Wendy's Co (WEN) 2002 Q3 法說會逐字稿

Welcome to the Wendy's International third quarter earnings release conference call. All participants will be able to listen only.

At request of Wendy's within this conference call is being recorded for instant reply purposes. If you should have an objection disconnect at this time. I would lick to introduce Mr. John Barker Vice President of Investor Relations and Financial Communications.

John Barker Thank you very much. Welcome to our third quarter earnings conference call. This call is being web cast live over the Internet and will be available for replay. Before when get started I would lake to introduce members of our executive management team. Chairman, Chief Executive Officer, John Schuessler; Executive Vice President and Chief Financial Officer, Kerrii Anderson; President and Chief Operating Officer, Tom Mueller; and several other members of our management team.

We published our third quarter results earlier today. Our corporate news release and the accompanying financial statements and materials are available on our website at www.Wendys-invest.com. If you don't have a copy, you can check in with our investor relations Department, and the number is 614-764-3251. From a disclosure standpoint you'll note the news release includes same store sales information and normal details about Wendy's and Tim Horton's. As we said in the past we have not included detailed sales information and other information regarding Baja fresh, which we acquired earlier this year. We do review our disclosure on a regular basis and plan on providing more information about Baja if our year end statements and 2002 annual report to shareholders.

Before we get started let me review a few items. We do plan on publishing our October sales results on Thursday November 7. Our period ends Sunday November 3 and jack will talk about sales in a few minutes. Secondly we plan on going in New York Monday November 11 for meetings with the investment community, the meetings are being arranged and we'll focus on providing investors with an overview. In November-December we'll be hosting investor visits to our corporate office in Dublin, Ohio. This I part our ongoing program to introduce investors to Wendy's and our management team. Keep in mind that information we discuss with investor at any of these meeting is posted and updated on our corporate and I.R. web sight and a current of our current presentation and power point format as well as all financial news releases are posted on the site.

Looking ahead we plan on publishing results for for the quarter and the year 2002 on Friday January 31. As we have done for the past five years we plan on hosting the investment community in New York to discuss our results.

I'll be send out more information about meeting which will be health February 3 in the near future and always as always the meeting will be available as a conference call and web cast. Following our meeting February 3 in New York we're planning to meet in London later that weak with investors and institutional shareholders.

The agenda for today 's conference call will include remarks by Jack and Kerry and following those remarks we'll open up the call for questions.

Let's refer to you our safe harbor statement attached to our news release and form 10-k. Certain information we may discuss regarding future economic performance, financial goals, plans and development, is forward looking. It is possible that various factors could affect the company's results and cause nose results to differ materially from those expressed in our forward-looking statements. Some of those factors are set forth set in the safe harbor statement attached to the earnings release and in our most recent form 10-Q. Would I like to note we're observing regulation f-d from the S.E.C. It encourage s public companies to discuss potentially material information in a public forum. Therefore we encourage you, those of you on the call to ask your questions at the end of our presentation today.

Let me turn it over to Jack.

Certainly good afternoon everyone. We had a very, very strong third quarter and we're pleased with our performance on a year to date basis. As you see in our news release reproduced some of the best same store sales results in the industry with our Wendy's and Tim's brands. Wendy's U.S. and Tim's Canada and Tim's U.S. had same store sales of 5% or more in the quarter. Our development is on track for the year to meet our guidance of at least 515 new units. And our P. & L. throw flew has been excellent. Kerrii will review the financial in detail in a few minutes but I'll just give you some key highlights.

System wide sales in the third quarter were 2. 5 billion up 14. 3% in year to date 7 billion in sales up 13.2%. Also we had strong growth in revenues during the third quarter 722 million up 18.3%. And again year to date 2 million up 13.7. Net income 61 million up 16.3%. And year to date our income is 16 8 million up 14.3%. And earnings per share for the third quarter was 52 cents up 18.2 and for the year to date, 11.45 up 16.9. Our core Wendy's and Tim's businesses are performing well with strong same store sales. We also had good cost controls at the carpet level and the restaurant level which Kerrii will discuss in detail. We had favorable food cost trends for the quarter.

Overall, we're focused on our long term strategic plan to grow the enterprise generating 12 to 15% annual EPS growth and building on our quality position with each brand. We'll be publishing our October sales results which ends November 3 on November 7. Wendy's U.S. company units in October are running similar to August when same source sales were in the 3% range. Tim's Canada has accelerated from September which in September was 5.1%. We really question feel good about these results when you consider the economic challenges and also the discounting that's taking place currently.

