiveness in operations and in new restaurant growth. As we look at our third-quarter performance, we see evidence that our Growth Pyramid is translating into results. While third-quarter same-restaurant sales was slightly below expectations, our two-year comps were solid, at plus 5.2%.

In addition, our single-largest strategic brand initiative remains on track, as we opened our 600th system-wide Image Activated restaurant in October, and franchisees owned nearly half of these restaurants.

Given our expected higher cost structure in 2015 and beyond, due primarily to record high beef costs, wage inflation, and the implementation of the Affordable Care Act, we are taking proactive steps to strengthen our economic model and realign our G&A resources to focus on investments and consumer-facing restaurant technology, and accelerated restaurant development.

As part of our commitment to increasing shareholder returns, we announced that our Board of Directors has authorized a 10% increase in our quarterly cash dividend rate from $0.05 to $0.055 per share. We also remain on track to achieve our full-year 2004 (sic - 2014) adjusted EPS guidance, despite third-quarter adjusted EBITDA that was slightly below expectations.

From a topline perspective, we have now posted seven consecutive quarters of same-restaurant sales growth in Company restaurants, beginning with the first quarter of 2013. And we expect this trend to continue for the foreseeable future, due in large part to our solid product innovation pipeline.

We will also be looking at the balance of our core, LTO, and price-value marketing messages, optimizing them for same-restaurant sales, profits, and customer traffic growth. We believe in our high/low marketing message strategy, but also recognize the need to refine how we bring it to life.

To give you additional perspective regarding our same-restaurant sales performance at Company restaurants, our 5.2%, two-year, third-quarter sales growth was our strongest since the third quarter of last year when we posted a 5.9% two-year increase.

Driving same-restaurant sales growth in the third quarter were two limited-time offers: our Smoked Gouda Chicken on Brioche, and our Pretzel Bacon Cheeseburger and Pretzel Pub Chicken sandwiches.

Looking ahead to the fourth quarter, the performance of our BBQ Pulled Pork trio promotion in October has been in line with our expectations. We have also made refinements to our marketing messages in our current competitive environment, as we lost momentum in the price-value segment late in the third quarter and early in the fourth quarter.

To address this, we have added incremental media weight to promote our Right Price Right Size Menu, concurrent with our BBQ Pulled Pork advertising. As we enter November, we expect to continue our trend of positive comp sales growth in the fourth quarter, despite rolling over the strong performance of our Pretzel Pub Chicken and Bacon Portabella Melt promotions in 2013. Based upon our current trends and projections, we expect our full-year same-restaurant sales growth to be approximately 2.5%.

As we look beyond 2014, we anticipate that wage inflation and the implementation of the Affordable Care Act will add pressure to our cost structure. We also expect that the record high beef costs we are currently facing will continue. As a result, we are realigning and reinvesting our resources in restaurant technology and accelerated restaurant development. As part of this realignment, we plan to reduce general and administrative expenses by approximately $30 million. But this initiative is about more than just cost-cutting. It's also about the realignment of resources to enable same-restaurant sales and new restaurant growth.

As noted in our release, we plan to realign our G&A resources with investments in consumer-facing technology to drive our brand transformation and enhance brand access. Platforms such as mobile payment, mobile ordering, and loyalty programs are rapidly growing in the retail marketplace and provide potential benefits such as consumer convenience, increased transactions, higher check, faster speed of service, and a seamless brand experience. These initiatives are essential elements of our growth strategy to increase brand relevance and economic model relevance.

You can expect to hear much more about these initiatives, as well as system optimization, at our upcoming Investors Day in February. I remain confident in our brand positioning and our brand strategies, and know that we have one of the truly special franchise systems in the industry.

I'm now going to turn the call over to Todd Penegor, our CFO.

Thank you, Emil. I'll start with a review of the third quarter. As expected, total revenue decreased 20% versus the prior year. The decrease was the result of the sale of Company restaurants to franchisees, as well as the impact of temporary restaurant closures related to our Image Activation re-imaging program, partly offset by higher rental income, sales at Company restaurants, and franchise royalties.

Adjusted EBITDA decreased 4.7% compared to the third quarter of 2013, which was slightly below our expectations of approximately flat. We'll take a closer look at the key drivers of our year-over-year adjusted EBITDA performance in a few minutes.

As this slide shows, we are delivering on our G&A reduction commitments, with a 14% or nearly $11 million reduction in G&A expense compared to the prior year. The 10 basis point decrease in our restaurant margin was due mostly to an increase in commodity costs of 70 basis points, primarily from higher beef prices; and a greater-than-expected impact from the year-over-year increase in temporary Image Activation restaurant closure weeks, partly offset by the positive margin impact of system optimization.

Adjusted EPS was flat compared to last year, but reported EPS increased $0.06 compared to 2013, as the 2013 results include higher facilities action charges. As demonstrated by this chart, we are improving the quality of our earnings. On the left side of the chart, you see $19 million in lost EBITDA from the sale of our restaurants, along with the impact from the year-over-year increase in image activation closure time, as we absorbed about 2.5 times the number of closure weeks as we did in 2013.

On the right side of the equation, you see the increased royalties, G&A savings, and rental income, all resulting primarily from our system optimization initiative.

