Wendy's Co (WEN) 2002 Q1 法說會逐字稿

Welcome to the Wendy's International first quarter conference call. All participants will be able to listen-only until the formal question and answer session. At that time, you will be instructed how to ask a question. This conference is being recorded at the request of Wendy's International. Should you have any objections, you may disconnect.

I would now like to introduce your host for today, Mr.

, vice president of Investor Relations and Financial Communications. Sir, you may begin.

Thank you.

Good morning, everybody. Welcome to our first quarter earnings conference call. This call is being web cast over the Internet and will be available for replay.

Before we get started, I'd just like to introduce the members of our team here this morning. Jack Schuessler, our chairman and CEO; Kerrii Anderson, executive vice president and CFO; Tom Mueller, our president of Wendy's and several other members of our management team.

We published our first quarter results yesterday during our annual meeting of shareholders here in Columbus, Ohio. Our corporate news release and the accompanying financial statements and other materials are available on our web site at www.wendys/invest.com., or you may contact our Investor Relations Department at 614-764-3251. We would be happy to send the information to you. We can do that via e-mail or fax.

Before we get started, let me just mention a recent disclosure that we made and some upcoming events on our calendar for investor relations. We did pre-announce our first quarter numbers on April 8 with expected EPS of $0.39 per share and that is what we reported yesterday. Jack and Kerrii will review those results in a few minutes.

In our announcement yesterday we gave an overview of our quarter. We disclosed our preliminary same-store sales for the month of April, and we announced that the board has authorized the call of our convertible securities.

From a scheduling standpoint, our analyst meeting this year is set for May 22-23 in Toronto. We will also be in Hopeville, which is a suburb of Toronto, and that's the headquarters for Tim Hortons. We will feature the Tim Hortons business, as well as their restaurants on a tour, and I'd like to invite all of you to come to that.

On Wednesday evening -- May 22 is when we begin -- we will host a dinner for investors at the Westin Harbour Castle Hotel in Toronto. Investors will get a chance to talk with Jack and Kerrii,

who's the president of Tim Hortons, and other members of their senior management team, including

,

,

. We will be able to give you a nice overview of the business during dinner.

On May 23, our analyst meeting really begins early in the morning. It will include breakfast at the hotel somewhere around 6 a.m. And then we will have tours of several Tim Hortons restaurants, to illustrate the diversity of Tim's real estate, as well as some of their store designs in downtown locations, highways, and in some small towns.

Following that, we will have a tour of Tim's R & D lab in Oakville. And following that tour, we will provide a good overview of the Tim Hortons business, with presentations by their executive management team.

Following lunch, we will provide an option of additional store visits in the Oakville area, or you can have transportation back to the airport.

We did send this information out to all of you in a fax and an e-mail earlier, including the forms to sign up for the meeting. If you still need a copy, please contact

at (614)-764-3251.

The agenda for today's conference call will include remarks by Jack and Kerrii. And following those remarks, we will open up the call for questions. Now I'd like to refer you for just a minute to the Safe Harbor statement that is attached to our news release as well as our form 10-K

Certain information we may discuss today regarding future economic performance, such as financial goals, plans, and development is forward-looking. It is possible that 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 set forth in the Safe Harbor statement attached to the earnings release and in our most recent 10-Q.

I would also like to note that we are observing Regulation FD from the SEC. Reg. FD encourages public companies to discuss potentially

information in a public forum. We therefore encourage those of you on the conference call today to ask your questions at the end of our presentation. Now, let me turn it over to Jack.

Thanks, John. And good morning, everyone. We had a very, very strong quarter in many areas, including our financial performance. Let me review some of our significant accomplishments.

As you know, on April 8, we pre-announced our first quarter results with better-than-expected sales and earnings. We reviewed the numbers yesterday during our annual meeting of shareholders in Columbus, and here are some of the highlights.

Our same-store sales for the first quarter were very strong. Wendy's Company U.S. -- a positive 5.6 percent. And our franchisees in the U.S. were even stronger -- +8.1.

, positive -- up 7.9. Tim's U.S. -- +10.0.

We delivered excellent top-line performance, with revenues up 10.2 percent to an all-time record for the quarter of $612 million. At the same time, we controlled costs effectively. Our G&A grew only 4.6 percent, as we continue to focus on spending on our core businesses and the most important projects.

As we said over the past year, our management team is very focused, only getting sales to the bottom line and delivering quality earnings performance. The great news is that both of our core businesses of Wendy's North America and Tim's Canada had excellent quarters, and both have very good momentum. Our Tim's U.S. business also had a very positive momentum.

We're also pleased with our preliminary same-store results for April. Wendy's U.S. -- in the range of +5.5 to 6. Tim's Canada -- +8 to 8.5. And the range for Tim's U.S. -- +12.5 to 13. John will be sending out a news release with our final April sales sometime next week.

We also had a solid quarter with store development, opening 71 total restaurants. And we're on track to open more that 515 units for the year, which is in line with our guidance. We are utilizing our new mapping technology to improve site selection and focusing on tightening the store development timeline.

Let me spend a couple minutes on the Wendy's brand. At Wendy's, our operators focused during the first quarter on running great restaurants and rolling out the new Garden Sensations salad lineup. Our Service Excellence program continues to pay dividends, as we lower our pick-up window times and improve the throughput of our restaurants.

