Wendy's Co (WEN) 2003 Q1 法說會逐字稿

Good morning.

My name is Charlene (ph), and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Wendy's International first quarter 2003 earnings conference call.

Call lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question and answer period.

If you would like to ask a question during this time, simply press star then the number 1 on your telephone key pad.

If you would like to withdraw your question, press the pound key.

I would now like to turn the call over to Mr. John Barker, Vice President of Investor Relations and Financial Communications.

Mr. Barker, you may begin your conference.

Thanks, Charlene (ph).

Good morning, everybody, welcome to our first quarter earnings conference call.

The conference is being web cast over the internet, and it will be available for replay.

Before we get started, I would like to introduce members of our management team here this morning, Chairman and CEO Jack Schuessler, Chief Financial Officer Kerrii Anderson, Wendy's North America President Tom Mueller, and our VP of corporate accounting Dan Boone (ph) here to help us today.

We published our first quarter results yesterday during our annual meeting of shareholders.

Our corporate news release, the accompanying financial statements, and other financial materials are available on our web site at www.Wendy's-invest.com or contact our investor relations department.

The number is 614-764-3251 if you still need a copy of those materials.

From a disclosure standpoint, you'll note that today's earnings release includes our income statement, financial data page, restaurant development summary, income statement definitions, and our Safe Harbor Statement.

We are closely following all GAAP and SEC rules.

As a management team, we are committed to providing full disclosure.

Our financial data page contains useful metrics that many of you track and some key balance sheet information such as cash, our shareholders equity, and long-term obligation.

Our full balance sheet will be disclosed with our 10Q during the second week of may.

I would like to review a few items on our investor schedule going forward.

We plan on publishing monthly sales for the month of April, and that will come out on Tuesday, May 6th.

The April accounting period ends on may 4th.

As for major meetings that we have coming up with investors, we plan on meeting with investors in New York on May 7th and 8th, and that will be with Salomon Smith Barney.

Management will host buy-side investors at our corporate office on May 12, and that will be with Bank of America.

We plan on presenting at the Goldman Sachs conference in New York on June 3rd.

On June 10 and 11, we will be meeting with investors in Texas, and that will be with JP Morgan.

On June 17th and 18th, we have meetings with investors set up in the Midwest with Bear Stearns, and looking forward on the disclosure calendar, we plan on publishing our financial results for the second quarter on July 24th.

For future reference, please note that our key disclosure dates for the year listed on our corporate and investor web site.

Also on our web site is our current investor relations presentation and power point format, including yesterday's annual meeting.

We also have all of our historical and current financial news releases, extensive corporate governance guidelines, overviews of each of our brands, and our recently published annual report to shareholders, and financial statements.

The agenda for today's conference call will include remarks by Jack and Kerrii.

Following those remarks, we'll open the call for questions.

I would like to refer you for a moment to the Safe Harbor Statement attached to the company's news release and on form 10-K.

Certain information that 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 Safe Harbor Statement attached to the earnings release and in our most recent form 10Q.

I would like to note that we are observing regulation FD from the SEC.

Regulation FD encourages public companies to discuss all potentially material information in a public forum.

Therefore, we encourage you on the conference call today to ask questions at the end of our presentations.

Now let me turn it over to Jack.

Good morning, everyone.

Certainly the first quarter was challenging in many, many areas.

And we knew it would be difficult for many reasons, including the economy, going against tough comps from a year ago and mild weather in the winter of a year ago.

But we also have positives.

We had good system-wide sales in total revenue growth on the top line.

Tim's in Canada produced strong same-store sales.

New restaurant development is on track in each brand.

We repurchased about 36 million dollars in common stock, taking advantage of the good value that our shares represent.

And we continue to execute our strategic plan, which I will talk about a little bit later this morning.

Now I'm going to review some key financial results, and Kerrii will go through this in more detail in a few minutes.

During the first quarter, system-wide sales reached $2.3 billion, and that's plus 7.1 percent.

Revenues were 694 million, up 13.3 percent.

And net income, 44 million, up 1 percent.

