Wendy's Co (WEN) 2002 Q2 法說會逐字稿

Good Afternoon, and welcome to Wendy's International Second quarter earnings release conference call. All lines will be on listen-only until the question and answer session. Instructions will be given at that time. This call is being recorded for instant replay purposes. If you have any objections you may disconnect at this time. Now I would like to turn the call over to today's host Mr. John Barker, Vice President, Investor Relations and Financial Communications. Sir, you may begin.

Thanks a lot. Good afternoon everybody and welcome to our second quarter earnings conference call. This conference is being web cast over the Internet and will be available for replay. Before we get started, I would like to introduce members of our executive team that is here this afternoon. Chairman and CEO, Jack Schuessler, Chief Financial Officer, Kerrii Anderson, President of Wendy's North America, Tom Mueller, EVP of Operations, George Condos and we have several other members of our senior team here today. We published our second quarter results earlier today, 8'o clock eastern time. Our corporate news release, the accompanying financial statements and other materials are available on our web site and that is www.wendys-invest.com or you may contact our investor relations department if you need a copy of the long form release. The number is 614-764-3251. From a disclosure standpoint you will know that our release today includes same-store sales information as well other details about our Wendy's and our Tim Hortons businesses and results for the entire company.

We have not yet included detailed information regarding Baja Fresh, which we acquired in June. We do review our disclosure materials on a regular basis and we plan on detailing more information about Baja in our year-end financial statements and in our 2002 annual report to shareholders. The agenda for today's conference call will include remarks by Jack and Kerri and following those remarks, we will open the call for questions. Now, I would like to refer you for a moment to the Safe Harbor Statement that is attached to the news release and in our Form 10-K. Certain information that we may discuss today, regarding future economic performance such as financial goals, plans and developments 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 Form 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 material information in a public forum. We therefore ask and encourage you on this conference call to ask your questions at the end of our discussions today. Now, let me turn it over to Jack.

Thanks, John and good afternoon everyone. We had a very strong quarter in many areas including our financial performance and I would like to review some of our significant accomplishments. System wide sales reached 2.4 billion dollars, up 13.4 percent. Same-store sales at Wendy's were positive 6.6 and I can tell you, our franchisee's sales are even higher. Tim's both in Canada and US had another great quarter. In Canada, Tim's were up 9.5 and here in the US we were up 13.8. Revenues for the quarter reached 684 million, up 12.2 and might point out that that's an all time record for the quarter. During this second quarter, we had 26, I'm sorry, 86 new restaurants opened. Our domestic margins improved by 90 basis points from 16.1 a year ago to 17.0 and as you know, earnings per share were 54 cents, up 15 percent over 47 cents a year ago. If we excluded the 2 cents in gains in the second quarter a year ago, EPS was up 20 percent. And we're really happy that all of our business units are performing well and hitting on all cylinders. We continue the positive sales trends in third quarter of this year. Our preliminary same-store sales results for July Wendy's US, plus 5.5 to 6.5, Tim's Canada, positive 5.5, 4.5 to 5.5, and Tim's US, positive 8.5 to 9.5. We also raised our guidance for 2002 based on second quarter.

Our new EPS goal is in the range of $1.90 to $1.95, which is a 15 to 18 percent increase over the last year's $1.65. That was up from a previous EPS goal with the range of 13.5 to 16.5 percent or $1.87 to $1.92 and the key reasons for this is the overall momentum that we have been experiencing in stronger sales, lower than expected commodity cost, a good foreign currency exchange trend and we have made progress on a number of our supply chain initiatives. Our EPS numbers include 1 cent in asset gains from sale of Wendy's restaurants and 2 cents in onetime gains from sale of our cup manufacture at Tim's, which we announced on July 3rd and that's compared to 2001, 3 cents in asset gains from the sale of Wendy's restaurants in real estate to franchisees. I might point out that our guidance also includes the 2 to 4 cents per share in dilution that we expect in the back half of the year from our acquisition of Baja Fresh and looking ahead we are optimistic about the second half of this year and also 2003. And our long-term annual EPS growth continues to be in the 12 to 15 percent range. At Wendy's, we continue to focus on our competitive advantages and it all starts with the food, whether it's Garden Sensations, our Super Value menu, we tested the Southwest Chicken Caesar salad in number of our test markets for salads.