General and administrative expense was $65.8 million in the third quarter of 2014 compared to $76.5 million in the third quarter of 2013. The decrease resulted primarily from lower incentive compensation, and cost savings related to our system optimization initiative, as well as a reduction in Image Activation franchise incentive expense. As you recall, we changed our franchise incentive program structure this year, moving from cash incentives to a combination of cash incentives, royalty relief, and construction support. With this change, we expect to more than double Image Activation activity.

Year-to-date, we have generated cash flow from operations of about $183 million. This does not include restaurant disposition proceeds of about $115 million, primarily related to system optimization, which are in investing activities. Year-to-date, capital expenditures were approximately $200 million, reflecting the acceleration of Image Activation activity compared to last year.

We ended the quarter with approximately $342 million in cash, which is down from $580 million at year-end 2013. In addition to investing in our business, we returned cash to shareholders of nearly $350 million in the form of dividends and share repurchases, including our $275 million Dutch tender in the first quarter.

We announced today that our Board of Directors authorized an increase in our dividend rate of $0.005 per share, or 10%, effective with our next quarterly cash dividend, which is payable December 15, 2014, to stockholders of record as of December 1, 2014.

This increase is an important component of our capital allocation strategy. We are confident our strong balance sheet, financial flexibility, and cash flow will enable us to fund our organic growth initiatives, which is our first priority for capital usage, followed by dividends and share repurchases. In the third quarter, we put a new share repurchase authorization of $100 million in place through 2015. To date, we have repurchased approximately 2.7 million common shares under this authorization for $21.3 million.

As we look at the remainder of 2014, we are reaffirming our guidance for adjusted EPS. We also expect adjusted EBITDA of approximately $390 million. This forecast includes a 2.3% increase in our commodity cost for the year, which is more than double our forecast from the first quarter.

We now expect full-year same-restaurant sales growth of approximately 2.5% at our Company restaurants. We expect capital expenditures in the range of $280 million to $290 million, higher than last year's $224 million, due to increased Image Activation activity in 2014, including more scrape and rebuilds. We also expect an effective tax rate of 38% to 40% for 2014.

We are reaffirming in our long-term outlook. We are expecting adjusted EBITDA growth in the mid- to high-single-digit range in 2015. After 2015, we expect high-single-digit growth in 2016, and low-double-digit adjusted EBITDA growth beginning in 2017. We continue to expect mid-teens adjusted earnings per share growth beginning in 2015.

This outlook includes the expectation for annual same-restaurant sales growth at Company restaurants of at least 3% beginning in 2015, as we continue to drive toward the reimaging of 85% of our Company restaurants by 2017.

Our single-biggest growth initiative is Image Activation. And we remain on track to achieve our Image Activation goals for the year. By the end of 2014, we expect to have 740 to 765 Image Activation restaurants across North America, as we have established a solid business case for franchise investment. To ensure that we hit our development targets, we are supporting our franchisees with planning resources, a commitment to collaboration, and financial incentives. To date, nearly 200 franchisees, representing more than 3,700 restaurants, have engaged in market planning with our real estate team.

Market planning gives our franchisees an outside-in customer perspective of their restaurant portfolios, providing insights on the competition in their trade areas. This arms them with a holistic view of their restaurants, including a perspective regarding how much they should invest in each of the restaurants.

This is where joint capital planning comes into play. Our franchise development team works with franchisees to determine a multi-year approach to help optimize returns, fueling the next wave of growth. In addition, we offer construction support and turnkey services for those franchisees who prefer to delegate the entire process to us. We also plan to launch a build-to-suit program in Canada as part of our Canadian growth initiative.

Another key component of our long-term outlook is our commitment to further reducing our G&A expense. This chart shows you the historical evolution of our G&A cost structure since 2013, when we were near peak levels: almost $295 million. You can see the meaningful progress we expect to realize, driving to a target of $250 million in 2015.

This chart also reconciles our current 2014 forecasted G&A of $265 million to our forecasted 2015 G&A expense of approximately $250 million, after an expected reduction of approximately $30 million. We expect G&A expense headwinds of approximately $12 million in 2015, due primarily to the impact of 2015's 53rd operating week, wage and benefit inflation, and incremental incentive compensation. This takes our current run rate of $265 million to a base of approximately $275 million.

In 2015, you can see the expected realization of our cost savings initiatives and our expected reduction in Image Activation franchise incentive expense, partly offset by investments in growth initiatives. It all adds up to a lower G&A cost structure, at about $250 million.

The last subject I'd like to discuss before we take your questions is restaurant ownership optimization. One example of this restaurant ownership optimization is our previously announced plan to further optimize our restaurant portfolio with the sale of approximately 135 Company restaurants in Canada to new and existing franchise operators. This initiative remained on track, and we are targeting the end of the first quarter of 2015 for the completion of these transactions.

We believe restaurant ownership optimization will build a stronger Wendy's by expanding new restaurant development and ensuring that our restaurants convey a contemporary image, consistent with our brand positioning. We continue to evolve our plans for restaurant ownership optimization as part of our brand transformation. This includes the selective buying of restaurants, along with selling restaurants to franchisees who have expressed or demonstrated a commitment to Image Activation and new restaurant development.

We believe this initiative will lead to a growing and more efficient Wendy's system, supported by brand and economic model relevance. We expect that the net result will be a reduction in the number of Company restaurants over time. We believe our realignment and reinvestment of resources will effectively support our restaurant ownership optimization strategy, which we intend to discuss in greater detail at our Investor Day on February 3.