Looking ahead, we're pleased to say that we're maintaining our 2002 EPS growth goal which is in the range of 190 to 195 and that's , 15 to 8% increase over last years 165. Overall considering the economic conditions of product companies retailers and restaurants we feel this is outstanding performance along with going against the competitive discounting of MacDonald's and Burger King. Our sales growth is superior among S&P 500 companies and our peers in the industry.

Now let me take a moment and review the details of our EPS numbers. For a full year in 2001 we had three [inaudible] asset gains from the [inaudible] restaurants and real estate to our franchise s. For the full year in 2002, as we said in the beginning of the year, we expect one cent in asset gains from the sale of restaurants and real estate to franchises and we're on track for that penny and it is spread out over the year. We booked in the third quarter two cents per air in a one-time gain from the same of our cup manufacture at Tim's which we announced in July. This will be offset by the loss of four corners from our conference cup business. For this year we expect Baja to be two to four cents through tough and we told but that delusion in may when we awe announced the acquisition. We previously disclosed our joint convenient secure between I.A.W. west and Tim's would cost one cent in 2002 and next we're expect the V.C. to generate income for us , J. V. we he woo an investment in Pasta Pomodoro and a share repurchase authorization. Yesterday our board of directors authorized the repurchase of up to 200 million dollars in additional stock and the total outstanding authorization is 247 million. During the third quarter we bought 24.7 million dollars worth of common stock. The key reasons for the additional authorization include the stock continues to represent a good value. Share repurchase is an important element of our long term strategy to proactively manage the balance sheet. And we're in a great position because we have the cash flow to grow our businesses, fund all our capital needs, make investments and buy back stock, all the while maintaining our investment grade rating.

I can assure you that we're confident about the future. We plan to make a 12 million dollar investment in the fast casual restaurant chain, pasta Pomodoro. We have a 25% stake in the company. Overall Past Pomodoro is a leader in freshly prepared Italian food. We now have 24 restaurants all company owned and they see the about 70 to 80 people. Temperature 80 people. They are in the San Francisco and Bay Area, Arizona and one in L.A. and currently two units under construction. The average check per person is $9 at lunch and $14 at dinner. And the menu is outstanding. It's all about their food with traditional and contemporary Italian dishes. With traditional and contemporary Italian dishes like chicken and egg plant parmesan, pasta with veggies seafood and meat, grilled panini, grilled fish, and Kerrii's favorite, butternut ravioli with sage butter. Salads and soups and handmade desserts are also on the menu. It was founded in 1994 by Adriono Paganini a native of Northern Italy. He has been in the restaurant business for quite a long time. He had been executive chef of the Hyde Park Hotel in London and of the Donatello Hotel in San Francisco. He is the Executive Chef and CEO of pasta Pomodoro and we look forward to working with him to grow the business.

This investment fits our strategy. The food is great, the concept is a leader in the fresh Italian food, it is in the fast casual space which we identified as a growth opportunity and it doesn't compete with current brands.

And the team is committed to grow rapidly. In our roles to provide growth capital and help pasta Pomodoro grow to 75 to 100 total units by the end of 2005. We're excited about pasta Pomodoro joining our growing family of quality brands. As a reminder over the past two years we've utilized our strong balance sheet to diversify the company and begin to build future both drivers to build our enterprise. They include a joint venture with Cuisine De France, a $9 million investment in Café Express. The acquisition of Baja fresh and our investment in pasta Pomodoro. And we're repurchasing around shares at the same time.

It's important to stress that our core businesses remain our highest priority and that it Wendy's and Tim's. Let me spend a few minutes discussing our core businesses. We continue to focus at Wendy's on our competitive advantages and it always starts with the food whether it's our garden sensations , super value menu. This past year we successfully tested a new salad, Southwest Chicken Caesar and this past August we market tested chicken strips made from the whole breast fillet. And during the third quarter we had numerous promotional sandwich tests going on. Currently our new R&D center is under construction and we'll be moving in sometime of March-April of next year.

Wendy's was number one in fastest service at the drive through in the 2002 I.E. magazine study published early earlier this month. This was the first place was for the fourth consecutive year. Our times came down 7 seconds from last year. We're currently at 127 seconds per car at the pickup window and that means for through-put at peak hours.