We continued to work with our service excellence where we are still at a 130 seconds or less and our best class is 100 seconds. We are also happy that transactions increased 4.2 percent in the quarter, which is outstanding. Our people excellence program are still paying off, we have very low turn over rates. Year-to-date our GM turn over is a 11.4 percent. Our co-manager is at 18.2 and our crew turn over is 134 percent. We continue to focus on balanced marketing. In the second quarter we emphasized in May, Garden Sensations and Super Value menu in June. And as you know we have been working on a seamless transition in our advertising over the past 5 months, we feel that it has been very successful. As you know we introduced our Tag line at Wendy's "Its better here" and Dublin, Ohio is the imaginary and the imagery and the television ads where we are open up here in Columbus, Ohio. Here in Dublin, Ohio, home of Wendy's. We have also put new images update in the restaurants.

Technology wise our new store systems is now in 1100 restaurants, and the franchise portal was in place both at Wendy's and Tim's, and were focused on e-pay solutions. At Tim's, we continue to focus on competitive advantages also, and as you know, we hosted an analyst meeting in Toronto, we had great feedback from all you and it was a really great opportunity for you to interact with Paul and the senior management team and of course, we remember the great store tours and the restaurants that we went into and the alliances that we have formed with Esso, A&P, and Home Depot. And at Tim's, it's always about quality products. 60 percent of the Canadian consumers purchase Tim's Coffee most often. That's 60 percent. The next three competitors are Starbucks at 7, Second Cup at 5, and Mac Donald's at 4. And we continue to focus on coffee and baked goods, 50 percent of our sales in Canada Tim's is coffee plus another 10 percent are hot beverages, and lunches are growing day part for us, and that's up to 10 percent of mix. We really feel that, Tim's acts more like a fast casual with the quality products, the clean restaurants, and when you order inside, you get China mugs, and bowls and silverware. And it's a multiple day part with breakfast, lunch, the chill outs, snack period in the afternoon and early evenings.

In the second quarter very successful marketing was behind Ice Cappuccino, and the strawberry themed promotion for Muffins and Tarts, and that's the first time we've promoted Muffins and Tarts strawberry version in 18 years, and it turned out highly successful. More good news Tim's US, the same-store sales are among the best in the industry, we have 146 restaurants open in more than half, or at 900,000 plus in the annualized sales. And we had the grand opening in Rochester, New York for Coffee Roasting plant, and we plan on new market entry in the fall this year in Rochester. So, we are on plan to break even this year and generate cash in Tim's US. As far as our joint venture with IAWS and Cuisine de France, again our par baking facility in Branford, Ontario is right on schedule. We are planning to open the plant this fall to supply par-baked products to the Tim's system. As a remainder, our portion of the cost for the JV would be about 1 penny per share in 2002, and then will contribute about 5 to 7 million dollars to our income in 2003. As you know, we did a strategic review of all of our businesses and as you know, we disposed our conference cup in July and we announced that it will generate a 2 cents per share gain in the third quarter we closed on July 16th, and in the past, the business contributed slightly less than a penny in EPS. Looking at our strategic initiatives, we invested in quality brands whether it is Cafe Express, the 9 million dollar investment for 45 percent ownership in the 13-unit chain. It is producing 2.2 million in average unit volumes and we are on track with our 2002 business plan.