As you know, we have the fastest drive-through service times in the industry, at about 134 seconds, which is about 30 seconds faster than any other major QSR chain.

Our best-of-class stores are in the 102nd range, and we believe the entire system will continue to improve. And that's always our goal: continuous improvement, to get better every day. So that we can provide better customer service, drive transactions, and build incremental sales at peak hours.

Also during the first quarter, our transactions increased more than 2.5 percent, which is very positive. Overall, Tom Mueller and his operations team are doing a great job of maintaining our focus on operations in both company restaurants and franchise restaurants. This is a significant competitive advantage for Wendy's.

Our People Excellence is continuing to pay off. At the end of first quarter, our turnover rate for restaurant crew hit an all-time low of 142 percent, which is down 21 basis points from 163 at the end of last year.

Our co-manager and assistant manager fell from 26 percent at year-end to 23 percent. And our general manager turnover fell from 17 percent to 13 percent. These are really phenomenal numbers in the restaurant industry, and it's a real testimony to the People Excellence program developed by Tom and Kathleen McGinnis.

Lower turnover rates are important because it enables us to serve the customer better. And we have lower training costs, which can help us improve domestic operating margins.

Another important accomplishment during the quarter was the successful introduction of our Garden Sensations salad lineup. We developed Garden Sensations in a very disciplined manner over the past two years, beginning with in-depth consumer research. We felt it was important to update our salad lineup, which is a core menu item at Wendy's and last updated in the late 1980's. Our goals were to meet emerging consumer needs, grow sales, and expand our leadership position in salads.

A cross-functional team including R & D, supply chain, management, operations, and finance all contributed to the development. We tested the new lineup last year in five major U.S. markets. It was very successful, with product mix numbers reaching double-digit range during the media period.

We began introducing the salads into our restaurants nationwide in December and January, to give our operators plenty of time to implement the new product and conduct training. And the national media began in late February. The results to date have been outstanding, with sales of Garden Sensations helping both

and transactions. And mix numbers reached double digits during the media.

Consumers really like the quality and freshness of the ingredients, the new packaging, the variety of toppings, and the fact that they can customize the salads.

The salads are just another example of how we successfully develop new products that meet consumer trends. They feature higher-quality greens, new toppings, reformulated dressings, and new packaging. Wendy's already has a clear competitive advantage in the salad category, and these helped set us up and expand our leadership position.

Another important accomplishment during the quarter was the seamless transition of our advertising. As we shared with the investment community in February, we have been working on the transition for more than two years, and we were transitioning our advertising when Dave Thomas passed away in January.

While we can never replace Dave as our founder and spokesperson, we felt confident that the brand Wendy's and our focus on quality products would continue to resonate with the consumer.

In January, we featured our Super Value menu as our national message, and same-store sales were strong at +6.7 percent. In February, we were in a local pillar, and sales were up 3.9 percent. And then in March, we featured Garden Sensations as our national message, and same-store sales increased 6.1 percent.

In April, we featured Crispy Chicken Nuggets and our new theme of "At Wendy's...it's better here." The ads also feature images of Dublin, Ohio, home of Wendy's. But most important, the ads feature our quality products. The product is always the hero at Wendy's, and that will never change.

I am pleased to tell you that our advertising continues to achieve excellent results. As I mentioned earlier, same-store sales in April are tracking between the 5.5 to 6 percent range, being positive.

Other new initiatives in the quarter include the continuing roll-out of new store systems in our Wendy's company restaurants and a plan to build a new R & D center. With new store systems, it is now installed in 500 restaurants, and we plan to complete the roll-out in company stores by October of this year. And we're really excited about the technology platform, because it will enable us to serve the customer better, improve store operations, and eventually implement important initiatives such electronic ordering and e-pay.

The research and development lab is being built as an addition to our corporate offices here in Ohio. And it illustrates our commitment to innovation in our core businesses, the development of new products, and the continuous improvement of our existing menu. Costs for the new state-of-the-art lab will be in the range of $3 to $4 million.

One last thing on the Wendy's brand. I can tell you I've spent considerable time with our franchisees during the first quarter. Whether it was our franchise advisory committee meetings, Wendy's national advertising meetings, or a number of market visits that I've made. And I can tell you that they are extremely happy and financially healthy as a result of the strong sales and profit trends in the system.

Kerrii, Tom, myself, and other Wendy's executives will be hosting a series of town hall meetings in May across the U.S. to review many of our strategic initiatives currently under way. And, of course, to talk about our future plans.

Let me spend a few moments on Tim's now. We are very pleased with the sales performance in the first quarter and April for Tim's. Both the Canadian stores and U.S. stores are performing extremely well and continuing a trend of the best sustained sales performance in the industry.

Tim's is focused on a number of service initiatives and their new

at the front counter as they expand their dominance of the Canadian marketplace and improve throughput in the restaurants.

Tim's has taken one price increase over the past eight years. And we believe that this has resulted in real customer loyalty that enables them to command 20 percent of all

occasions in the quick-service restaurant sector in Canada.