So, in conclusion, we are confident that our brand initiatives remain on track to deliver our long-term goals.

And now, I will turn the call back over to David Poplar, who will update you on some upcoming Investor Relations events.

Thank you, Todd. Please note that Todd and I will be returning calls with the sell-side for the remainder of the day. But if you need to reach us, please email me at David.Poplar@Wendys.com, or leave a message at 614-764-3311, and we will get back to you as soon as we can.

Before we open up the phone line for questions, I'd like to review some upcoming events on our Investor Relations calendar. On February 3, we will issue our preliminary 2014 earnings release and 2015 outlook in conjunction with an Investor Day that we will host here in Dublin. There, we plan to share greater detail regarding our long-term targets for restaurant development, along with updated perspectives on our major strategic and operational initiatives, including restaurant ownership optimization.

And on February 24, we plan to issue our final earnings release and file our Form 10-K, including our 2014 audited financials. Please watch for more information from us regarding our year-end earnings event in the coming weeks.

And now we are ready to take your questions.

(Operator Instructions). John Glass, Morgan Stanley.

Two questions. First, Emil, maybe you could just talk about the same-store sales. And you talked about the value piece not being what you want it to be. Do you think that's more of a competitive issue, or maybe just that you weren't promoting it? Was it an internal issue? And can you remind us what value is now, as a percentage of total sales, so we can frame the size of it?

Yes, John, good morning. I think it was actually a combination: some, as you described, internal, and some of it external. And clearly, if I look at the last four or five months, I believe that there has been an increased component of price-value messages in the marketplace. And some of those have gotten more aggressive. And the fact is that we had, underneath a couple of our higher-end promotions at the end of the year, the Pulled Pork and the Smoked Gouda, we really didn't have a lot of price-value under there. So I think it was that combination.

And when we look at the marketplace, I think it's generally projected that about 25% of the marketplace is what we characterize as price-value in the overall QSR marketplace.

Okay. And that would be similar to what your experiences mix to, then?

Yes. If we look at our Right Price Right Size Menu, John, we don't give that exact percentage, but that would not be far off.

Okay. And then just, Todd, just following up on the fourth-quarter EBITDA, it does assume a fairly significant improvement or growth year-over-year. Is that mostly just gaining the closure hours or store weeks back? Maybe you can just quantify what the increase is going to be, or what bridges you to that acceleration in the fourth quarter.

Yes, John. The two major drivers of that is just our core restaurant EBITDA. So as we start to get the restaurants open and running that we had re-imaged into the quarter, we start to pick up some profit from that; as well as the G&A savings that we've announced throughout the course of the year.

So, the system optimization savings from the US initiative kick in, in the fourth quarter, as well as we start to get some savings from the initiative that we just announced this morning.

Okay, thank you.

David Palmer, RBC.

Hi, it's a Eric Gonzalez in for Dave Palmer. Just maybe as a follow-up to the last question, given the traffic declines that Wendy's is experiencing, do you think the Right Price Right Size Menu is cutting through? And what kind of lift do you see when you are on-air with that type of advertising? And that I have a quick follow-up.

Yes. Well, let me answer the second part first. As we go back and look at the last -- well, post-implementation of Right Price Right Size Menu -- when we look at the periods of time in which Right Price Right Size Menu is running underneath a higher-end promotional product, the performance during that period of time is stronger than a period of time in which we only have the high-end message running. So it is supporting that.

But, you know, Eric, what we see is that actually if you think about the price-value marketplace, it's not a totally homogenous marketplace. And what I mean by that is there are some people in that marketplace that are attracted by a value menu. Some of them are more coupon users. And then some of them are more users of what I'd call a higher-end promoted product that has been discounted.

So, I think as we look at Right Price Right Size Menu, I think there's some refinements we can make in messaging there. But we also have to just look at the portfolio of price-value messages that we put in front of the consumers.

So, we still feel very good about the whole idea of our high/low message strategy. But as I mentioned in my comments, that as we look to 2015, I do think there's some refinements we can make in terms of the combination of messages in terms of price-value, limited-time-only offers, and core menu. Because we also have some great core menu items that we've had a lot of success in promoting.

Okay. And then as maybe a follow-up to that, how has your advertising mix changed over time? And maybe what areas of advertising has been the best or most incremental spend for the brand?

Well, clearly, we have continued to put more media into digital and social. And we will continue to do that. We don't give out those specific numbers. But, by the way, there are some very sophisticated techniques by which you can measure the incremental impact of those, in terms of building awareness and reaching consumers that you might not be able to reach with traditional media. And I'm very encouraged by what I see; because, obviously, particularly the Millennial consumer is a -- consumes media in different ways than really even the X Generation, and certainly in the Boomer generation. So, we're going to continue to see that migration taking place.

Thanks.

Jeffrey Bernstein, Barclays.

Couple of questions. One just on the comp. Just looking specifically at 2014, I think you now took us to the lower end of 2.5%. But that, I think you mentioned in the press release, positive in the fourth quarter. That would still imply the fourth-quarter comp is still north of -- what did we calculate? North of 2%, so just wondering -- that doesn't seem like a huge disappointment.