In order to help us, take the chain to a higher level, we hired Charley Foster as the Chief Operating officer for Cafe Express and he will start on September 1st and he had many many years with a variety of chains. With Baja Fresh, we close the transaction as you know and Kerrii and I have spent considerable time with CEO Greg Dollarhyde and CFO Don Breen and their whole management team. We met with all their employees and franchisees in June and it was just a great trip, we saw a great system with lots of channels and depth in Baja. Currently, we are working on integrations plan with the Baja team that would include opportunities in supply chain, real estate and best practices, and the best way I can describe this is, Wendy's uses 22 acres of lettuce a day behind our Garden Sensations. And with Baja, if they can just take 750 square feet of our 22 acres, at our price they will come out ahead. So, those are the kind of synergies we are looking at. Baja is focused on our 2002 business objectives and have just completed their 30th consecutive month of positive same store sales. Presently, Baja has 173 units and the plan is to have about 210 by year end and recently, we announced that Rich Melman of Lettuce Entertain You on as a franchisee to develop and operate Baja Fresh in the Chicago area. As maybe you know, Rich is the premier developer and operator of restaurants in Chicago. And looking forward, Baja really diversifies our company. We expect the chain to generate about 4 to 6 percent of revenues in 2003.

In summary, I think we had a very busy and productive quarter, a stronger than expected performance. We have made considerable progress in core businesses of Wendy's and Tim's. We have made progress in our strategic plan whether it is M&A and integration with Baja. We divested our cup business at Tim's. We are initiating and following through on a number of technology initiatives and you know, we are leveraging and working with our balance sheet that Kerrii will discuss a little bit later. So, we are raising our 2002 EPS goal to 15.8 percent and we are very very optimistic about the remainder of the year. Now, I would like to turn it over to Kerrii.

Well, thanks Jack. I would like to take a few minutes to review the financial results in little more detail and discuss some of the initiatives that we have completed. For the second quarter ended June 30th, our sales performance was outstanding with strong growth in system wide sales, revenues, franchise royalties and same store sales. Our system wide sales grew 13.4 percent to 2.4 billion, a record for second quarter. Total revenues increased 12.2 percent to a record 684 million. The important components that really drove our revenues including same-store sales at Wendy's US company restaurant growing 6.6 percent for the quarter on top of 2.8 percent a year ago. Our franchise same store sales grew at even stronger rate than the company. Our same store sales were driven by first, transaction growth, Jack talked about it, 4.2 percent and the average check increased about 2.5 percent which included a 0.7 increase in price.

As Jack mentioned there's been several initiatives that we believe contributed to sales. We really leveraged our Service Excellence program and Garden Sensations introduction. Same-store sales a t Tim Hortons Restaurant in Canada grew 9.5 percent for the quarter and again, that was on top of a 7.1 percent increase during the same period a year ago. Same-store sales at Tim's, US grew 13.8 percent in the quarter on top of 5.6 percent a year ago.

From a new restaurant development stand point, we opened 86 new restaurant system wide during the quarter and the openings consisted of 53 Wendy's and 33 Tim Hortons. It was a very good quarter for new restaurant development and we believe we are on track to meet our goals this year of opening 515 to 540 new net units system wide in 2002. Our inventory of sites under construction looks solid and our pipeline looks very good. At the same time, we have gone through a strategic review of our international Wendy's business and we have closed 22 stores in 5 markets. We closed 9 in Greece, 6 in Hungary, 5 in Japan and 1 in Indonesia and Belfast. This is consistent with our goal to focus on American strategy and to grow with our strongest franchise. In addition to the strong top line growth, we delivered results on margins and other costs. Domestic operating margins improved 90 basis points to 17 percent and the major element consisted of about a 60 basis point improvement in food, 30 basis points improvement in utilities, 30 basis point improvement in the leverage of labor and 30 basis points in a number of other items. We will tell you that we will also increase and this is an offset to the improvement, 60 basis point in the area of our bonus incentive plan. We really believe that the 60 basis points in the bonus incentive payout is in line with our strategy to pay for a superior performance. Our people did a great job during the quarter. Looking close at margins, our strong sales produced excellent leverage. We continue to work on a number of key initiatives to improve our supply chain system from manufacture through distributor to our restaurants. To control utility cost and lower them wherever possible and to lower manager and crew turner in our restaurants, and Jack told you what those statistics were.

Looking ahead, we believe that our margin expansion can continue over 2001 if we produce strong sales and continue to see moderations in key commodity costs, in labor costs. We believe that a 50-100 basis point improvement in margins in the back half of the year versus 2001 is reasonable and that includes the expectation of a higher payful performance at the store level.