And as we've said in the past, they've long been the leader in the coffee and doughnuts category. And they just dominate and own that category at about 70 percent of all eater occasions.

Focusing on marketing during the quarter, Tim's looked at a number of high-quality products, featuring the Fruit Explosion muffin and the Chili in a Bread Bowl. It also conducted its annual Roll up the Rim to Win promotion, which was a very popular one once again in March.

Right now, the chain is promoting iced cappuccino, which is a great product that continues to attract customers.

At Tim's in the U.S., our results continue to improve. And it's really clear that customer acceptance of the brand is growing. Same store sales were up 10 percent year-to-date, and more than half the stores have topped $900,000 dollars in annualized sales volume.

Coffee as a percent of sales is now above 30 percent, and loyalty to the brand is growing.

From a development standpoint, we continue to open Tim's stores in the U.S., focused on franchising restaurants in our markets of Buffalo, Michigan, and central Ohio.

We currently have 150 restaurants in the U.S., and continue to make progress franchising the units, with about 90 now being operated by franchisees. And looking ahead, we're working on real estate zoning and other prep work to enter new markets. Our goal is to enter a new market and establish a strong presence with franchise operators. We will get on television with advertising to properly establish the brand and build awareness. We'll focus on operations, and our goal is to generate a profit quickly.

If we can establish Tim's in our markets -- in these new markets, then I really believe that we have another growth vehicle for the corporation.

We also made progress during the quarter on the construction of our

baking facility in Brantford, Ontario. This state-of-the-art facility is part of Tim's joint venture with IWS and the parent of Cuisine de France. We expect the plant to open in the fall and to begin supplying baguettes, breads and confectionery items to Tim's stores in Ontario and the U.S. We've been testing new baguettes at restaurants in Ontario and Columbus, Ohio, and consumer love the taste. More importantly, the new product will significantly improve the quality of our sandwiches at Tim's as we attract customers and build sales.

As we talked before, a portion of the cost for the joint venture will cost us about one penny per share in 2002 and then contribute to income in 2003.

As part of our long-term growth initiatives, we announced during the quarter a $9 million investment in Cafe Express for 45 percent ownership in the Quick Casual chain. As you know, Cafe Express has 13 units in Houston, Dallas and Scottsdale, Arizona, and it averages $2.2 million in average unit volumes.

Since our announcement in February, we closed the deal, and we've been working with chain founders Lonnie Schiller and Robert Del Grande on initiatives to help them grow to 50 stores in the next three to four years. And we've started to help them with the new unit development methods in mapping technology, and we've also leveraged our relationship with Coca-Cola. They're also tapping into our expertise in the areas of operations and long-term planning.

I'm very optimistic about Cafe Express. They have great food and outstanding locations, and they have tapped into an emerging growth area with bistro-style food, fast counter service, no waiters, no tipping, no hassle.

In summary, it was a very, very busy and productive quarter as we made significant progress in key areas of the business, and we continue to make progress every day on our strategic initiatives, and we're believe we're on the right track to take this company to the next level. And I've very optimistic about the remainder of the year.

I look forward to seeing many of you at the analyst meeting at Tim's later this month, and now I'd like to turn it over Kerrii.

Thanks, Jack.

I'd like to take a few minutes this morning to review the financial results in a little more detail and to discuss some of the initiatives that we've completed.

For the first quarter, ended March 31, 2001, our systemwide sales grew 11.7 percent, to $2.1 billion, and it's a record first quarter. Total revenues increased 10.2 percent, to a record $612 million. And the important components that drove our revenues include the same-store sales at Wendy's U.S. company restaurant, growing about 5.6 percent for the quarter, on top of a 1.4 percent same-store sales increase a year ago. Our franchise same-store sales grew at a much stronger rate, 8.1 percent, than did the company stores.

On the same-store sales, they were driven by transaction growth and a higher average check, as we capitalized on our service excellence progress that Jack discussed and the Garden Sensations introduction.

Our transactions were up about 2.7 percent, which is encouraging and quite an improvement over the flat transaction trend we saw in 2001.

Same-store sales at Tim Hortons restaurants in Canada grew about 7.9 percent in the quarter, and that's on top of a 9.9 percent increase during the same period a year ago. Same-store sales at Tim's U.S. grew 10 percent in the quarter, and that's on top of an 8.6 percent a year ago.

From a new restaurant development standpoint, we opened up 71 new restaurants systemwide during the quarter. The openings were represented by 45 new Wendy's and 26 new Tim Hortons. It was a very good quarter for new restaurant development, and as Jack said, we are on track to meet our development targets for the year. We plan on opening 515 to 540 new units systemwide in 2002. Our inventory sites under construction is solid, and our pipeline for the sites looks really good.

In addition to the strong top-line growth, we had good news on margins and other costs. Our domestic operating margins in Wendy's U.S. company stores improved to 14.8 percent, which is up about 100 basis points compared to a year ago. And I'm going to talk a little bit more in detail, but the major element consisted of 60 percent favorable improvement in utilities, 60 basis points, 50 basis points in food for the quarter, 20 basis points in labor, and about 30 basis points in a number of other items, all on the positive side. These were offset by about a 60-basis-point increase in what we call our bonus incentive plan, and I'll talk a little bit more about each of these elements here as we move forward.