Earnings per share during the first quarter was 38 cents versus 39 cents a year ago.

A number of factors presented challenges in the restaurant industry during the quarter.

In the Wendy's system, we had 578 closed store days in February.

In March, a major storm impacted the mountain states, they had more than 40 inches of snow in Colorado.

Our Baja Fresh sales were impacted by severe weather on the east coast, and Tim's was affected in the Midwest, where we have a major concentration of stores in Michigan and Ohio.

Overall, we have been experiencing a weak economy and a nine-year low in consumer confidence.

The index dropped to 62 percent in March.

You can remember there's also been concerns about the war in Iraq.

Also during March, there was a spike in gasoline prices, impacted, in my mind, consumer spending habits.

So as a result of these challenges and our strong results a year ago, first quarter sales were lower than expected at Wendy's, Baja, and Tim's U.S.

Just to recap, same-store sales, Wendy's U.S. company restaurants were negative 3.1 versus a plus of 5,6 a year ago -- 5.6, I'm sorry.

Wendy's U.S. franchise were minus 1.7 versus a strong plus of 8.1 a year ago.

Tim's Canada: 3.9 positive versus a 7.9 positive a year ago.

Tim's U.S., positive.4 versus a 10 percent double-digit 10 percent a year ago.

And Baja system-wide down 1.8 versus a year ago of being positive 5.4.

Let me touch on each brand.

In Wendy's North America, continue to make great progress on service excellence.

Our national average for the pickup window speed now is below 120 seconds, and that's down from 127 a year ago.

I know Tom Mueller and his team are really focusing on the next step of service excellence, and that's for the inside.

Our research and development group is very focused on promotional salads, our chicken lineup, and overall menu, and our new R&D center opens in early May.

From a marketing counter standpoint, we believe it's a strong calendar for the rest of the year.

We just completed six weeks of garden sensations, and Wendy's continues to dominate consumer perceptions of who offers the best salads in QSR.

Coming in the second quarter, in media will be our new Southwestern Chicken Caesar salad.

It's an outstanding promotional salad with great taste, including Romaine lettuce, seasoned corn and black beans with nice chicken with southwest seasonings.

We're beginning a new national pillar this week featuring our super-value menu.

Coming on later this year is our new homestyle chicken strips.

It's a great product, and it's made from whole chicken breast fillets.

New unit development is on track at Wendy's North America.

We opened 31 new units at Wendy's North America in the quarter, and we're on track to open the 285 to 300 for the full-year.

Our franchisees are healthy, and our royalty collection rate is above 99 percent.

And we continue to focus on our people, and you know how important that is.

Our turnover actually dropped to all-time lows again in the first quarter, just to give you a couple examples.

At the end of 2002, our GM turnover was 10 percent.

For the first quarter of this year, it's 6 percent.

And crew dropped from 139 at year end to 115 at the end of the first quarter, and that's quite phenomenal.

I have been out in the marketplace for a lot of the quarter.

I have been to our regional sparkle meetings, have met with our WENAP (ph) and FAC members, made a number of market visits in the Midwest, and I can tell you our employees and franchisees are positive and optimistic.

And I'm optimistic about our sales trends improving.

You know, weather will be less of an issue, the war in Iraq seems to be settling down, and we expect consumer confidence will improve.

Tim's had another strong quarter.

They produced same-store sales growth of 3.9 on top of a 7.9 a year ago.

And their national advertising had good promotions during the first quarter, including fruit muffins in January, the Big Baguette sandwiches in February, and their popular "roll up the rim to win" promotion in March through April.

For the second quarter, we will feature ice cappuccino, a strawberry theme promotion, and one of the highlights of the first half of the year for Tim's is camp day, if you remember, that's where we raise sales on coffee on June 9 across the system to be donated to the Tim's Children's Foundation.

From a development standpoint, Tim's opened 32 new units in Canada during the year.

And our par-baking plant Brantford, Ontario is fully operational, and we're producing baguettes and other confectionery items for all of our stores in Ontario and the U.S.

To remind you, the joint venture is profitable as we expect it, and it will contribute to our other income line during the quarter.