Now lets take a look closer at some of the margin items. If you start with cost of sales at the domestic Wendy, food as a percentage of sales was 29.1 percent, down 60 basis points from 29.7 a year ago, reflecting good sales, better than expected beef costs and chicken costs that are lower than a year ago. Our system watch strategy on these in which we consolidated suppliers and locked in quarterly pricing late last year really paid off for the quarter. With beef costing us about 7 percent less than in the second quarter 2001. Indications are that beef costs will continue to be better for the year than thought. Our original projections were an increase of 3 to 6 percent.

We now believe that beef prices could be flat or up 1 percent for the entire year of 2002 over 2001. Store labor was 26.1 percent of sales, down 30 basis points compared to a year ago, reflecting the good top line sales in great control of turnover at the restaurant level. The news is that the rate of increase in the average rate wage rate continues to moderate. Our average crew rate for the quarter was 7 dollars and 7cents per hour. We had a 1.8 percent increase in crew wages in the quarter versus a year ago. And that continues to increase at a very decreasing rate from previous quarters.

We also had good news on the utility costs. After increasing substantially in the first half of last year we are making progress with utility management programs and for the quarter costs are down by about 30 basis points. As I mentioned the offset of restaurant lines cost was higher than expected in performance based bonuses in the field. They were about 60 points higher than a year ago and again our operators did a superb job we have aligned our compensation program more tightly to pay for superior performance.

In addition to the good flow through at the store level we remained very focused on profit enhancement at the corporate level. While at the same time making strategic investment, so lets take a minute to look at G&A. In dollars General and Administrative expenses were 10.3 percent in the quarter up, to 58.8 million dollars. With revenues being up 12.2 percent we are still getting leverage on G&A. G&A was higher than expected in the quarter due to the fact that, again we have higher pay for performance costs at corporate due to the excellent results. As well as we did have some advisory and integration calls associated with both Cafe Express and Baja Fresh in this quarters G&A. Its important to note that G&A was in line with our superior sales performance during the quarter and as a percentage of system wide sales G&A was 2.5 percent and that's flat with the year ago. As a percentage of our revenues it was 8.6 percent versus 8.7 percent a year ago so that's down 10 basis points. On the year-to-date basis G&A expenses in dollars are up 7.5 percent, which is slightly higher than our original guidance at 5.75 to 6.25 percent. But expenses are down 20 basis points, as a percentage of system wide sales to 2.5 percent and down 30 basis points as a percentage of revenues at 8.9 percent.

Looking ahead, we now believe that G&A extending will more closely track the increase we experienced in the second quarter. If strong sales continue, and we deliver at the higher end of our updated earning's guidance. We are delivering strong financial results and we are paying people for that performance. It is important to know that we do expect G&A to continue to track positively with our system wide sales and revenue growth. And I will also ask you to keep in mind that we will also be reflecting the expenses of Baja G&A on a consolidated basis going forward.

Now lets spend a few minutes taking a more detailed look at our second quarter earnings. Pre tax income grew 13.3 percent to a 100.8 million. Our tax rate was at 36.75 percent, which remained the same as the first quarter. Our net income grew 13.8 percent to 63.7 million dollars. Total diluted EPS was 54 cents for the quarter. And again as Jack said EPS was up 16 percent compared to the 47 cents reported in the same period a year ago. Asset gains were about 730,000 dollars in the quarter. Which is less than half a penny versus the 4.7 million in the quarter of a year ago, which was equal to 2 cents per share. Therefore excluding the gain a year ago our EPS actually increased 20percent. The impact from coupon currency translation with the Canadian dollar was really immaterial for the quarter, which is very encouraging for us. The Canadian dollar averaged 1.55 dollars during the quarter, and that compared to 1.54 dollars in the same quarter a year ago. We did not repurchase any shares in the quarter as we really had focused on continuing demands in the balance sheet for the investment opportunities. During the quarter we completed the conversion of 99.9 percent of our term convertible securities. The 200 million dollars of T-Cons as we call them were issued in 1996. And at comp conversion there was no impact to our diluted EPS as the shares were already included in EPS calculations. And the conversion did actually increase the float of our common equities by 7.6 million shares.