Looking closer at margins, our strong sales were important, as were the initiatives that we put in place, and that is to manage our supply chain, to control our utility costs and lower them wherever it's possible, and to lower the crew turnover. So I'd like to go in a little bit more detail on each of these items.

Now, let's start with the cost of sales at domestic Wendy's. Food as a percentage of sales was 29 percent. It was down 50 basis points from 29.5 a year ago, and it reflected good sales, better than expected beef cost, and lower chicken cost.

Our systemwide beef strategy, which is consolidating the suppliers and locking in quarterly pricing beginning late last year really paid off in the quarter, with beef being about 6 percent less than in the first quarter of 2001. Indications are that beef costs will continue to be slightly better for the year than we originally thought, more in the 2 to 3 percent range of an increase rather than the 3 to 6 percent we had originally thought.

Store labor was 27.5 percent of sales, and that's down 20 basis points over a year ago, truly reflecting the good top-line sales.

The great news is that the rate of increase in the average wage rate continues to moderate. We had a 2.2 percent increase in crew wages for the quarter versus a year ago, and that's down sequentially from the previous quarter and well below the rate of increase we've experienced over the last few years.

We did incur certain costs related to crew training for the Garden Sensations introduction, and that concluded in the quarter.

We also had good new on utility costs. After increasing in the first half of last year, we are making real progress with our utility management program, and for the quarter utility costs were down 60 basis points. The outlook is favorable as we made some contract purchases for 2002 in a number of markets, and we are working aggressively to manage this cost line. And I might add, the weather helped.

The one offset on the cost line was the higher than expected performance-based bonuses in the field, and as I mentioned, that was about 60 basis points higher than a year ago. Our operators did a superb job in the quarter, and we have aligned our compensation program more tightly to performance, and that's reflected in the increased expense.

In addition to the good flow through at the store level, we remained very focused on profit enhancement at corporate, and as a result, let's take a look at G&A for a minute. I'm very proud that the controls that we put in place again this year and the efforts that our headquarters and field staff have made to manage cost in this tough economic environment is paying off. In dollars, G&A expenses were up 4.6 percent in the quarter to $56.3 million. G&A as a percentage of revenues was 9.2 percent in the quarter versus 9.7 percent a year ago and 9.8 percent two years ago. As a percentage of systemwide sales, G&A was 2.6 percent, and that's down from the 2.8 percent a year ago and the 2.9 percent two years ago.

Our outlook for G&A in dollars is to increase at a rate of 5.75 to 6.75 percent, and while we are very focused on cost, strong and growing companies are investing in people as well as important projects.

Now let's spend a few minutes taking a little more detailed look at the first quarter earnings. Pretax income grew 11.8 percent to $68.7 million. Our EBIT increased 18.7 percent. Our tax rate was 36.75, which is in line with the guidance we've given you. Net income grew 12.3 percent to $54.3 million.

Total diluted EPS was 39 cents for the quarter. EPS was up 18.2 percent compared to 33 cents reported in the same period a year ago.

Asset gains were about $750,000 in the quarter, which is less than a half a penny versus the $2.2 million in the quarter a year ago, which did equal one penny. Therefore, excluding the gain a year ago, our EPS increased 21.9 percent.

The impact from foreign currency translation with the Canadian dollar did cost us about two-thirds of a penny during the quarter.

We did not repurchase any shares in the quarter due to the trading restrictions related to our disclosures and other matters. However, we are currently authorized by our board to purchase up to 25 million in common stock, and since the inception of our share repurchase program in '98, we have repurchased 33 million shares for 778 million.

In our news release yesterday we also announced that our board of directors has authorized management of the company to call for redemption its outstanding term-convertible securities, which we also call the TECONS, that were issued in 1995. The call is subject to a final determination by management to proceed by mid-May, depending on market conditions and other circumstances. As of April 30, 2002, there were $200 million in TECONS outstanding.

We expect several positive effects if all of the securities are converted. The company's balance sheet will become stronger as its debt to total capital ratio would improve from 39 percent, which would include the TECONS as total debt, as of December 30, 2001, to about 27 percent.

There would be no negative impact on the diluted earnings per share, as those shares are already included in our company's diluted EPS calculations. There would be an increase in the float, in the common equity, by 7.6 million shares, and there would be an increase in the company's market cap by about $280 to $290 million, depending on, you know -- based on recent market prices.

The calling and the converting of the TECONs is important to us because our financial goals include continually improving our financial metrics and to be in a position to utilize our balance sheet for new opportunities, such as Cafe Express or the Cuisine de France opportunity.

The debt rating agencies have maintained their strong ratings on Wendy's, with Moody's being at a BAA-1 and Standard and Poor's at a BBB-plus. S&P did change its outlook from stable to negative, if you remember, back in October of 2001 when we issued our $200 million of straight debt as a part of the Ron Joyce transaction and repurchase of stocks. But the S&P acknowledged that we have demonstrated a long history of conservative financial management, and just encouraged us to stay focused on the health of our balance sheets. We believe that they will look favorably on the TECON conversion.