I was wondering, maybe you can shed some light on October, or whether you see if there's any risk to that estimate. Maybe what the promotional focus is. I know you talk about the tough lapse of what we might see over the next month or two. And then I had a follow-up.

Yes, no, Jeff, again, it's important to look at comps in a two-year context, because it's what you are rolling over that also makes a difference. And if you look at the progression that we've had, as we mentioned in our comments, throughout the year we've seen two-year comps continue to improve. And, again, the third quarter at 5.2%, you'd have to go back to the third quarter of last year at 5.9%. And if you can kind of project where the fourth quarter is, the fourth quarter has the potential to be the highest two-year comps throughout the year. And so, we'd always like to be higher. But we still think, in the environment we're in, this is really a solid performance.

Got you. And then just the -- you mentioned the Company-operated mix on a couple of occasions, and over time lessening that. I'm just wondering where you draw the line philosophically. You mentioned, over time, you expect that franchise mix to increase. Is there a reason why the franchise mix can't go north of 95%? Do you see some hurdles to that? It seems like that seems to be the direction we're moving in.

Yes. You know, Jeff, I'd like to -- I think you are thinking about things in the right way. And when we get together in February, and I hope you'll be able to join us in February, we'll be in a better position to share how we see that strategy unveiling. And also it's very important to talk about the benefits that strategy has in terms of efficiency and effectiveness, from a P&L perspective, for both us and our franchisees.

We also see that very important in terms of our new restaurant development. Because as franchisees develop restaurants, they are obviously anxious to get -- not have their business impacted by other development, and have a total revenue perspective on that. And so the more concentrated they are in terms of their restaurant base, we find that they are generally a lot more enthusiastic about the new restaurant development. So I think you are going to see a very thoughtful approach about how to go about this that's a win for us, win for our franchisees, and a win for shareholders.

Got it. And then just one last thing, based on your comment earlier in terms of the competition. It seems like your largest QSR competitor has been losing share more significantly of late. I'm just wondering, would you expect to be a beneficiary of that? It doesn't seem like that's happened in the past quarter. You mentioned this quarter was a little bit below your expectation, but it would seem like there's a lot of incremental dollars up for grabs. I'm wondering whether you think you'd be the beneficiary; or, perhaps, who might be, more so than you?

Yes, I do think that we have benefited from that. I don't honestly look at things that way, because we constantly look at the QSR marketplace as a total. And we're certainly competing with not only the traditional QSR competitors, but the new QSR competitors. And so we don't try to get to analytical about who we are taking share with; we just want to continue to build our share. And if we would look at the CREST data through -- I think it's August, we would show that we are making progress in that regard.

Now, did we pick up all the share that they lost? No, we didn't. But at the same time we have been building share, and we're in encouraged by that. But we think there's clearly more upside and more opportunity in that.

Great. Thank you.

Matt DiFrisco, Buckingham Research.

I got a little different topic here. You're not the first guy to talk about wage inflation a little bit more these days. And I'm curious, is there a need to -- is it a competitive situation, where you are looking to outpace maybe some peers as far as wage rates to try and get that better employee? Or is it also maybe just the changing world that we're in, as far as digital and other things that you're doing to the stores, where maybe you are needing to bring on a higher skilled level person in labor?

I'm just curious as far as -- I guess it seems a little unexpected, the degree of wage pressure we're hearing on a lot of these conference calls. And do you see it not only being a cost issue, but could it be a top line driving issue to differentiate yourself, or to maybe even drive comps a little bit better by having a better workforce in there?

Well, Matt, this is Emil. Let me give you a couple thoughts, and then I'll ask Todd to jump in here. No, we certainly aren't pursuing a strategy where we're trying to out-pay the competition, I'll call it. But one of the things that we are working on very hard internally, to get across and push down to the restaurant level, is the tremendous opportunity that we provide people coming into the organization. And we have individual development plans that we create for team members in the restaurant.

We can demonstrate -- and have, in many cases -- how people come in at a minimum wage; can quickly move up to a shift lead; can move up to an assistant manager; and really, in a fairly short period of time, become general managers. And all of a sudden, they now have incomes that are nicely above what the average household is in the United States. So my point is that this is a business that provides people a tremendous opportunity, and I think we're getting much more effective at communicating that internally.

But as we've shared in the past, what we see happening is we have less concern about a national initiative on minimum wages. But where it is harder to deal with is on a local level and on a state level, because they are far more of those initiatives that have been successful in being passed around the country. And so I think people are just getting realistic about what's happening there. And we have incorporated certain assumptions in our outlook for the remainder of the year, as well as next year.

But, Todd, you might want to comment some more.

Yes, no, I think, Matt, Emil hit all the major points. And what we're really doing is trying to factor in into 2015 the state-by-state level minimum wage pressure that we're seeing. And we're working very hard, leveraging technology and other in-restaurant initiatives, to make sure that we can mitigate some of that impact while doing the right thing to make sure that we have a great level of employee engagement in our restaurants, every single day.

How much lower is the labor at a re-imaged store once it's been open for, say, six months or so, and you've got your feet under you? Versus what it was maybe the prior year?