To complete the Baja Fresh acquisition we used 50 million of our cash on hand and we also financed 225 million at straight debt at a very favorable 6.2 percent rate and that's 12-year money. It is worth noting that our debt offering was over subscribed by more than 5 times as investors showed their support for the company and for the Baja Fresh transaction. The debt rating agencies were also very supportive as well, following the transaction and the debt financing, Moody's maintained its BAA1 rating with a stable outlook and Standard & Poors maintained its BBB+ rating and changed its outlook from negative to positive. S&P acknowledged that we have demonstrated our long history of conservative financial management and encouraged us to stay focused on the health of our balance sheet. As forecast position we ended the quarter with 139.5 million dollars of cash. Looking ahead we are very optimistic about the year and that is why we raised guidance on earnings per share growth. We expect 15-18 percent in EPS growth for the year, and 12-16 percent EPS growth, really remained our long-term goal. We are confident that we can achieve these goals. Based on the dollar 65 in EPS that we delivered in 2001, our 15 to 18 percent growth would produce EPS in the range of a dollar 90 to a dollar 95 in 2002. As we previously disclosed, we expect about a penny in asset gains and two cents in a one-time gain from the sale of the cup manufactured this year versus a total of three cents a year ago in asset gain.

Our EPS guidance also includes the assumption that we would have two to four cents dilution from the Baja Fresh transaction in the back half of 2002. We do believe that 15 to 18 percent EPS growth qualified as a superior performance in today’s market place. Overall our core businesses of Wendy's and Tim's really are healthy, and we are staying focused on building our brand and delivering quality financial results. At the same time we made great progress this year on a strategic growth strategy by investing in Café Express and acquiring Baja Fresh and we continued to proactively manage our balance sheet. We really appreciate the support of our shareholders and although we certainly have been disappointed over the volatility of the recent weakness in our stock price. We are encouraged that relative performance continues to be superior, our performance continued to be superior to the broad market and to our peers. And we believe that our ongoing strong performance will be rewarded by investors and must look forward that will be reflected in our stock price. I would like to now turn it back to John Barker for Q&A .

We would be glad to take some questions operator. If you would you ask them to queue for questions.

Thank your sir. Now begin the question and answer session and if you would like to ask a question, please press the star 1 on your touch-tone phone. If you are going to be using speaker equipment today please pick up your handset prior to pressing star 1 and to cancel your question it will be star 2. Our first question comes from Mark Kalinowski from Salomon Smith Barney.

Hi, Good quarter I have two questions for you. First I understand that Tim Horton same store sales are solidly in positive territory, but just wondering if you are concerned about their deceleration and second with, Wendy’s franchisees comps up nearly 10 percent I am wondering if there is any particular reason why that might have been so much better than the company owned stores. Thanks.

First on the Tim's, we took a price increase for the first time in you know since 1994, July 1st of last year. So we are going against that a little bit here and I can tell you that July has been a very very hot month throughout the Northern States and Canada that it has impacted a little bit. As far as the Wendy's, the franchise sales had been outperforming the company restaurants for about the past 12-18 months and that is good, up until then the company restaurants have been, out pacing the franchise and what we feel is as we get there’s a lag factor between company and franchise as far as the different initiatives and programs. As you know we put everything in the company restaurants first and make sure they are proven out and then you know we lead by example. So, to me this is just a trend that we are very familiar with.

Right.

Thank you. Our next question comes Coralie Witter from Goldman Sachs.

Hi, Just wanted to talk about Baja Fresh a little bit. Can you walk us through your assumptions behind the dilution expected this year and next and the perhaps if that has changed since you have had had more time to spend with Baja since the acquisition was announced. And then secondly if you can talk generally where Baja sees their sales are trending versus their prior period continuing to see the same trend?

We are really continuing to see the same trend and you know, what we said when we made the announcement that we need to work with Baja for the next 6 months of the year till the end. What we will do at the end of the year in our annual report segment wise Baja and then included in all of our quarterly reports next year. But we really need time to integrate here we did deal so fast the we got to really make sure that we have got every thing in hand here. As far as dilution its 2 to 4 cents and that has no synergies baked in and it could be better .