As for our cash position, we did end the quarter with $132 million in cash. And looking ahead, we are optimistic about the year, which is why we raised our guidance on our earnings per share growth in our April 8 pre-earnings announcement. We expect 12 to 15 percent EPS growth for the year and 12 to 15 percent EPS remains our long-term goal. We are confident that we can achieve this level of growth. Based on the $1.65 in EPS that we delivered in 2001, our 12 to 15 percent growth would produce EPS in the range of $1.85 to $1.90 for 2002. As we previously disclosed, we expect about a penny in asset gains this year versus the three cents we had a year ago. Therefore, excluding gains, our 2002 EPS growth is actually in the 13.5 to 16.5 percent range.

While our guidance may seem a little conservative, considering our strong first quarter and a very good start to the second quarter, the economy's still a little uncertain and we are prudently cautious. We do believe that the 13.5 to 16.5 percent EPS growth qualifies as superior performance in today's marketplace.

Overall, our core businesses are very healthy. And as always, we resisted the discounting gain that our competitors embraced in the quarter. We stayed focused on building our brands and delivering quality financial results. John and Jack and I all look forward to seeing many of you in Toronto at our analysts meeting.

And in summary, we sincerely appreciate your continued support, especially that of our shareholders. Our shareholders and certainly our employees are energized by the resiliency of Wendy's stock price as the market has faced certain challenges. We continue to believe that the best days are ahead and we look forward to the future.

So at this point, I'd like to turn it back over to John Barker, who will instruct the operator and we'll be excited to take some questions

Operator, this is John Barker, if you can go ahead and ask folks on the call to field questions.

Thank you.

If you'd like to ask a question, please press star-1. You will be announced prior to asking your question. To withdraw your question, please press star-2. Once again, if you'd like to ask a question, please press star-1 now.

And our first question comes from

from Goldman Sachs.

Hi. I have two questions. The first is regarding May promotions. Given that you're closing to the end of April here, what will follow the chicken nuggets at Wendy's and, as important, does the "Roll up the Rim" promotion continue or do you have something else lined up? And then the second question is regarding your April same-store sales with mix versus traffic. You mentioned traffic was up 2.7 percent which implies good continued mix shift, which I think means the salads are still selling quite strong. Can you tell us what the mix is like in April relative to March?

First of all, the May promotions, we're going to kick off another round of garden sensations beginning May 9. And as mentioned before, the Tim promotion right now just started for May, and will be the ice cappuccino. The April mix we're still looking at, but I can tell you due to the warm weather, like two weeks ago, and the

demand for the salads, mix jumped whenever it gets warm because of the awareness of a salad is out there.

Thank you.

The next question comes from John Glass from CIBC.

Thanks.

Good morning. Two questions. One is just on the second quarter. Is there anything in the store-over margins that is not going to be sustainable through the second quarter? In other words, can you comment, I guess, on the earnings guidance for the second quarter, particularly as it relates maybe to how margin trends will continue? And secondly, with Hortons in the U.S., the

store sales have been strong for a long time, but they seem to have kicked up recently in the last six months. What do you attribute that to? Is it increase of frequency or are people discovering it for lunch

is ticket rising faster? If you could provide some detail on that.

I think when you have same-store sales like that in Tim's U.S., it's everything, whether it's frequency or whether it's new customers. The net thing that we're seeing in both Ohio and Michigan is these two markets are reacting exactly like Buffalo. When Buffalo started, they had a $400,000 store average and now they're, you know, on track to do a $1.1 million. Also, when we opened up Tim's in the mid-'90s, early '90s in the western provinces, it was slow to go. So I believe that, you know, both Columbus and Detroit is just nearing prior results in Buffalo and western Canada.

I wasn't sure what you really meant about your first question, John.

If consensus is $0.52, I think, with an 11 percent earnings growth, why wouldn't we expect -- if sales trends continue to exceed that, is there anything you're concerned about in the margins?

John, this is Kerrii. Let me see if I can help put a little perspective on that.

As we have shared with you, our earnings guidance for the rest of the year is $1.85-$1.90. It is based on the assumption that our same-store sales at Wendy's would be $3.25 to $3.75 and it also is based on, at that level, we could see 20 to 30 basis of margin improvements. Now, if sales are higher, we would certainly, you know, expect margins to see some improvement and the indications we have on cost are that they're very favorable.

But the guidance has been the twenty to thirty basis point

the $3.25 to $3.75. We're certainly seeing more better trends the month of April, but the quarter's not over.

Thank you.

The next question comes from

for Solomon Smith Barney.

Hi. Two things I wanted to ask about. First, apparently the Canadian dollar rose to a six-and-a-half month high yesterday. And if I'm not mistaken Wendy's outlook regarding the Canadian dollar is quite a bit more conservative to that. Just wanted to see if the Canadian dollar keeps its strength, how that might affect earnings as the year goes on.

The other thing is in terms of the higher than expected performance bonuses in the field, what kind of metrics did you use to grant those extra bonuses? Thanks.

Let me take the bonuses, and Kerrii then can comment on the dollar. Bonuses are based on budgets, and there's three components to it: topline sales, cost of goods and labor, so that's for food, paper, and labor, gross profit. And then the third part is overall net income at the restaurant level.

And as you make more money and you beat budget, you get more bonus dollars.