Second place was Chick Fillet and we are 24 seconds faster than them. But like everything else at Wendy's we don't rest on our laurels. Continuous improvement is our focus and Wendy's stores are in the 100- second range.

During the third quarter we focused on super value men crew with two national pillar as and one local window which we had numerous market tasks. Let me stress one thing. We have had a super value menu in place for over 13 years. And since 1989 we offered our every day value menu at 99 cents. It is familiar and predictable to our customers at 99 cents. We have real brand equity with our customers and they trust the Wendy's brand. Quality products makes up the super value menu, whether its junior bacon cheeseburger, chili made fresh everyday, Caesar side salad and a baked potato cooked in an oven. Our approach with the value menu has always been strategic, not tactical like some of our competitors.

We completed a seamless transition in our advertising over the past nine months. Our sales are strong, and customer feedback is very, very positive. Recently brand week magazine named Wendy's and Don Calhoun marketer of the year. We made the change from advertising agencies from bates to Maccan Erickson and it has gone smooth. We're working on the transition at we speak with Maccan. They are the leader in north America with a very talented team. They have the best expertise in depth in advertising creative media buy and research. Several key players came over to bates to Maccan so the exciting news is the core keep is in place. Don Calhoun and Bob Levit are providing leadership at Wendy's and we have a experienced team. And I fully expect great work and results in the future. As always at Wendy's the food is our hero. We're featuring our tag line "at Wendy's, it's better here." And "doing it Dave's way" in the copy.

Technology, our new store's systems are now completed and in 1200 company restaurants and I'm happy do to say the rollout was on time and under budget. The franchise portal is in place that will help them with their business plan, ops information and finances. In the future the portal can be leveraged for supply chain information and royalty payments. This is a major step forward for our system.

Also Tim's is working on a similar portal. We're focusing our research and test for e-pay systems. I know many of you have been asking a lot of questions about our competitor's, and they have consistently offered discounts and this is the latest version. So, rather than worrying about the competition, we're focused on always getting better and always improving and beating ourselves. We compete against ourselves.

During the third quarter Wendy's transactions increased 3% as we continued to attract consumers. At the same time the competition offered a dollar sandwiches, two sandwiches for two dollars. Introduced 99 cent menus, and other items right out of the Wendy's play book. The difference to our competitive advantage is our quality, our balanced approach and our long term commitment. Ours is a strategy, there is a tactic. While we can never rest on our laurels we're confident about continuing to grow sales. Wendy's company stores have produced positive comps in every quarter since the second quarter in 1996. While the competition is trying to move to our position we're focused on getting better.

The mozzarella chicken supreme sandwich is our current national promotion and it's a great sandwich. Our kids meal tie-in is an outstanding one with Lionel Trains.

At Tim's we produced another outstanding quarter in sales, growth and profits. And Paul House and his team are focused on the advantages that Tim enjoys, whether it's the always fresh twenty minute coffee pledge, the tandem team system that is producing better drive-through times, and faster drive-through times through automatic dispensers and turbo toasters. Again, Tim's is about the food and the coffee. More than 60% of the Canadian consumer purchased Tim's coffee most often. The next three competitors are Starbucks at 7%. Second cup at 5% and Macdonald at 4%. Coffee is vital to Tim's success. It's 50% of sales plus a 10% other hot beverages. Our marketing in the third quarter featured popular Tim bits and a coffee and bagel promotion.

We're currently featuring the new big Baggett sandwich. Our always fresh par bake program is on plan and this is the joint venture between Cuisine de France and Tim's. The Brandford Ontario facility is open, it's operating, we're building inventory and we're in the early stages of introducing products into Tim's stores. The Par Bake product should be in 1,000 restaurants by the end of the first quarter 2003 in Ontario and the U.S.

As we discussed previously we expect to generate income and excellent returns from the J.C. in 20 03. We're also proud of D.J.V. The same store sales are among the best in the industry. In the U.S. we have 153 Tim's opened and over 100 are franchised. Our core markets are in central Michigan , Columbus and Buffalo.