And it really goes back to the release that we did on the May 31st with the Baja people and that is, there are number of questions asked, what is same-store sales assumptions? We have not changed the any of those in the reflection of that, there were around three into three and a half separation.

Right.

From Baja they talk about getting to 200, 210 stores by the end of this year, those assumptions are part of what we have probably disclosed in the dilution. All we did see of our core systems that we would do with that transactions which we were able to complete in mid June and I did assume basically what we were able to get the deal done for, a little better rate but we did 225 million dollars versus 200 million. We weren’t quite sure whether we need 60 or 70 million, about 75 million of our cash. All of those are elements up to 2 to 4 cents solution without synergy.

Our next question comes from Michael Sherrick from Morgan Stanley.

Thanks. Two questions, on the first Jack you alluded to the new point of sale terminals enabling electronic sales. I wonder if you could elaborate on that little bit. I know you guys have done some test market, we used to talk about the potential for that, what you have all seen and then for Kerrii could you just walk us through your interest expense, which was a bit lower than I would have thought. Can you just walk us through how the T-Cons came out and how the new debt came in and what we can expect on going forward? Thank you.

Mike were you referring to e-pay solutions on the whole or POS systems….

Well e-pay solutions in particular, if you want to talk about some of the supply chain and labor, sort of, modeling stuff that the new system allows?

As you know we have about 200 stores left, and the first step is to get it in that has a connectivity through satellites here to home office. The real leverage comes when you put in different modules in supporting our restaurant operations, one module would be labor scheduling and other module would be theoretical food costs another module would be ordering and the other module would be the inventory and when we have all that then our supply chain department can then better forecast and demand food products into our distribution centers and that’s where you get the leverage just on time and so on. As far as e-pay, we are looking at different solutions and the thing that we put framework around, it cannot slow us down from our speed of service. It is going to have to take multiple methods of paying because different parts of the country they are used to whether it is prepaid, or credit card or debit card we have to have multiple solutions but at the end of the day it is not going to slow down our service.

And what have you seen thus far in your test market in terms of user acceptance and if you can track frequency?

Yes, early on, I mean, we can really do that, I mean, we have an indication, but you can have additional frequency but then you have to offset by the fees and that is the other thing that people forget is, there is an increase in fees with all these kinds of transaction so, you got to be very very systematic in your testing on this.

Michael to try to help address the interest expense in it. It is fairly intricate, but I will try to keep it somewhat simple. I will start off with the T-Con and that is that we announced conversion on May the 10th by, Dave I might need help here, by our dividend date, which was around May the 15th or 16th. Because people were anxious about being able to get the dividend, they actually made the conversion and once they made that conversion they no longer received interest on that on T-Con. So by, around mid month of May about 70 to 80 percent of the T-Con holders that already converted and that was seized interest expense for us. By June 10th of course 99.9 percent of all people had converted. We no longer then had interest expense on the T-Con's, which was at 5 percent, then we issued the new debt for the Baja transaction and actually closed around June, the 17th. And that debt of course 225 million at 6.2 percent, so you have the interest expense from June 17th on that particular transaction. So it probably was less than you might have expected just because of the earlier conversion of the T-Cons on June 10th.

Terrific thank you.

Thank you our next question comes from Paul Westra from SG Cowen.

Hi everyone.

Hi Paul.

Just a quick question each of the major brands at Wendy's. Could you comment on how the test markets but it sounds last year or during this year as they wrapped a good performance last year and, on Baja just a question, if you looked at the company's franchise nexus with different higher companies, operations and whether you are going to change, looking into that might be on the where you stand on your judgment time table, whether you should accelerate development given the results, so that it might be better than you expect ?

At Wendy's we are very pleased with our test markets on South Western Chicken and we are evaluating that and deciding what the next steps are. As far as the Company franchise mix at Baja, we think in the near to mid-term, we're looking more of a 50-50 percent Company franchise. And in Tim's U.S. we're very pleased with the comp sales and as we have said for the past two years, and the next thing we have to prove out is new market entry. And as you know, we announced that it is going to be Rochester if we can prove out that we are profitable, sooner and quicker then I think we have a growth vehicle but we have got to prove out new market entry before we accelerate.

