WEN

Wendy's Company (The) (WEN)

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The Wendy's (WEN)

Q3 2012 Earnings Call

November 08, 2012 10:00 am ET

Executives

John D. Barker - Chief Communications Officer and Senior Vice President

Emil J. Brolick - Chief Executive Officer, President, Member of The Board of Directors, Member of Executive Committee and Member of Capital & Investment Committee

Stephen E. Hare - Chief Financial Officer and Senior Vice President

Analysts

John S. Glass - Morgan Stanley, Research Division

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Michael Kelter - Goldman Sachs Group Inc., Research Division

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Michael W. Gallo - CL King & Associates, Inc., Research Division

Christopher T. O'Cull - KeyBanc Capital Markets Inc., Research Division

Nick Setyan - Wedbush Securities Inc., Research Division

Keith Siegner - Crédit Suisse AG, Research Division

Howard W. Penney - Hedgeye Risk Management LLC

Phillip Juhan - BMO Capital Markets U.S.

Presentation

Operator

Good morning. My name is Brandy, and I will be conference operator today. At this time, I would like to welcome everyone to The Wendy's Company Third Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to John Barker, Chief Communications Officer. Please go ahead.

John D. Barker

Thanks, Brandy. Good morning, everybody. This morning, we issued our third quarter 2012 earnings release and we filed our Form 10-Q. The agenda for today will start with the opening comments from our President and CEO, Emil Brolick, and will be followed by a review of our third quarter financial results from our CFO, Steve Hare. Then Emil will provide an update on Wendy's Recipe to Win and the progress we're making on the brand and our key growth initiatives. Finally, we will open up the line for questions.

Today's conference call and our webcast is accompanied by a PowerPoint presentation, which you can find on our Investor Relations page of our corporate website, aboutwendys.com. For those of you who are listening by the phone today, make sure you select the appropriate webcast player option from our website and that will make sure you can sync up the slides with the audio.

Before we begin, I'd like to refer you for just a minute to the Safe Harbor statement that is attached to today's release. Certain information that we may discuss today regarding future performance, such as financial goals, plans and development, is forward-looking. Various factors could affect the company's results and cause those results to differ materially from those expressed in our forward-looking statements. Some of those factors are referenced in the Safe Harbor statement that is attached to the news release.

Also, some of the comments today will reference non-GAAP financial measures, such as adjusted earnings before interest, taxes, depreciation and amortization. Investors should refer to our reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measure.

And with that, I'll turn it over to Emil.

Emil J. Brolick

Thank you, John, and good morning, everyone, and thanks for being on the call. As we look at our progress this quarter and over the last 9 months, we are more clearly seeing the results of our core organic growth strategies pay off in North American same-store sales growth and Image Activation progress. We also have good news around the top layer of our growth pyramid with our shareholder value creation initiatives that will return capital to our shareholders in the near term and we anticipate in the long term as well. Steve Hare will add more color on these value-creating initiatives in a moment.

Due in part to the benefit from Image Activation we expect in the fourth quarter, along with positive reaction to our new ad campaign and strong performance of new product initiatives such as Bacon Portabella Melt, we are reaffirming our 2012 adjusted EBITDA outlook, of $320 million to $335 million, which includes the impact from Hurricane Sandy.

In 2013, as we continued to ramp up company and franchise Image Activation, we expect solid growth with the 2013 adjusted EBITDA in the range of $350 million to $360 million. This growth is within the long-term guidance previously provided and is a sign that our brand rejuvenation strategies are working. Image Activation remains on track and we are transforming our brand through these restaurants.

While closures related to Image Activation had a dampening impact of approximately $4 million on our third quarter adjusted EBITDA, we expect our fourth quarter results to benefit from the 47 Image Activation restaurants that reopened late in the third quarter and early in the fourth quarter. In a few moments, I'll share a more comprehensive update on Image Activation.

Our top line sales momentum continued this quarter as we generated our sixth consecutive quarter of same-store sales growth, including a 2-year same-store sales increase of 4.5%. And I can say that the Bacon Portabella Melt promotion, which began October 1, continued this momentum. The continued improvement in sales reflects progress with all of our PEs and our Recipe to Win. While Image Activation is fundamental to our brand rejuvenation, all the PEs working together is what we expect will produce consistent same-store sales, profit and brand growth, as well as building shareholder returns. So as we look beyond 2013, we are committed to an adjusted EBITDA and adjusted earnings per share growth in the high single-digit to low double-digit range. We believe that our core organic growth strategy and financial management initiatives, including share repurchases and optimized restaurant ownership, will put us in a position to consistently deliver adjusted EBITDA and adjusted earnings per share growth. At the same time, we are gaining traction with our core organic growth strategies, we are accelerating Image Activation in 2013, 2014 and 2015.

Because we are confident about our free cash flow and the flexibility of our balance sheet, we are also increasing our return of capital to shareholders by increasing our dividend and instituting a share repurchase program. Our board approved a 100% increase in our quarterly dividend payable in the fourth quarter and also authorized a $100 million share repurchase program. As we look beyond 2013, we expect to have the financial capacity to grow shareholder value through dividends, share repurchases and core business growth.

I'll now turn the call over to Steve, who will review the quarter's results, and I'll be back later to provide more detail and color on our key growth initiatives. Steve?

Stephen E. Hare

Thank you, Emil, and good morning. Let me begin my comments with a review of the third quarter. North America company-operated same-store sales increased 2.7% in the third quarter. The third quarter sales increase was the result of an increase in average check, partially offset by a decline in transactions. Our franchisees' same-store sales increased 2.9% during the quarter.

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