Our new coffee roasting facility is operating and flying supplying our Ontario spores stores. We opened four new stores in our new market in Rochester September 16 and launched our new market entry with heavy media and I'm excited to tell you early sales are very encouraging and we have great hope for the future of Tim's brand in the U.S. And we now expect Tim's U.S. to make a small profit this year. With Cafe Express, as a reminder, we invested 9 million dollars in Cafe Express for 45% ownership in the quick casual chain. They have 13 units in Houston, Dallas and Scottsdale. And they are producing about a 2.2 million dollar average unit volumes. Recently we hired Charlie Foster as Chief Operating Officer and we opened our 14th unit in Houston setting all time sales records for the new unit. And we're on track with the 2002 business plan. We just completed a long term strategic plan led by founders Lonnie Schuler and Robert DelGrande. The plan in place is to grow 50 stores in the next three to four years.

With what Baja Fresh Kerrii and I have spent a great deal of time with Greg Gollerhide, their CEO and Don Green the CFO. And a small team at Wendy's corporate office working on integration plans with the Baja team, which would include supply chain, human resources, real estate, and best practices. Baja is focused on its 2002 business objectives. And they are building on 31 consecutive quarters of positive same store sales.

During the third quarter Baja opened 17 new units. And Baja expects to grow from 191 units to today to more than 200 by year end. As a reminder, Baja Fresh is providing significant diversification for our whole enterprise. We expect the chain to generate 4-6% of revenues in 2003. We'll be sharing more information about Baja in our year end documents and during our February 2003 meeting with the investment community.

So in summary, it's been another busy and productive quarter. We have had strong performance. We have made significant progress in our core businesses of Wendy's and Tim's. We made progress on our strategic initiatives, the integration with Baja, the strategic plan for Cafe Express and our investment in pasta Pomodoro and we're optimistic about achieving our goals in the fourth quarter and the future.

Now I'll turn the call over to Kerrii.

Thanks, Jack, I would like to take the time to review our financial results in a little more detail and discuss some of initiatives we have completed. For the third quarter ended September 29, 2002, our sales performance was outstanding with strong growth and system wide sales revenues, franchise royalties and same store sales. Jack reviewed the key financials in addition to those numbers I would like to review the results in more detail.

The financial results I will discuss include a complete consolidation of Baja fresh. So there are numbers in our revenues and our cost of sales and our company restaurant operating costs and G&A that reflect the inclusion of a complete quarter of Baja fresh.

Lets start with the same store sales. Wendy's U.S. grew 5% in the quarter up 5.9% for the year. The great news to us is that our franchise same store sales growth was even stronger at a rate higher than our company stores at 7.8%. And Wendy's same store sales were driven by transaction growth of 3% and average check-in crease of 1.9. As jack mentioned, there have been several initiatives that contributed to the strong sales at Wendy's. We leveraged our store program and our super value menu.

Same store sales at Tim Horton's in Canada grew 5.8% for the quarter and that's up 7.7% for the year. Tim's did face unusually warm weather in the third quarter but still produced results in line with our plan. Same store sales at Tim's U.S. grew 8.8% in the quarter and are up 10.9% for the year. From a new restaurant development standpoint we opened 143 new restaurants system wide during the quarter. The openings consisted of 71 new Wendy's, 55 new Tim's and 17 new Baja Fresh.

It was a good quarter for restaurant development and we're on track to meet our goals for the years. Our guidance originally was to open 515 to 540 system wide in 2002 and that's just the Wendy's and the Tim Horton's. We anticipate being at the lower end of the range closer to the 515. And that's due to opening fewer planned units in our international division which we believe is prudent. Our inventory of sites under construction is solid and our pipeline of sites looks great. The 4th quarter will be a sprint, and I will tell you that certainly 9-11 last year slowed development by some of our franchises but we worked hard to get them back on track. At the same time we continually review the overall progress and the returns of our stores in the system. And during the third quarter we closed 21 Wendy's including 14 domestic franchised units and seven international franchised units. For the year we closed 79 Wendy's units with more than half of those being in the international market. When mention earlier this year the closing of the units in Greece and hung today are you, Japan, Indonesia and Belfast. This is consistent with our goal to focus on an America strategy and to grow with a stronger franchisee.

In addition to the strong top line growth we delivered good results on margins and other casts so let's talk about the domestic operating margins. They improved 60 basis points to 15.7 percent. For the quarter. And the major elements as we talked about before we had significant improvements in food, 100 basis points along with utilities and other items. At the same time we did have increase in the bonus area, 60 basis points and a little bit in labor. From the bonus perspective we believe the 60 basis point increase in the incentive payout line is in line with our strategy to pay people for superior performance. Our store managers and crew did a great job during the quarter.