You know how long once you are in Rochester would take, you think, before you feel good about it either way?

We are not putting a time frame to it right now.

Great thanks, good quarter. Thanks.

Thank you.

Thank you. Our next question comes from Janis Myre with Credit Suisse First Boston, Inc.

Hi. Thank you. Two questions. Kerri you mentioned about the you know unit plans on track. It looks like you are little slower actually for the first half of the year, than last year particularly on the franchise side. So I was wondering if you could comment on that. And also on your franchise royalties excess itself, they are up pretty strongly up more than the comps and the unit growth would indicate. So I was wondering if you could talk a little about that.

As far as unit, as far as development grows, your point being, last year this time we had opened up about a 116 Wendy's, we have opened up 98 year-to-date this year. Last year we opened up 77 TMs, 59 allocated from our perspective. We are not, does not cause us concern on the I mean it depends on the pipeline of the development, where it is in the process. Technically, there could be some carry over last year, I mean in 2001, that you know, you picked up even at , our we are still on target to deliver going in to the 515 to 540.

Okay then on the royalties?

Well, the franchise royalties as you are aware, are really made up of two pieces. One, as they open up new restaurants, the tax we get from that and the second piece, the royalties from the sale.

Fine.

When we have all indicated that their sales are much stronger than our 6.6 for the quarter. So we are really leveraging the royalty.

Right, but I mean even if you look at your

units are up by an 3-4 percent, you know, even if you know up 9 to 10 percent, I think your royalties are up by excess, itself like 18 or 19 percent. So more than you know, even the strong sales would indicate.

Well and you got growth in, in our franchise revenue number, is growth in Horton Canada stores as well as sales, and again you have to remember that a part of franchise revenues includes rental income to the extent we are, you know, and we do it on the ten percent system on the real estate and rent it out to the franchisee, we are getting rental dollars on that increasing composite based on the percentage of sale

All right. Was there any particular jump this quarter in one of those items, cause your royalties is also running at a much higher rate than its run in several quarters, you know your franchise income.

I think it just reflects the strong overall sales we had in the second quarter Janis.

Okay, thanks.

Thank you. Our question comes from Brett Levy with UBS Warburg.

Good afternoon. Pretty easy question, just following on with what Michael said earlier on our store systems. I wanted to know what other capabilities, do you have any capabilities with credit cards at the counter, is that something you are looking to do and if it is something, cause I know you tested it in certain units, is that something that you are fearful of given credit card companies push for higher wages or higher rates?

Well with new store systems, that's what really enables us to do any kind of e-solutions including credit cards. In the big, big year as you still got to you know, we got to get the new store systems in, we got to find the right form of payment at the right price.

And I think to add to Jack's comment without a doubt, credit card companies are pushing higher fees but you have to remember that banks are also charging higher fees to process cash. They don't want to deal with cash and they are continuing to increase their fees relative, so those are all elements of understanding e-pay of which potential costs are, you know as well as impact.

And we are being very disciplined like we are with new product rollouts we got to find the correct solution and we are not going to willy-nilly slam something in without doing our homework.

Because feeder service is a very important elements for us, you may have credit cards that you.....you know get higher average check but if you getting less people through the line, it has an impact and that is all of part of the total picture.

Thank you. Our next question comes from Joe Buckley with Bear, Stearns.

Good afternoon, just a couple of questions. With the new bakery plant for Tim Hortons coming on, will there be changes or additions to the Hortons menu using a product from that bakery do you think and secondly, on the POS systems at Wendy's are the franchisees upgrading at the same time as the company's stores, is that a system wide initiative or where does that stand?

As far as the Tim's menu you know our focus is to get the French baguette in the system sandwich baguette in order to upgrade our sandwich offering at the lunch day park. That is the big thing Joe, and then I think as we get the other bakeries up and running, then we will consider how you do the new products but to me, we got to get this bakery in and want two more up and running to supply the Tim's system.