In the U.S., our same-store sales were essentially flat compared to a strong growth of a year ago of 10 percent.

Again, severe weather in Michigan and Ohio definitely hurt the overall sales performance.

Overall, we're pleased with Tim's progress in the U.S. and expect the sales trends to improve.

We now have 160 restaurants open and more than 120 are now operated by franchisees.

In Rochester, we opened four new stores last fall, sales are encouraging, and also our new coffee roasting facility is operating profitably in Rochester, and they're supplying coffee in Ontario and the U.S. stores.

Baja Fresh contributed significantly to our revenue growth in the quarter, as it was not in our revenues a year ago.

Their rapid new unit development plan is on target, and from a sales perspective, we're comparing against a strong first quarter of a year ago.

January and February were challenging due to the weather on the east coast, but we have seen March sales improve.

In fact, our company stores which represent a little bit more than half the system, were slightly positive during the quarter, and we chose to report blended sales in our releases.

We expect sales trends to improve throughout the year.

As mentioned, the new restaurant development is on pace.

We opened five new company units and 12 new franchise units.

And we now have 226 total Bajas, restaurants open in the U.S..

The pipeline is full, and we are very excited about their development plans, and we will be opening that units in Boston, including fannell hall (ph) by the end of June.

From an earnings perspective, Baja cost us about 2 cents per share in dilution for the quarter, and that was expected.

And as we said during our analyst meeting in February, we expect 4 cents per share dilution for the full-year 2003, with a swing to accretion in 2004.

Greg (ph) and his team are really focused on profitable expansion with an excellent list of franchisees, and recently at the beginning of this month, I had the opportunity to talk at the Baja franchise update meeting, and I can tell you they're all very positive.

It reminded me so much of Wendy's of 25 to 28 years ago, the electricity in that room of the franchisees, and I'm very, very proud of all of them.

Overall, the first quarter was a challenge, but we made progress on our long-term strategies.

More importantly, we like our position for the rest of the year and for the next several years.

We avoided all of the discounting that occurred in the fourth quarter of 2002 and the first quarter of '03, and we're focused on serving quality food.

We believe that our customers will reward our brands for being familiar and predictable.

And I just want to reiterate our EPS goal for 2003 is in the 7 to 10 percent range.

That's 2.02 to 2.08, up from 1.89 a year ago.

Let me mention one thing, and that is that we filed a form 10K/A on April 22nd.

It is an amendment to the 10-K that was filed on March 28.

And here is Kerrii to walk you through the details.

Just a couple comments with respect to the amended 10/KA.

The amendment deals solely with future minimum lease payments due under operating leases, the allocation of rent expense between minimum rent to contingent rent.

The allocation of rent income between minimum rent and contingent rent and the future minimum operating lease receipt.

This amended information can be found really primarily in the footnote 6 of our financial statements as we filed in this amendment, as well as under the MBNA (ph), because of contract to obligations and commitments.

All other financial information contained in our original 10-K, annual report, and financial statements remains unchanged.

There is no change to the company's 2002 consolidated statement of income, the consolidated balance sheet, the consolidated statement of cash flow and consolidated statements of shareholders' equity.

So I think that's just an important note.

Maybe, Jack if you would like to finish your summary.

In closing, we're focused on managing our business in a challenging environment.

We're maintaining focus on our strategic plan, and we are building on our quality position with each brand.

Our long-term goal is to generate 12 to 15 percent annual EPS growth and improving returns.

And I can tell you our management team and the board are very confident about our future.

So with that, I will turn it back to Kerrii.

Thank you, Jack.

Let me take a few minutes to discuss results in more detail and discuss some of the initiatives we have completed.

Before I get started, and Jack's alluded to it, please note that our first quarter results do include a complete consolidation of Baja Fresh in our revenues, cost of sales, and our company restaurant operating costs in G&A and interest expense.

So for the first quarter, ended March 30 of 2003, our system-wide sales grew 7.1 percent to $2.3 billion.

Consolidated revenues increased about 13.3 percent to 694 million.