If we look closer at margins the strong sales produced good leverage. We also continued to work on key initiatives to improve the supply change system from manufacture through distributor to our restaurants to control utility cost and lower them where possible and lower manager and crew turnover in our restaurants. We reached 135 % on crew this period.

Looking ahead, we believe margin expansion at Wendy's can continue. If we produce sales growth in line with our expectations and continue to control our key commodity costs and labor. The good news is what the our beef cost per pound lower than expected and clear wage increased continue to moderate.

So now let's look closer as the margin items I mentioned. Let's start with cost of sales sat domestic Wendy's. Food as a percentage of sales was 29.1%. That's down 100 basis points from 30.1 a year ago in the quarter. And that reflects good sales, better than expected beef costing from a year ago and chicken costs that are lower from a year ago. Our supply chain group has worked hard to form long term relationships with our suppliers and we're working continually to take costs out of the system.

For example our system wife beef strategy in which we consolidated suppliers and locked in quarterly pricing late last year paid off again in the quarter, with beef costing six percent less than at same quarter a year ago. The indications for beaver costs in the quarter continue to be lower than a year ago. It is too early to make detailed projections for 200 3. But we think beef should be in good shape again during the first half of next year with some increase in the back half. We're even encouraged with negotiations we're having with all our supplier s including chicken and we expect reasonable and manageable overall food cost increases next year.

Store labor was 26.7% of sales. And that's up about 10 basis points compared to a year ago. Our average crew wait for the quarter foes $7.10 an hour and 1.7% increase in crew wages during the quarter versus a year ago and two 2% increase in Waynes for store managers. The 10 basis point increase on the labor line was due to lower manager turnover and more full staffing at all our restaurants.

We also have good news on utility. After increasing substantially in 2001 we continue to make progress with our utility management program. For the quarter utility costs were down about 20 basis points.

As I mentioned an offset on the restaurant cost line was higher than expected performances based bonuses, higher than last year. But our operators did a superb job in the quarter. We aligned our compensation programs more tightly with paying for that superior performs. In addition to the good flow at the store level we remained focused on profit enhancement at the profit level. The plan does require a bam of initiatives to reduce costs while we need to make strategic investments.

Let's look at G. & A. costs. In dollars G&A expensed for up 16.4 percent to 63.6 million. While G&A was up higher than originally planned, so are the revenues which rose 18.3%. So a key reason for the higher revenues and G. & A. is the nucleas of Baja fresh and the third quarter results for the full three months. Exclude be G. & A. costs associated with Baja fresh the expenses rose only 11.7% for the quarter. And at that level, we produced excellent leverage on the G&A line relative to sales. G&A expense was higher than last year's third quarter as we paid again for pay for performance costs and in the bonus line really due to the company's excellent results. Along with bonuses we encouraged some advisory services, integration cost s associated with Baja, Cafe Express and pasta Pomodoro. We believe our management and M&A strategy costs are justified as we I am amendment our strategy and build future groept drivers. Our core businesses are strong and we're investing in the future.

Finally I think it's important to note that if you look at G.N.A. without Baja fresh and the additional bonus related to improved performance our base G.N. A. was only up 4%. Very important to note that G.N.A. expenses were in line with our sales performs answer during the quarter and total G.N.A. including Baja and bonuses as a percentage of system wide sales was 2.6% up 10 basis points versus a year ago. And total G.N.A. as a percent percentages of our revenues was 8. 8 percent versus 8.9 percent a year ago, and he will provide movement of 10 basis points. In summarizing GNA, we're effectively manage can the company and we remained focused on its cost.

Let's spend a few minutes taking a detailed look at our third quarter income statement.

Our pro tax income grew 15.8 percent to 96.3 million. And our tax rate remained constants at 36.75% for the 2002 year. Net income grew 16.3% to 60.9 million. Total diluted E.P.S. was up 52 cents for the quarter. Right in line with our expectations. Our EPS was up 18.2 percent compared to 44 cents in the same period a year ago.

There were offsetting items for our EPS line from the third quarter, and I would like to review those with you. We did have a one-time gain of two cents from the sale of the Tim Horton's cup business. That occurred in July and we booked that on the other income and expense line.