Yes, I guess from a wage rate, we don't pay folks any differently within our re-imaged restaurants. I think what you do see is a lot of leverage in those restaurants, with the step up in transactions. So we've got 10% to 20% lifts that we continue to see from our re-imaged activity, and it drives a lot of leverage. In addition to that, Matt, we have evolved the model, where we had some labor that we initially put out in the dining room; we're actually moving that labor around a little bit.

So when we started our journey, if you go back in time, and our Tier 1 and our Tier 2 restaurants, we were talking about 30% flow-throughs to the bottom. Where we have evolved to, with the ultra-modern standard design, is we've evolved to flow-throughs north of 40%, as we've really gotten good at managing that labor model within that new environment.

Right. I wasn't looking for wage rates. I was looking for more so the optimization, but that's important then. So you've gone from 33% flow-through to 40%, and the majority of that is optimizing labor more efficiently.

Exactly.

Excellent.

Yes, Matt, this is also one of the reasons that we're pushing more G&A resources towards technology of consumer-facing technologies. Because not only is this something that consumers are very interested in, because we are moving from a service to a sell service world out there, but also we see that as having upside in terms of reduced labor content in our restaurants, eventually.

Also just as a follow-up to that, do you think, despite the struggles of the largest competitor out there with negative trends, do you think the overall environment, though, is going to react as far as your peer group, taking maybe greater price in 2015, given these the drumbeat of the labor -- the wage inflation?

We can't speak for other people. It certainly remains a competitive environment out there. Because if you look at the overall restaurant industry, it is essentially flat in terms of traffic growth out there. QSR is only up modestly, and so it is still a tough environment. But some of the encouraging signs that we very much see out there is if you look at food inflation at home is running above food inflation away from home, and that has typically helped the restaurant industry when that has happened.

Also when you look at gasoline prices, in July, at the end of July, the average price for regular gasoline in the country was $3.62. It's now a little below $3. So you've got a 17% or so decline in the price of gasoline, which puts a lot of money in the hands of consumers out there. So we believe that those are encouraging factors.

Great, thank you.

Michael Gallo, CL King.

Just a couple questions. And perhaps I missed it, but how much did closed store days from Image Activation hurt the Company store comps on a year-over-year basis?

Yes, so from a comp basis, it wouldn't have impacted same-restaurant sales comps, because that would have all been taken out, Mike, of the calculation. Remember, we've got the free closing time, and then the grand opening impact. But it does have a drag on the profits within the quarter. So as you think about 2.5 more times closure weeks year-on-year, we basically did 3X on the number of restaurants that were re-imaged in the third quarter this year versus last year.

That closure time -- which is a mix of scrape and rebuilds, as we're doing some of those, as well as the re-images -- that 5.5 weeks to 15 weeks of closure time that you experience on that spectrum is what had an impact, net-net, on our P&L of what we showed in the waterfall of almost $4 million of EBITDA headwind in the quarter.

You've got the closure time of the new restaurants this year offset by the tailwinds of the openings of the restaurants coming in from previous years. But what we have is this big step up, moving from 100 restaurants last year to 200. So the headwinds are more than the tailwinds.

And remind us how many of the Image Activation Company stores have you done to date, and how many are left for the fourth quarter?

Yes, Emil had talked on the call a little bit that we had, in total across the system, 600 restaurants that have been re-imaged. And we have about half of those owned by the franchisees; half of those owned by the Company. We would expect the total system, Mike, to have 740 to 765 re-imaged restaurants by the end of the year. So, about 12%, when you do the math from a North American perspective. So, that number --.

Sorry, I meant just on the Company stores. I was wondering how many store closure days, relative to Q3, you'll have in Q4 (multiple speakers).

Yes, so on Q4, when you get into closure weeks, we will see lower closure weeks year-on-year; a comparable amount of restaurants that we're doing in the fourth quarter of this year versus last year. But as we've gravitated to the ultra-modern standard design and away from the tiers that we've talked about earlier, we're seeing a less invasive approach. So the closure weeks do come down as we get into that fourth quarter. We're working through those, and you'd expect to see some of that benefit as we work through those restaurants to get them open and running.

What we did in the third quarter, and what we're doing in the fourth quarter, by the time they get into our comp base, you start to see some of that tailwind in our same-restaurant sales comp into the first quarter of next year.

Okay, great. And then just a follow-up question, Todd, on -- 2015, you expect earnings growth I think in the mid-teens, of an EBITDA growth in the mid- to high-single-digits. What do you expect for depreciation? Do you expect that to be down next year, relative to this year?

Yes, so excluding the accelerated depreciation, which comes into play when we're reimaging the restaurants, you will see our depreciation coming down over time as a result of the US system optimization, as well as the Canadian re-franchising initiative that we're embarking on. We expect all the transactions in Canada to be closed by the end of the first quarter in 2015. And we'll provide specifics on depreciation guidance at our Analyst Day in February.

Okay, thank you.

Will Slabaugh, Stephens Inc.

Wanted to ask you about your outlook for franchise re-images, and if there's any update on your part from a willingness to further help the franchisees obtain the capital for the re-images. I know we've visited this before, but didn't know it if there was any updated thoughts on either using your balance sheet or some other means to help them obtain that capital.

Good question, Will. We do have an GE Capital program that we've put in place that we've talked about previously that the franchisees can access if they need. And what we've seen is they haven't needed to access the GE Capital line. They've been able to work with their local banks, based on the business case that we've proven over the last couple of years, to provide them good local access to funds at more attractive rates.