Baja Fresh contributed nearly half of our revenue growth in the quarter, and we expected it to continue providing strong growth the rest of the year.

Jack already shared our same-store sales results, so let me move on to the development details.

From a new restaurant development standpoint, we opened up 83 new restaurants system-wide during the quarter, and we closed about 33 for a net total of 50 new units.

The openings consisted of 31 new units at Wendy's in North America, two new franchise Wendy's international markets, 32 new Tim Hortons in Canada and one in the U.S., and 17 new Baja Fresh restaurants.

It was a very good quarter for restaurant development, and as Jack mentioned, we are pleased to report that we are on track to meet goals for the year.

Our guidance is to open up 560 to 605 new restaurants system- wide in 2003, and that would include Wendy's, Tim's, and Baja.

If you continue down the income statement, let me discuss first of all the cost line.

Our domestic operating margins at Wendy's declined about 170 basis points due to 13.1 percent, due primarily to lower-than-expected sales.

I'll tell you that food costs were manageable due to continued emphasis on supply chain management, and as we expected, first quarter beef costs were actually lower than a year ago.

We do expect to see second quarter be pretty much in line with what our beef costs were a year ago, and then a little higher towards the back half of the year.

Utilities were about 30 basis points higher than a year ago, and that's mainly due to the severe winter weather that we have all talked a lot about.

And then lower sales did - you know, as a result of the lower sales, we did not get leverage on the labor line.

Now a closer look at some of the cost items.

In the cost of sales line, our overall cost of sales increased about 15.6 percent, to 363 million dollars.

And if you start with domestic Wendy's, food as a percentage of sales was actually down about 20 basis points to 28.8 percent.

And it reflected lower beef costs, stable chicken costs, and a small price increase we took at Wendy's in the fourth quarter of last year.

Store labor was 28.4 percent of sales, and that's up 90 basis points compared to a year ago.

The 90 basis point increase on the labor line was really a result of lower than expected sales.

On the positive side, our average crew rates for the quarter was $7.17 per hour, and that's an increase of crew wages of only 1.7 percent versus a year ago.

Cost of sales included the cost of Baja Fresh in the quarter, which, of course, a year ago there was nothing.

If we move to the company restaurant operating cost line, it increased about 13.7 percent to $121 million.

And in that, that line are the cost of Baja Fresh included in this year versus no cost again a year before.

I think worth noting in the company restaurant operating cost line is the increase in utility costs for domestic Wendy's, which again, as I said already, were up about 30 basis points due to severe winter weather.

You move down the income statement to the operating cost line, it increased about 22 percent to 30.7 million dollars, as we expected.

The increase is primarily related to Tim Hortons, and the good news is that Tim's increase in operating costs are offset by the chain's higher franchise revenues.

Increase in the operating cost line include higher rent expense and equipment costs related to new stores, a higher percentage of rent due to sales growth, and a higher warehouse cost related to sales growth.

Moving down the income statement to G&A, up about 15.2 percent in the quarter to $64.8 million.

The reason for higher revenues and G&A is inclusion of Baja in first quarter results.

If you were to exclude the G&A cost associated with Baja Fresh, which were about $3 million, our total G&A expenses rose to about 10 percent over last year for the quarter.

As we already talked to you about, insurance costs, as we expected, were up, and it's important to note that we are continuing to focus on controlling G&A expenses during the quarter and the year, while continuing to make investments to grow the company in the future.

Total G&A including Baja as a percentage of system-wide sales was 2.8 percent, up about 20 basis points versus year ago, and total G&A as percentage of revenues was 9.3 percent versus 9.2 a year ago.

On the other income expense line, we produced $3.2 million compared to about $600,000 a year ago.

And the main reason for the increase was income from our joint venture plant with CDF and Canadian currency adjustments.

I know we took excruciating detail in New York to try to explain this is what would you see as we continue to book that benefit of that equity investment.

Now, let's spend a few more minutes taking a detailed look at some income items.

Pre-tax income was 68.6 million, which was essentially flat with a year ago.

Our effective tax rate was 36 percent, as we had previously disclosed.

Net income increased about 1 percent to $43.9 million.