With respect to the Canadian currency, Mark, last year in 2001, our average exchange rate for the entire year was $1.55, which is up pretty significantly on the year before, 2000, which was $1.49. As we have not given a specific number that we would expect the conversion rate to be, but I will tell you what we're seeing right now with the current currency is it is more in line with last year.

Thank you. The next question comes from

from Bear Stearns.

Good morning. Could you just run through some of the food cost items again, getting a lot of mixed vibes on different companies, on the outlook for ground beef prices. I was wondering if you would comment on that, and then also if you could, you had a pretty good labor expense experience in the quarter, even with training costs related to the rollout of the salads. Wondering if you could quantify those at all?

last, and let me just put one more in, the franchisees' performance -- wonder if there's anything special driving the

concepts of the franchisees in the company unit.

First on the food costs, during first quarter, our beef was 6 percent less than first quarter 2001. And we will really attribute this more to our beef strategy. OK? And it's paid off real well for us, although we paid slightly higher lettuce costs. It was only like 10 bases points was the impact with the problems we had out in California, and then we had a favorable

contract. So all that added up.

As far as the same store sales at franchisees, the best way I can describe it is as a lag factor. And the company's always put in the programs first whether it's service excellence or people excellence or productivity initiatives, because we lead by example and we prove it out. Then we take it as a business case back to the franchisees, and they implement it.

And quite frankly, it's a lag factor. And then the labor costs, I'll let Kerrii.

Yes, as far as the labor costs go, they were in the quarter, but they're -- in our minds, they were not substantial, but they did add to not getting as much leverage on labor as we'd like to have. But it's not a significant number. With re -- I also want to comment, come back to your question on beef.

What we said is we originally thought beef would go up 3 to 6 percent and we are more in the range of 2 to 3 percent. So we have lowered our expectation on the increase of beef.

Kerrii, is that a full year number including the first quarter experience?

OK, thank you.

Our next question comes from

from Morgan Stanley.

Thanks and good morning. A couple of just follow-up questions. One, D&A was a little bit higher than we had forecasted. Is some of that the build-out of the R&D facility if you could just comment on that? And number two, with regard to the conversion, could you just walk us through the cash flow impacts of it? Is there obviously crude interest through whenever you guys convert it, and then we'll see converted prior to your actual

supporter.

Well, the G&A guidance we gave was 5.75 to 6.75, and we came in at 4.7. So I don't know what you modeled.

No, D&A, depreciation and amortization.

I'm sorry, depreciation and amortization...

I thought you said G&A.

I did too. I'm sorry.

No, I said D&A.

Yes, I'll speak to the depreciation. The depreciation is maybe higher than you anticipated for two reasons. One, you have to recognize we do have more restaurants opening. We opened up a number of restaurants this quarter, and so you get more depreciation on the restaurants that are out there as well as we've talked about technology initiatives. And some of that is capitalized technology costs for software that has to get amortized.

And so with those initiatives, we're seeing some increase in depreciation.

Would you expect to see that level off just in terms of the percentage of revenue that we're looking at as we go forward?

Actually, I will tell you with new store systems, which as Jack said, we've got 500 of, approximately 1100 or 1200, you will see some increases. Those new store systems are -- new systems are being implemented and depreciated with technology lite.

And let me see if I can go back to answer the question of the conversion of the TECON. Today, we pay 5 percent interest expense on the TECON, which is $10 million. We of course get a tax benefit for that. So the net impact would be about six just in interest expense savings, but you do recognize that we do pay a dividend of six cents a share.

And that would equate to about approximately a million, eight or two million dollars. So you have about a $4.5 million cash flow savings as a result of the conversion of the TECON. So that helps you understand a little bit of the cash flow key.

That's terrific. And then just one final one, you've had so much success with salads. Could you just talk about any plans or thoughts on the extension of those?

Yes, this past March in our original test markets, we took out two of the five and put in a fifth salad. And that's the Southwestern Grilled Chicken Caesar. And its performance, while we're still reading, looks very positive.

Terrific. Thanks, guys.

Your next question comes from

from J.P. Morgan.

Hi, thank you. I had a question on Tim Horton's in the United States. If I heard you right, I think you said 50 percent of Tim Horton's in the United States had average volumes over 900,000. As you look at that business and begin to understand it in the United States, what is the average volume needed to have returns of the Tim Horton's unit equivalent to a Wendy's unit in the United States?

I think it's around the $800,000 range. OK?

$800,000 of Tim Horton's brings equivalent returns to an existing Wendy's

?

No, no, no, no, no. No. No. I misread your question, because I didn't read it that way. It's about the same, OK? So if you do $1.1 million at Tim Horton's and $1.1 million at Wendy's, you have equivalent returns. But I mean that -- I mean because it's all franchised, that's hard to even say in that way. I mean, what's your question, John?

Well, I just wanted to have sense in terms of where that nine hundred needs to go on like a pro forma basis to have

Well, what we've said all along is, you know, buffalo's up to $1.1 million. We want to franchise the rest of our Tim's U.S. stores, so you want to get it north of eight hundred to refranchise. Because that's where the model works best, OK?

OK.

So it's hard to do apples-to-apples on a Wendy's and Tim's, because we've got 20 percent company stores in Tim's. It's very minor amount.

OK. Thank you, Jack.