While Baja fresh generated operating income we did have delusion from Baja fresh as we're pay paying 6.2% interest on the money, 225 million that we borrowed for the acquisition. And the interest we lost on the 50 million of cast we invested. The interest cost and the integration and with operating income were equivalent to a 1.5 cent dilution for the quarter. Also offsetting the gain, were costs from our joint venture plan in Canada. Jack talked about how it's going. We incurred about a a penny of costs in the quarter as the plant began operation. And we booked this on the other incomes and expense line.

The impact of foreign currency translation of the Canadian dollar in the quarter was really minimal during the quarter. The Canadian dollar averaged $1.56 during this quarter compared to $1.54 a year ago. We had expected the Canadian dollar to improve when we raised our guide up, so that it worked against us a little bit for the quarter. Focusing on our balance sheet for a minute we repurchased 731,500 common shares in the quarter for 24.7 million dollars. We continue to proactively manage our balance sheet as we have over the last two years and will continue to do so. I'll While at the same time maintaining our investment grade rating.

The third quarter buy back brings our total share repurchases since 1998 to 33.9 million shares and 803 million dollars. As for cash position, we ended the quarter with a strong 194. 2 million dollars on our balance sheet.

As we look ahead, I will tell you that we're optimystic about the 4th quarter and meeting our goal of 15 to 18% growth for our eps for 2002. We believe that that growth of 15 to 18 percent in today's market represents superior performance. Over the long term our goals for annual eps growth remains at the 12 to 15% range. We're confident that we can achieve that growth level in 2003 and the next several years based on the strength of our core brands of Wendy's of North America and Tim Horton's in Canada. A consistent improvement we're seeing in Tim Horton's U.S. business the execution of long term strategic growth plan. We have added three quality brands to our business in 2002 and we're excited about their growth prospects.

We're also confident that because of our unwavering commitment to our core values, such as quality food, superior restaurant operations, continuous improvement in consumer research and that good old thing called integrity and doing the right thing, that gives us a lot of confidence. As John mentioned earlier we'll provide more details about the 2003 plans and projections with our meeting with the investment community in New York on February the 3rd.

In summary we appreciate the support of our shareholders we are disappointed somewhat with the volatility of our stock price and with some of the hedge fund selling in the third quarter, but we are encouraged that our relative performance continues to be superior to the broad market and to our peers. We believe that our own going strong performance will be rewarded by investors and look forward to seeing the results of our performance being reflected in the price of our stock.

At this point I would like to turn it back over to John for Q and A.

Our first question comes from Carol Lee Whitter from Goldman Sachs.

Will you change your marketing strategy in Q4 considering McDonald's and others spent more money on advertising?

Well we don't knee jerk just because of something the competition does. And we continue to say that our biggest competitor is ourselves. We keep an eye on what the competition does, but we have a strategy in place and we're not going to waiver from it. We've produced excellent results. We've grown sales better than anyone else in the QSR over the past 15 years.

Our next question comes from Howard Penny from Sun Trust.

I was wondering if you could further comment on your balance sheet strategy in terms of your debt to total capital and where you see that today and where it's going? And what your overall strategy is on that?

I think, what we've really focused on on a balanced sheet ratio perspective, is primarily to maintain our investment grade rating. And as we all know, depending on the nature of the business, sometimes S&P and Moody's numbers change with respect to their feelings about what the right ratios are. I think we're around 47% today and that is a number that we are comfortable with and as we repurchase stocks we keep that in mind with the investment grade rating.

So, to translate that, 47% is at the upper end of the range? I'm trying to gain some perspective on the time frame will be with the share repurchase program.

We looked at the share repurchase authorization that was announced today, that brings us to 247 million and that's a longer term approach. You usually make these kind of announcements with a one to two year repurchase strategy. What we have said historically is that we like to offset some [dilution] with stock options which is about 2.3 million shares annually. That's generally what it takes to offset dilution.

I know you plan to comment on 2003 in January, but can you give me any forward looking statements for 2003?

If you look at what we've been doing for the last two years, we want sales growth at Wendy's to be at two five to 3.75 and at Tim's in the 5-6% range and our GNA in the 6.5% to 7.5% range. We are focused on getting our GNA bellow our increase in revenue so that we get leverage.