And then total diluted EPS was 38 cents for the quarter, down 2.6 percent from the 39 cents reported a year ago.

So at this point, I mean you might be asking yourself how can earnings be up and EPS be down with approximately the same number of shares outstanding.

It's really quite simple if you're an accountant.

The net income as reported on the financials was, as I have already said, 43 million 440 for 2002 and 43 million 893 for 2003.

However, in accordance with GAAP, the reported net income for 2002 is adjusted as if the TECONs, the convertible securities, were actually converted last year from debt to equity.

Therefore, the reported net income of 43 440 is then adjusted by a million -- I'm sorry, the net income of 43, yes, 440 for 2002 is adjusted by 1 million 604 as if the interest expense on the TECONs never occurred.

Therefore, last year's net income for the EPS calculation is, as adjusted, is 45 044.

So on a comparative basis, the net income for 2003 is actually 2.6 percent less than 2002.

And that explains how EPS could then be 38 cents versus 39, down 2.6 from 2002.

There are some offsetting items for the quarter.

While Baja Fresh did generate operating income, we had dilution as Jack said, we were paying about 6.2 percent interest on the 225 million we borrowed for the acquisition, and that's of 2 cent dilution for the quarter.

The impact of foreign currencies translation with the Canadian dollar was material in the quarter, worth about a penny and a half.

The Canadian dollar averaged about $1.51 during the quarter, compared to $1.59 a year ago.

We had expected the Canadian dollar to have a minimal impact on the year when we provided guidance in February.

So if we can focus on the balance sheet for a minute, we did repurchase a total of 1.4 million common shares in the quarter for about $36 million.

We have continued to proactively manage our balance sheet over the last two years, and we will continue to do so.

While at the same time, maintaining our strong investment grade rating.

The first quarter buybacks bring the total share repurchase since 1998 to $863 million, and as for our current cash position, at the end of the quarter, it was $127 million.

In summary, we continue to be very optimistic about the year with our 7 to 10 percent EPS growth goals.

We believe that the growth of that kind of a growth rate in today's market does represent superior performance.

Over the long-term, our goal is for annual EPS to remain in the 12 to 15 percent range, and we are excited about the future for several reasons: the strength of our core businesses, Wendy's and Tim's, the ramp up of Baja Fresh, the completed turnaround at Tim's U.S. which is now profitable, and our investment in two quality brands, Cafe Express and Pasta Pomodoro.

And for these reasons, we're confident about the future and because of our unwavering commitment to our core values, such as quality food, superior restaurant operations, continuous improvement, and integrity to doing the right thing.

So at this point, I would like to turn it back over to John to open it up for Q and A.

Operator, this is John Barker.

If you could ask our listeners to queue for questions, we're now ready for Q&A.

At this time, I would like to remind everyone in order to ask a question, please press star then the number 1 on your telephone key pad.

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Mark Kalinowski from Smith Barney.

Hi.

Two questions.

First, if memory serves me correct, I think in January, you said that the Wendy's brand would do same-store sales of anywhere from1 1/2 to 2 1/2 percent this year, just wanted to get an update as to what you think the full-year number will be now.

And second, just wanted to ask about the Canadian dollar.

You did get a little bit of benefit from that in the first quarter.

Just want to see how much of a benefit, if any, is incorporated into the EPS target for the rest of the year.

Mark, as far as guidance on sales, historically we don't give new guidance as things change on sales.

And that remains true.

I can tell you we're confident about our marketing programs and our service initiatives for the rest of the year, so we're optimistic and, Kerrii, you want to ...

From an impact of Canadian currency, as we disclosed in February, our current guidance does not take into account any benefit from or detriment to the impact of changing Canadian currency from what we experienced last year, which was $1.57.

Great.

Thank you very much.

Your next question comes from Coralie Witter from Goldman Sachs.

Hi.

Two questions.

The first one relates to Baja Fresh.

Could you talk about what the geographic split there looks like?

And also at that franchise meeting, where are the bulk of your new franchisees for Baja Fresh coming from?

Are they from the Wendy's system or other brands as well?