The next question comes from

with CSFB.

Hi. I got on late, so I don't know if you've addressed this, but given the success you've had rejuvenating the salad line really moved the product quality it seems, you know, away from fast food and more toward casual dining, and obviously the consumers noticing that. Are there any other areas of your menu that you might be able to target to do the same thing with?

Well, I mean, it's a whole notion of continuous improvement. We are going to continue to target different lines, whether it's chicken or hamburger or other products that, you know, we feel we have to maintain our quality edge in the QSR sector, and we'll never sit still.

We put together this past year a whole menu strategy at looking at all of our lines,

, and, you know, that's another reason we're building a state-of-the-art R&D lab to help us in this endeavor.

Is there anything on plan for next year like the salads or...

We're always working on things. They have to prove out first.

OK. Thanks.

The next question comes from

from Wachovia Securities.

Hi, it's

. I wonder if you could give us an update on your late night program and the progress you're making there.

It's everything we've said. I mean, we continue to make progress. We have year-round marketing behind late night. We understand who our key consumers are. You know, we built sales in

part last year at 21 percent, and that's on top of three years in a row at 30 percent. And that 21 percent last year was not due to our expansion, but traffic expansion. So we feel like we understand it. It's a good part of our business. I mean, we look at different segments and that's how we think about the business.

For instance, we kicked off Hispanic advertising this past January, because we felt there was a business opportunity there.

Thanks.

The next question comes from

from Lehman Brothers.

Thanks very much. Good morning. A few questions. First, on the salads. Can you give us a sense of how the margins are running on the salads...

Outstanding. They're outstanding. They're -- versus the old line-up it's six points better.

Got it.

And the salad only really cost us about 10 basis points, and our food cost was better in first quarter, at 60 basis points. So we're quite happy with the margins on the salad.

Great. That's the first question. Second, on the increase in ad budget of 30 percent, are we -- through the first quarter, did we see a 30 percent increase in the ad budget, or will that incremental bump occur as we look ahead?

The way the advertising calendar works, the advertising calendar goes from September through August. OK. And then we schedule our national

at different times. And you can never look at media by "I spent this amount this quarter versus a year ago," it's almost like a continuum that you have to look at.

OK. Thank you. And the third question, on lettuce costs, wondering if you might have to help that, or perhaps your lettuce cost might be up in the second quarter, given what happened at the end of the first quarter?

No. In fact, our lettuce prices are very normalized right now.

John, if I could squeeze one last question in there on medical benefits. I believe you mentioned those in the fourth quarter as an onerous cost. You didn't mention it here in the first quarter. Can you give us an update on labor costs like medical, worker's comp? Thank you.

Our response on insurance was that we were seeing higher insurance costs, both in the property casualty line as well as the medical and benefits line. But we have made a certain number of changes to our plan, to try to help shift that cost. I think you're seeing a lot of employers do this. If we want good coverage, then we have to either raise deductibles or raise contribution from employees. And as a result of that, we have not seen -- you know, 20 percent is what a lot of people are seeing in the medical field. Our overall costs are less than that because of the shifts.

Great.

Great. Thanks.

The next question comes from

from Merrill Lynch.

Hi. Good morning. I was curious if we have explored Garden Sensations just a little bit more. Jack, could you give us a sense as to what you feel the incrementally is that you're seeing thus far?

You know, it's always hard to say. I mean, we've always looked at Wendy's in a realm of a number of competitive advantages, starting with our food, going on to our people, our service. I don't think you can always say that this gave me this. You have to deliver a good customer experience at the restaurant level.

I can tell you we're in the final stages of analyzing it, and we're very happy with the incrementally as it relates to how it performed against the test markets. But you've got to look at your business as a whole, not just any one thing. And people help drive it, your operations help drive it, and of course, you know, a good product like Garden Sensations and great marketing also drive it.

OK, it just looks that your transaction count clearly picked up during the quarter. And I was curious if you were able to see, you know, and responsibility from that product. Obviously, there's bigger...

Well, we never -- in January our same-store sales increase was, like, 6.7 or 6.5. And in February it was 3.9, and then it came back to 6.1. So clearly, we had momentum and transaction growth before we ever went on TV with Garden Sensations. And that's why I say it all has to work as a whole.

OK. I have actually an operations question on the Garden Sensations. I've noticed time and again that the freshness really is a great attribute of what you're able to do on a consistent basis. What are you doing procedurally to make sure that the freshness stays? Because clearly that's going to have some impact on the legs of the product.

Well, it first starts with the product coming in the back door. I mean, we contracted with the growers back in May to have enough supply. And they really delivered with us -- delivered for us, when there was some spotty issues across the country with lettuce.

Again, it's procedurally how do you make sure it's done at the store level, and you do it as simple as you can. And I can tell you, this product line versus the old product line, we've even saved steps in building the salads at the in-store level. And then lastly is we're committed to freshness, where we make the salads two to three times a day.

Would it be reasonable to expect the training costs associated with the Garden Sensation rollout are going to disappear this quarter?

Yes, that's very reasonable.

Can you give us a sense as to the magnitude of that?

There will be none.

No, what was the magnitude in first quarter?

Oh. I mean, I really don't want to answer that one, OK?