Got it, that's helpful. And then one quick follow-up on the value conversation, just with regard to your positioning. It seems like Burger King and some of the others are disrupting the market currently with some loss-leading products, either low- or zero-margin products, as well. Is that a route you would be willing to take at some point, or do you think that wouldn't necessarily align with the Wendy's brand?

I think that our high-level strategy is something that we got to continue to refine a little bit. And I wouldn't see us taking the exact same approach that they are taking in the marketplace. And our research, fortunately, continues to show that versus the traditional competitors, that we still have a superior imagery around our food in terms of freshness, in terms of quality. And we want to continue to leverage that.

So, I think you have to be smart on how you go about that, because at some point in time, you don't want that to become the dominant part of your brand association. And I think you have to be very targeted in how you approach that, so you do effectively segment the marketplace, and you are really addressing those price-value messages to truly that price-value consumer; and while you're still dealing with the high end on the limited time offers, and as well as the core offers.

So, I think our approach will be a little different. But we do recognize that when some 25% of the value customers out there, or the business's value customers, you can't just not deal with that group. And also, if you would look at the last, I would say, 10 quarters in the industry, the price-value customer growth has been stronger than the non-price-value customer growth. So, again, it's just saying that you have to deal with this group of consumers.

Thank you.

Andrew Charles, Bank of America Merrill Lynch.

Emil, to follow up on the softness you saw in same-store sales this quarter, I was wondering if you think this reflects the fact that you don't serve breakfast, which has been the strongest daypart for the remainder of the QSR sandwich segment?

Well, first of all, again, when you look at our same-restaurant sales, I'd encourage you to look at this on a comp basis at 5.2%. That's not shabby, in the world that we live in. And, again, when you look at us on a progression throughout the year, it's the strongest two-year number throughout the year.

In terms of the breakfast daypart, as we shared in the past, that we still do see the morning daypart as one of the most rapidly growing dayparts out there. That is in part, in fact, that you've got a couple of players in that marketplace who are doing particularly well. One of those is, of course, based in Seattle, Washington, and you know who that is. And so they are helping to drive that growth.

I don't see us, in the near-term, jumping back into the breakfast market fray, in part because I think that the commitment that would take would take, in terms of resources, would not be the appropriate thing to do at this period of time. And we continue to feel that, as we've shared, our goal is to get to $2 million AUVs in the United States or in North America. And the assumptions we've made to get there do not include us having breakfast to get to those kinds of numbers.

Got it. That's helpful. And then, Todd, you narrowed the guidance for the number of franchisees re-imaging stores this year at the top half of the range. Can you talk a little about the changes you mentioned for the incentive payments? You are still targeting $8 million this year. And any sense, directionally, where we can expect incentive payments to go for 2015.

Yes, so what we've done this year is, as you know, we moved to a combination of royalty relief, cash incentive, and some G&A support, and that's the components of that $8 million. Last year, we spent $9.4 million, all cash. But what we've really done is taken it to a whole different level, where we are actually starting to really work with the franchise community to bring them along for the ride.

So doing the joint market planning, and the joint capital planning that we've talked about, to really work with them to understand what investments need to happen in their restaurant; and what the pacing and sequencing needs to be to make sure that they have a strong business case to have solid returns, and solid growth into the future.

And because the business case is starting to speak for itself in the eyes of the franchise community, and they see the sustainable results that we're getting from the re-imaging, we haven't had to provide as much incentive on a per-restaurant basis to get the activity done.

And you see that in what's happening this year. We had a range at the beginning of the year of $150 million to $200 million. Clearly, we're at the top end of that range, at the $175 million to $200 million. And, very encouragingly, we have a nice pipeline as we get into the 2015 re-imaging activity.

And we had a lot of discussion at our update meeting just three weeks ago with the franchise community around the economics of IA, the support that we're providing. I would expect, in an absolute dollar term, we would continue to provide similar type incentives. It could creep up a little bit in the absolute dollar terms into 2015 and beyond, only because the number of franchise restaurants go up. But we'll provide you those specifics when we get together in February as part of our guidance. But that's all contemplated in our reiteration of our long-term guidance that we provided this morning.

Thank you.

Jeff Farmer, Wells Fargo.

Just somewhat following up on that -- and again, you made it abundantly clear that more information is coming in February -- but assuming you potentially further reduce your Company ownership mix, which in turn reduces your capital intensity through at least 2018, based on your planned re-image schedule -- bottom line is that your free cash flow profile over the next several years would look very, very different. So, to the extent that you are able to comment about that now, I'm just curious what your thoughts are.

Yes, well, we've talked about in the past, Jeff. Clearly, we've got this hump that we're working through with the amount of capital that we're spending here in 2014, and we plan again to spend in 2015. And then once we get to the 85% of the Company restaurants re-imaged, we come down that other side of the curve, and we do free up a lot of cash for other growth opportunities, whether that be new restaurant development in North America, international, or something else.

Could that profile change, depending on where our ownership ultimately evolves through that timeframe? Absolutely. And I hate to keep begging it off to the February analyst meeting, but that's where we want to make sure we have a holistic picture of all of those elements. Where does restaurant ownership evolve? The selective buying and the selling; the role that that plays in building a stronger franchise and Company economic model; and then, how all that factors into our long-term guidance, will all be things that are forthcoming.