I can tell you we have very stringent requirements on accepting Wendy's franchisees into Baja.

We do have three that we have approved, and what we have said is they have to be financially sound, operationally sound, and they have to be fairly built out of Wendy's within their own market.

So those are the criteria.

As I said, we have had many applications, but we have only accepted three.

The distribution of restaurants, we have 116.

At the end of the year, we had 210 total, of which 116 are in California.

And then we have on the east coast between Virginia, Baltimore, D.C. area and the Carolinas, we have 12, almost 25 units.

So it's pretty substantial.

Okay.

And then the second question relates to the Cuisine de France joint venture, just trying to understand better the 3 million and change contribution there.

How much of that was due to the profitability of Cuisine de France, and how much was due to currency benefit at Cuisine de France?

Okay, Coralie, with respect to the change in other income, as we have disclosed, it is a combination.

Currency was about a penny and a half of the total for the quarter.

Some of that comes through other income and expense, I will tell you about a penny.

The rest of it is just a factor that comes through your sales and cost of sales and other elements.

So, you know, that's of the change, about a penny was related to currency, and the rest is primarily CDF (ph)

The other half cent of currency benefit flowed through the income statement, that was related to Tim Hortons?

That's correct.

Okay, thanks.

Your next question comes from John Glass from CIBC World Markets.

Thanks Two questions as well.

Back to the annual guidance, I think you had suggested that your domestic margins, I think you said, strive to maintain, which I guess means flat year over year.

Can you maybe give us an update given what you have seen in the first quarter, if that's still a realistic goal?

And secondly, when you look at the Hortons business in Canada, have you noticed an impact from SARS?

Can you maybe give us a sense of how many of your stores are in the greater Toronto area and might be impacted?

Thanks.

Hey, John.

We have approximately 37 in the greater Toronto area.

And as you know, the world health organization put out, I guess you would call it, a warning about travelers going into Toronto being only if necessary.

We have looked at it.

We haven't seen anything material right now, but we're keeping a close eye on it.

And, John, with respect to the margins, as you know, we did experience 170 basis point decline.

It is our goal to continue to hold margins the rest of the year, and we think food costs are very manageable, you know, the element is just to get the 1 1/2 to 2 1/2 percent sales at the Wendy's level.

So do you mean hold margins from here on, but it would still be down on a full-year basis given what happened in the first quarter?

That would be correct.

Okay, thanks.

Your next question comes from Howard Penney of SunTrust.

Can you comment on what your capital expenditures were in the quarter, and then also a question on Baja Fresh?

While you haven't provided guidance, it would appear same-store sales are kind of below plan, yet dilution was in line.

Where did you see a benefit to keep the dilution in line with your prior guidance, if, in fact, same-store sales were below plan?

Some of it was because the integration that we did, we had some good cost savings, and that's the reason.

And going back to capital expenditures, Howard, you will see that information disclosed as we file our 10Q, which will be filed here about 15th of March, approximately -- I mean May, sorry.

Don't go backwards.

So just -- I mean, given the share repurchase and the capex in the quarter - well, you're not giving me the capex number -- did you generate any cash in the quarter, or did you burn cash?

We had a cash balance of 172 million at the end of the last year and ended the quarter with 127, so it's pretty likely we used cash.

Thank you very much.

Sorry about that.

Your next question comes from Mitch Speiser of Lehman Brothers.

Thanks very much.

Two questions.

First, on the initiatives to increase speed at the counter, I was wondering if you have what the average service time is at the counter.

Have you benchmarked that versus other, you know, versus your competitors?

And perhaps some of the things that you're doing to increase speed at the counter?

And secondly, just on second quarter guidance, perhaps it looks like Baja will probably be the same in terms of dilution in the first quarter, and just wondering in terms of earnings progression, if we should expect any improvement in year-over-year growth in the second quarter versus the first quarter.

Thank you.

Let me handle the easy one first, and that's the inside service.

That's part of getting ready to implement, is doing the benchmarking, putting in procedures, maybe putting in a different timing system that's more accurate, so, you know, from that standpoint, benchmarking is part of the plan, and that's all I can say about it right now.