What you will have to keep in mind is that this quarter we have affects from Baja, so we will be picking up two more quarters next year in GNA for Baja. With respect to gross GNA we're going to have a difference for Baja.

Our next question comes from Janice Meyer from BFSG.

The 3% in the last quarter seems impressive, especially considering what's happening in the discounting. But, if you look around the country, you have more than 20,000 competitors with a 99 cent menu. Something you really pioneered a decade ago. Given that everyone now has a dollar menu, do you think you should re-establish yourselves in terms of value in the minds of the consumer?

I think you differentiate. The value menu is just not price as a component. The other component is quality. You can put cheap things on a dollar menu. But they don't distinguish from quality. We have always had the position with the super value menu that it is quality, it's price, and it's familiar and predictable. Competitors have approached it as a short term tactic, instead of a long term tactic like we have. We feel good about our positioning.

You mentioned that Past Pomodoro were fast-casual. The couple that I have been to were actually table service, so did I see some unique stores, or?

They do have some table service, but it really plays in the fast-casual theater. It's a little higher checked, it's has the component of alcohol, [inaudible] and it's demographics is really in the fast casual.

But it's format is table service, correct?

Yes.

Our next question comes from Jonathon Wing from McDonald's Investments.

I was wondering if you could shed more light onto your promotional calendar for the Q4?

Our promotional calendar is very strong, currently we're doing mozzarella chicken supreme. And then another very successful promotion we have run in the past is dual bacon cheeseburger featuring hamburger and chicken.

Also on the gain you booked for the quarter, I'm wonder what the dollar amount is on a pre-tax basis versus what you did in Q3 of 2001?

It's 3.2m on a pre tax basis for the conference [inaudible] gain.

Was there anything booked in last years quarter?

I think we had [inaudible] that gain about a year ago. It was minor.

Okay. Hasn't the asset gain always been in the "other" expense line?

The asset gains would be in franchise revenue for restuarants. But for this cup business it was included in the other.

Our next question comes from Igor Richabob from Thornbird Investments.

Can you tell me how much you expect your profits and bottom line to be for Pasta Pomodoro?

There will be no dilution for this year or next year.

But no accretion either?

It is only 25%, it is a small chain. If you go on your out years, then we would expect accretiveness.

What is your growth strategy with the Pasta Pomodoro, now that you have a Mexican franchise, and an Italian franchise?

We can't comment on things like that. We're happy with what we have. We'll keep quality in the equation.

Are you commited to any capital expense there?

No. They are self funded.

When will Baja be fully integrated?

6-9 months.

Our next question comes from Peter Oaks from Merril Lynch.

The next call is from Paul Wester from SG Cohen.

Can you flush out for us the "other" expense line. I have it here as $1.4m. It's up over last year and that's a $2m gain. But was there a $4.6m expense there? Can you give more color on that?

What you got in that other expense line is the 3.2 conference cut gain but at same time we lost 900,000 in conference cup earnings for the quarter. So you kind of got a -- we closed that right at the beginning of the quarter. And so that's a loss netting out. Then as we talked about we had the Irish Star operating loss for our share of it for the quarter of 1.2 million. So that's your net change at to what's happening in the other expense line of last year.

Did you get 0 0 Baja numbers in there.

There are no Baja up ins in other income expense.

my phone blanked out. The next question on the bonus points you had a 60 basis point gain year over year margins [inaudible] and 60 basis increase in bonus accrual. Is that a 1-1 ratio to shareholders and employees as far as your bonus strategy?

I don't know if we understand the question.

You had a 60 basis point increase in bonus s and 60 increase in margins so the margin gain essentially year over year.

I don't think there is correlation there.

Ok. And that's it for now. Thanks.

Next question from Michael Sherrick from Morgan Stanley.

My phone blanked out. Can you provide the update on how sales are looking in the period to date and secondly can you provide the estimate of sales breakdown for one event Tim Horton's.

The system wide -- we covered this.

We did not provide the breakdown for the quarter we'll start doing that at the fourth quarter and start talking about Baja in the future.

Then the part we have covered is we'll be publishing our October sales results which in that period ends November 3 on November 7. We can tell you that U.S. company units are running similar to August when our same store sales were in the 3% range. Tim's Canada accelerated from September which was in the 5. 1 range.

Our next question questions question comes from Jeff Omaholdro from Calandria Securities.