All right. That is helpful. And then just one more. You did touch on it earlier. But in terms of commodity inflation in 2015, wage inflation in 2015, Affordable Care Act, 2015 -- a lot of costs on the restaurant-level margin line. So can you give us any high-level thinking in terms of how we should think about 2015 restaurant-level margin, versus what theoretically we would see in 2014?

Yes, no. We would expect, despite all of those headwinds, and contemplated in all our guidance, that we would continue to see margin expansion. We have made the assumption that beef costs will remain relatively high, all the way through 2015 and even into 2016. We've factored in the wage inflation that we're seeing on the minimum wage at a state level. And we do have the Affordable Healthcare all built-in.

But as we continue to look at initiatives around technology and how we drive productivity in the restaurant, what we're seeing from the tailwinds as we get these Image Activated restaurants opened, with the nice lifts in transactions and the strong flow-throughs, and all the work that we're doing to really leverage mobile order, mobile pay, and technology to drive more transactions, especially as we tie that into a loyalty program -- those would be all things that we've contemplated in the guidance to offset the headwinds that we're facing.

All right, thank you.

Sara Senatore, Sanford Bernstein.

I have a few follow-ups. One is -- the first is about the gap between the franchisee and the owned comps. And I know you referred in the release to Image Activation. I guess I am trying to think through -- my sense, or my math, says that the biggest lift you'll get from Image Activation will be in 2015.

And I'm just trying to think, since you've given us guidance out to 2017, how sustainable are comps? Because it does look like, ex- the Image Activation lift, the franchisee comps were fairly modest. So just trying to understand your confidence in your product pipeline and marketing, and what you see as Image Activation might start to roll off. And is there any sense, given that gap, that maybe there is some cannibalization that's going on?

Yes, so, a couple of things, Sara. We will continue to lead the system, as we've said, to have 85% of the Company restaurants re-imaged through 2017. And we will see the biggest tailwind from IA, on a Company same-restaurant sales comp basis, 2015, and probably into 2016, as you think about what we're doing another couple hundred restaurants next year. And those things, if we do a lot of them in the back half, you really don't get that benefit into the comp base until 2016.

But we'll continue to lead to drive those comps. And the delta that we've seen, recent over the last several quarters, is really a function of the Company having a higher mix of re-imaged restaurants relative to the franchise base. We would expect that gap to close over time, as we now see the franchise community following and soon outpacing the number of re-images that the Company is doing, on our journey to have north of 35% of the system re-imaged by 2017.

And on the follow-up question around -- are we seeing cannibalization, as we put re-images in place -- again, some of the existing, older restaurants? It's a mixed bag, and too early to tell. So, in some cases, we see a nice halo effect against all those restaurants. Other cases, we see some impacts. But it's really a function of how the older restaurants are being operated from the team within it.

Because you can have an older restaurant with a great crew that's going to continue to do very, very well, and you could have the other side of the equation. And if you're on the other side of the equation, you could probably see a bigger impact when a re-imaged restaurant opens 4, 5 miles away. But it is mixed on that front, pluses and minuses.

Okay, thank you. And then if I may, Emil, you have a lot of experience, a long track record in this industry. I was just hoping to get your thoughts on -- you mentioned gas, and you mentioned food at home inflation should be beneficial to the restaurant industry overall. It feels like we're seeing a mixed bag with, in general, full-service showing actually some nice improvement in the third quarter; and then limited service, much more mixed.

Is it a matter of timing? Are there other things? Obviously, it's competitive in QSR, but it always has been in full-service, as well. So do you have a perspective on why we might be seeing these different trends?

It's a good point. And I think your observation is really pretty accurate. Because normally when you've seen the changes in inflation rates, that it's probably shown up to a benefit more quickly than it has so far. And with the significant drop in gasoline prices, you probably would have expected to see a little bit more of that showing up more quickly.

And my sense is that the reason for this is, very simply, that there still are a lot of consumers out there whose household incomes have not increased a lot over the last several years. I think if you look at per-capita income in the United States over the past three years, it's up 1.3%. And so there's a lot of families that aren't feeling all that robust about this.

And my sense is also, too, is if you look at the strength that's taken place in some of the high-end things like automobiles, that there's some money going into that, as well; and that might also be this. But having said that, these still are undoubtedly encouraging signs to me for consumers and the restaurant industry. And I think we will eventually benefit from those.

And this is where also I think our brand positioning of this Cut Above brand positioning, where we do -- our goal is to give people a new QSR quality experience, but at a QSR price. And I really believe that that's being brought to life in our Image Activated restaurants. That's a powerful idea. But remember, right now, we have it in 10% of our restaurants. Because it's great that we've Image Activated 600 restaurants, but we've got 5,400 to go.

Understood. Thank you very much.

Chris O'Cull, KeyBanc.

Could you comment -- how are the stores that were re-franchised last year, I guess, west of the Mississippi -- how are those franchisees doing, in terms of sales performance?

Yes, for the folks that we've been seeing, both from a sales performance perspective, as well as a profitability perspective, we've been very, very encouraged as we've taken on those restaurants. And, importantly, they were up against some stronger comps, so some of the non-weather impacts that they had in the base. But they continue to plow forward.