Is Tim's doing a doing a baguette product now or when is it?

Yeah, this replaces it. It is not the Cuisine de France type baguette product except in Columbus, Ohio.

Okay.

Okay. As far as new store systems, it's very important and Kerrii, you piped in here that the franchisees are on board with us. We had to switch our systems because IBM would no longer support what we had. Now, the franchisees have different types of systems and the solutions got to be able to support their POS System also.

And Joe what we are focused on without a doubt a franchisee could piggyback off a same system that Wendy's is putting in our store. But we recognize that all tomorrow our all partners and the restaurants out there aren't going to necessarily spend the money to upgrade that technology, so what we are really focused on is to make sure that they are selecting vendors and replacing any technology needs they have with systems that will meet the long-term needs of the vision of technology for Wendy's such as what Jack just talked about. How do we get Point of Sales information not only from our company stores but from the franchisees to really leverage supply chain and so we are all working towards what is a common platform that we are migrating to certainly web based being more, more where we are going and making sure that the systems that the franchisee are putting in place whether they be our system or others, are meeting the future needs of the organization and we have taken a very active role in helping franchisees in that process and really certifying vendors that meet the future needs.

Thank you.

Thank you our next question comes from Howard

with SunTrust.

Thanks very much. Jack I just was curious about your comments you made earlier about Baja Fresh and you said you did the deal really fast. Can you tell us as to what you meant by that to that seems to contrast what you did, presented that your presentation when you announced the acquisition and it was my impression that it need a little more due diligence?

No, I think we did it. I think we portrayed it very accurately, that took about 8-10 weeks from start to finish and what enabled us to do it. They had filed an S-1to go public and that was, that enabled us to do the due diligence very quickly and that is what we said in New York.

Thank you. Our next question comes from Jeffrey

with Lehman brothers.

Yes good afternoon and excellent quarter on the

. I have two questions. The first is related to an update on Tim's US, just looking specifically for how much EPS dilution you are expecting in 2002 and how much EPS accretion we can expect in 2003, Second is related to CAPEX budget in 2002 just looking for an update, I guess now including Baja Fresh. I guess with the new total l CAPEX budget would be and the break out of how much of that is actual Baja Fresh. Thanks very much.

Well what we had said has been very consistent all year as far as Tim's US in 2001, we were cash flow positive and for this year, we will break even net income. We have not given guidance yet for next year, that is 2003 Jeff. We will do that in February. And then what was the CAPEX question?

Just looking I guess for a, I guess a total number for 2002 including the Baja Fresh and then the piece of that actually is the Baja Fresh.

Well, 275 million.

Right plus the new stores that they will build from a corporate perspective, which I believe we are in New York we gave a number expected of around 10-15 million.

I am sorry I meant I guess total CAPEX for Wendy's or combined?

Yeah, if you take what Kerrii just said of 10-15 million just go back to the information, I don't have it right here, go back to the information we gave you in February. That would be the way to go about it. There is a very detailed breakdown on CAPEX that we laid out in February.

Okay thank you.

Okay.

Our next question comes from Jack Russo from A.G. Edwards.

Hi guys. Nice quarter. Jack I need, just one quick question. I want to talk about beef costs next year rising double-digit rate just due to some drought conditions and so forth in the US. Are you going to be able to later this year lock in a decent rate and avoid some of the spike that we could see next year? Is that in your plan?

Well yeah I mean, as you know we lock in quarterly rates spike to take the spike out and you know we have been very successful with it and I think our whole beef strategy has paid off and we feel like we are in pretty good shape going into the next year. We do have our beef economist coming in later on this month to talk to us and give us some outlook, but we are not certainly seeing anything very drastic right now.

Is that a quarter-by-quarter process or could you if you really felt there was going to be spike you could lock in like a whole year ahead of this?

No we really cannot.

It is a quarter-by-quarter process.

Yes, quarter-by-quarter.

Okay thank you.

Thank you and at this time I show no further questions

We thank you all for joining the conference call, for your follow up calls, please let get in touch later today and tomorrow. Thanks a lot.

Thank you everyone for joining today's conference call and have a nice day.