Just the wonder if you can up date on the longer term strategy in this program you are pursuing with Wendy's, Cafe Express within Baja Fresh , pasta Pomodoro and cuisine France. Is the an optimum number you are working towards? If so, what might that be?

Well, our whole strategy is to take care of our future growth because we know nine to 10, 1 years from now that our 11 years from now Wendy's, north America and Tim's Canada will be pretty much built out so you have to have other growth drivers in your enterprise to provide the future growth and we said it's a long term that we want to grow 12 to 15%. So if you look at the classic business curve that you would want growth drivers coming on board, every two, three, five , seven years to help generate your growth, that's why we're getting a stable brand. Some like Baja is mature and entering that growth curve. Others are smaller like cafe express , a as Pomodoro that we want to work for our national or regional expansion then they can at sometime entering the both curve.

Do you think there is an upper limit in terms of the number of concepts you are dealing with?

I'm sure this always an upper limit. You know, the thing we also said ourselves, not everything is going to work. And you know that's why sometimes we're making investment in sometimes maybe at the end of a period of time something isn't fitting in our plans and maybe then you sell it. So it's a complete strategy, it's in the whole goal is to provide for your our growth , five, seven, 10 queers from now because we wouldn't be good stiewrdz of the company if we said let's concentrate on Wendy's and Times for the next five years and let someone else handle it after quard. So we're being pro active and we feel it's the right strategy.

Operator*: Our next question comes from Janice Meyers.

From royal advertise 21% , assuming part of that is the inclusion of Baja could you breakdown how much of that was pro Baja versus your core business? Then also just to go back to Pasta Pomodoro, since it is table service how are you looking at your core competency as a company and you said that it's a fast casual customer but not a fast casual concept.

It is a fast casual concept in your mind.

So you don't think just fast foods format you think it can be a table service concept? You know most people think fast casual means fast food format.

Well, fast food format is what the drive-thru window and fast casual does not have a drive-thru window.

Would you consider a table service restaurant potentially a fast casual so again what is the use then -- your core competency since it's not just a fast food operating system that you view as your core confidence, what do you think it is?

I'm not quite sure I know. Pasta Pomodoro was listed in the fast casual area.

Does that mean in terms of this M. & A. program you are casting a pretty wide net on the restaurant industry?

As long as we don't compete with our existing franchises I don't think as we looked at it now we're not into fine dining. We think that the type of menu and the freshness of the product really meets the fast casual. Casual I think has a bigger quit a bit bigger liquor components and the research suggest s a to Pomodoro is fast casual.

We're not -- maybe I can give you a little help here. The biggest part of the increase in franchise revenue s, first of all comes from the same store sales at wind Wendy's. 7.8 on the same store sales, [inaudible] were up 55.8. So you have the increase in rail advertise to Wendy's, increase in royal advertise to who are tons but also, Tim Horton's but you have

The increase important they are this to this element impeachment restaurant income which is based off the fact that Tim Horton's own the real estate and lease it to the Fran cheese. They get more rent. So you have the growth and the nurnl of storms at Tim's along with the increase in revenues that contribute to that rental income growth which is in our franchise revenue number. Then one last thing is that we have been selling more stores at Tim's U.S. We can talk about the fact of it trying to franchise those stores and when we sell shows stores, the S from that and the equipment are running through franchise revenues. And they were, you know, up about 4 million dollars because of the number of restaurants we sold during the quarter franchise s U.S. Baja is in there but it's not a big number.

Just as a follow-up you said accompanying sales are up 3% in October. For the west, last several months, franchise sales will been running significantly ahead of company sales. Is that still true for October?

The same braish ratio shall the seam spread is basically true.

Thanks very much.

Our next question comes from Howard Penny.

Jack I was wondering if you can expand on your growth. You focused on U.S. if you will and multi brand concepts. Are you still thinking about an international business?

International Wendy's division?

You know by the even of the year we'll have two stores left in Europe. One in Heathrow airport where the lease runs out in five years in London and the other is our Naval base in Iceland. We really believe that we have more of an American strategy for the brand Wendy's. We do well in new Zealand. We do well in Latin and the Caribbean and you know we're going to stay in north America. We feel that's where the brand plays best. I can tell you that we do have some strength in Japan that will continue to work with our franchises there.

We would like to thank you for moderating the call and working with us and thank you those on the line. If you have further questions you can contact me tonight or tomorrow. Thanks a lot.