And as you know, Chris, they have commitments to re-image X amount of restaurants over the next five years. There was 180 with those restaurants that we sold. And they're working hard on their new build commitments of 100 new restaurants in the West. But, by and large, they are feeling very good about their total economic model, and what they are seeing from their businesses.

Yes, and I'd add, Chris, that several of those franchisees have also recently purchased additional markets, which probably -- and in some of those cases, additional franchise markets -- which probably is maybe the most powerful testament to the fact they are pretty happy.

And then just as a follow-up, let's assume you were to sell more Company stores to franchisees. Presumably, these stores would be east of the Mississippi, more core markets, where they are more profitable and you would arguably expect greater proceeds for these stores. So, it would require more capital commitment from franchisees. How do you think about requiring these types of purchases, or the franchisees who make these purchases -- how would you -- what would you expect in terms of Image Activation requirements for these folks, if they were to make some of these acquisitions of Company stores?

I think we would follow the same course of action that we've played in US system optimization west of the Mississippi, and what we've done in Canada. We believe in the business case, so there is a strong cash-on-cash return from re-imaging restaurants. We do believe there's opportunities for new development, whether that's west, east, or north of the border in Canada. So we would have those same discussions.

And what we've seen is folks that are committed to Wendy's growth, with strong balance sheets, that are good operators, with that focus where they have that access to capital to really move the brand forward. So, we are working through that ultimate plot and how all that holds together, and how it fits into our long-term guidance and what levers we want to pull, Chris. And that will be a big part of the dialogue at the Analyst Day in February.

Good. Okay. Thanks, guys.

John Ivankoe, JPMorgan.

Of the $250 million G&A target that you gave for 2015, is it fair to ask how much of that $250 million that you think is specifically for Company stores? Obviously it's become of big theme of this call here, is just the idea of the more re-franchising. So just to get a sense of what you think system G&A is versus Company G&A.

And there's been a lot of conversation about G&A per system store, for example. There's a lot of different reasons that that is looked at right now. But just to try to get a sense of how you are thinking about the organization, and how you want it to be structured in the future.

Yes, John. We haven't got into the specifics of where our G&A splits are, and whether they're here in the Dublin resource service center, or they're out in the region, so I wouldn't want to comment on that. But you've seen it in US system optimization; you've seen it in Canadian system optimization. There is an element of overhead that does go away when you sell Company restaurants.

Okay. And if I may -- and I apologize if this is addressed. The sales performance of your stores that have been on Image Activation the longest, is it consistent with the system, above the system, below the system? How are those stores comping what are presumably some pretty high opening volumes in the first year?

Yes, no. They are comping consistent with the system. So what you do is, you always get the grand opening impact in the first two or three months. They settle into the sustainable lifts north of 10% to 20% that we've talked about in the past. And then in year two, what we see them then is just kind of grow with the rest of the system from that much higher elevated base, which was really driven by transaction growth.

Thank you.

Nick Setyan, Wedbush Securities.

So, in the past, you've talked about a more sophisticated way of taking price, with respect to maybe geographic locations or specific menu items. How has your thinking evolved regarding that, particularly into next year, as in general the restaurants should take a little bit more pricing to offset some of the higher inflationary costs? And can you just maybe talk about the core itself in Q3, in terms of -- was it more price? Was it more mix? Because at the same time you've got these higher-priced Pub Burger offerings.

I'll start, and then maybe it Emil will jump in a little bit, Nick. But in the third quarter, to start there, we had transactions were down, so you'd see that a lot of the growth was driven by price mix. We do have a pricing optimization model that we continue to leverage to look at. And we're trying to manage price and mix as an element of -- how do we manage inflation?

But as Emil had said earlier, it's a balancing act. We've got to play the game on both sides of the menu, both with our high and our low, and to make sure that we continue to drive transactions.

And we've got to look at our whole promotional calendar to make sure that we're managing the mix equation as we factor in -- how do we mitigate some of the impacts of inflation on the commodity front as we go into next year?

Yes, Nick, I think that we continue to use this very sophisticated pricing model. And as we see with many restaurant companies and retailers across the United States now, they price very much by locality versus en masse. But at the same time, what we always do is not just default to that by itself, but we provide our own good judgments on as we look at those pricing strategies in detail.

And I think what clearly continues to hold in this business is that those people that take the most aggressive price have a tendency to be impacted most by traffic. So you've got to be careful about getting ahead of yourself.

Thank you. And on the Canadian stores, are those the margin profile that the level are, are they similar to the rest of the system, or can they be accretive next year?

From a margin perspective, we would expect the sales in Canadian restaurants to be slightly accretive.

Got it. And then, lastly, in terms of the COGS this year in Q3, it wasn't that different from what my expectation was. But, obviously, we saw the deleverage on the occupancy and other line. Was there anything else going on there, aside from the week closures? And should we see that levering again, going forward, starting in Q4?

Yes, no. I think when you think about the margin pressures that we had, we clearly had deleveraging. And then you had the Image Activation closure time, which has a big impact on margins. We did invest a little more into training to get ready for the Pulled Pork promotion, so that had an impact on the margin in the quarter; and then, of course, commodities. So those were the drivers that were the headwinds against a lot of the tailwinds that we saw in price mix, on benefits of system optimization, and other productivity initiatives in the restaurants.

Thank you.

Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. At this time, you may now disconnect.