OK. Well...

I mean, that kind of goes back to the commitment we have in training, and we don't want to give away some of the family secrets here.

OK, and then an easier one. Tim's, as you mentioned...

it's already four.

All right, well, this is the last one.

Tim's in the U.S., you clearly talked about building the pipeline for franchises as you expand geographically. Are you tapping into the Wendy's franchisee family at this juncture, as you start to think about growing Tim's in the U.S.?

No, we're not. In fact, we're having, you know, a lot of demand for our -- especially franchisees in southern Ontario that really don't have the opportunity to grow, because it's one of our most populated, penetrated markets. They love to come down to the U.S. and open new restaurants. We don't have a problem with tracking franchisees.

OK. Thank you.

The next question comes from

from U.S. Bancorps.

Good morning. A quick question for you, Jack. You might even be able to answer it with a yes or no.

Could you just give us a little color on the mix -- on the sales mix again? I guess what I'm looking for is, with the salads, was there a lot of trial or can you say that the sales fix generated from salads was accelerated or decelerated or was the same through the first quarter?

I think I'll just be safe and answer yes.

We always have trial in the beginning of a product launch, OK? Based on that product, and based on how you handle the customer during the launch, will predict how sustainable it will be in the future.

You have to say it all was trial, because there is a great awareness. I could tell you, you know, we went off air at the end of March. When it got warm, second or third week in April -- remember on the East Coast in Minneapolis and the Midwest, it got to 80 degrees -- I mean, the awareness was out there that just that whole week the mix, you know, was higher than during the medium.

So, to me, in talking our marketing people, that we really think we got the message across and the awareness is there.

So you think that the salads...

The other thing is, you know, we're getting a lot of trial from

. When you compare these salads to your

players, clearly they're a better price point and they're as good, if not better, in quality.

So, just reading into that, seeing that mix increased when you got off -- even when you were off

, you think that this is sustainable at this level versus, you know, having...

No, I wouldn't say that. You know, the salad is seasonal, OK, and it starts in January and it peaks in August and then it goes down, OK? But we're very happy with our mix levels. We're very happy with the original test markets and how they settled 12 to 15 months after the introduction. We feel very good about it.

OK, thank you.

The next question comes from

from Robertson Stephens.

Hey, guys. I was hoping you could explain the disappearance of all the grape tomatoes in my local super market.

But, Jason, Cafe Express, I have one question remaining there. Could you talk about the sort of timing of the ramp-up and

developments and maybe whether or when you're going to explore new markets there?

And then two quick questions -- net development, comment on closures. You had a dozen or so closed international

stores. How many more would you expect this year, and give us an idea what the next development number could look like.

And lastly, just remind us where those field bonuses hit the P&L. Thank you.

On the field bonuses, Paul, they hit the P&L in the margin line. They hit in the cost of -- yes, restaurant operating costs. So they -- and they're reflected in the margins.

As far as Cafe Express, you know, we want to position it to be a growth vehicle. We feel that we got to get 50 stores, and that's our immediate goal over the next three to four years.

And how many new markets?

Probably one or two.

Great. And then the closure question on maybe international and domestic, if there's anything different today, three months into the year, than what you expected earlier?

I'll answer your overall question on net. I mean, what we gave guidance of is that we would expect new units net to be 5 to 6 percent, and that was the guidance we gave. So, net is, of course, new openings and closures overall.

I don't know if Jack wants to speak a little more to specifically, internationally, what our strategy is.

I mean, internationally, for instance, you know, in Colombia we closed three stores in the first quarter, and it's a very difficult operating environment in Colombia. And the franchisee thought the best thing to do was close the stores, and we agreed.

We're also bullish on a number of countries, as you know, in Latin America, but we've got to be very choosy.

OK, that answers it. Thank you.

The next question comes from

from Bear Stearns.

Hi, just two follow-ups. You mentioned the technology, as you rolled out the new store systems. I'm wondering what that ran on a per-store basis.

And then just a question on the quarter. The operating

line seemed like it was up more than the franchise revenues. I'm just curious if that's something you're gearing up maybe for the Tim's USA expansion or if there's some other factor.

OK, Joe. With respect to the technology, what we've shared is that capital expenditures in technology for new store systems this year were going to be somewhere between $30 million and $40 million. That averages somewhere about $35,000 and $40,000 a store. So hopefully that helps answer that question for you.

And we do treat that as an investment that we will get a return on through productivity, through number of initiatives that can take place after we get it in.

Yes, get it in completely in the system, so we're trying to leverage that as we focus on 2003.

With respect to the operating costline, there's a couple of items, just to kind of remind you what's in that section. We have, as you know Tim sells equipment to their franchises, much like

does, and that equipment cost is reflected in that line, and they opened up 11 more franchises this quarter than we did a quarter a year ago.

And they also, as you have seen intense growth overall, they supply in Canada and in the U.S., but mostly in Canada, products to other franchises. They have a distribution business in warehouses, and some of that increased cost is reflected in there as they have grown. So a couple items there is in that operating costline.

OK, thank you.

Thank you. And at this time I'm showing there are no further questions.

OK. We thank everybody for joining the all today. If you have other questions, you can follow-up with me later today. Thanks a lot.

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