Now, I wasn't quite sure what you meant on the Baja, Mitch.

Just on Baja, it was 2 cents diluted in the first quarter.

I was wondering if we should expect that in the second quarter, meaning that, I guess, in the second half of the year, we should expect accretion.

And then, back to the second quarter, should we expect any earnings improvement versus what was reported in the first quarter given that a lot of the same metrics are the same, like the comparisons.

It looks like food costs may not be as beneficial.

I guess it does come down to comps, but just trying to get a sense of where you think guidance should be in the second quarter.

Thank you.

Mitch, with respect to dilution of Baja, I think what we have been comfortable saying and disclosing is that we would expect Baja's dilution to be 4 cents for the year, and, of course, you know now it's 2 cents in the first quarter.

We have not been, you know, at this point disclosing anything on individual quarterly basis, but second, third quarters are usually better times for them.

No other comment on second quarter versus--

I still can't understand what you're trying to--

Earnings were down 2 1/2 percent in the first quarter.

In the second quarter -

Oh, okay.

In the second quarter, you know, consensus is looking for up slightly, and a lot of the metrics seem to be the same in terms of Baja Fresh dilution, you know, comps comparisons still pretty difficult, and just want to know if you want to, perhaps, give us a sense of your expectations versus where our consensus is at this point.

I'm confused, Mitch.

Are you talking about consensus on Baja?

Consensus on Wendy's?

I really don't understand what you're driving at here.

Okay.

I will try and be more clear.

Earnings were down 2 1/2 percent in the first quarter company-wide.

Right.

Trying to get a sense for second quarter, given that comps comparisons are pretty much the same, food costs seem to be less beneficial, and a lot of the same conditions are continuing.

Well, I think the conditions are, you know, the weather is not there, the war is over, we see some signs that consumer confidence may be coming back.

So I'm looking at something different than you are.

And, Mitch, specifically on your question about - we just don't update on quarterly guidance.

We have never done that, and we're not going to get into that going forward, no intentions.

But if you look at our guidance of 7 to 10% for the year, one has to assume that things are going to improve as we go through the next three-quarters.

We said that we're more confident.

Just the reason why I brought it up just going into the first quarter with consensus where it was, Kerrii did mention it did look a little bit aggressive, and just wanted to know if you wanted to give perhaps some view on the second quarter, but -

We can't, we can't.

Okay, thank you.

Your next question comes from Joe Buckley of Bear Stearns.

Thank you.

I have a couple questions as well.

First, a question on the franchise revenue growth, up about 12, I guess, 12.4 percent in the quarter.

It far outpaces system-wide sales growth, and this was the case for all of last year, you know, principally driven last year by Hortons, as we know from the 10-K details.

Wondering if would you address that, what's going on there to break (ph) that faster revenue growth on the franchise line.

Well, part of it is Baja because it wasn't in the numbers a year ago, Joe.

Yeah, I was suspecting that's kind of relative to the Hortons, Wendy's contribution.

It's more restaurants.

We opened, if you look at it, 530 new restaurants or so, and only about 80 of those were company-owned, which were mainly Wendy's.

So I think it's a combination of, you know - you had over 400 new restaurants.

Is there anything changing on the revenue stream out of the Hortons franchisees that we should be aware of?

If you look for all of last year, Hortons system-wide sales were up 15 percent, franchise revenues up 25.

You know, we'll get details when you file the Q on the first quarter, but, you know, that's a huge disparity, and if it's sustainable, that's great.

If something is changing, I would like to know about it.

Another item is, I think if you would compare new openings in first quarter, it's always very low, and I think we had a very good development for the quarter where we opened more restaurants during the quarter than we historically have.

And you have equipment package that's go along with that, Joe.

And I might just add, Joe, I mean as you know, what's in franchise revenues are certainly the royalties, of which - Baja is in there this quarter, weren't before.

You probably have 50 percent of the increase is a result of rental income that comes through as a result of Tim's owning the real estate, and you've got an average same-store sales increase of 3.9 percent, plus you've got, you know, about 170 more restaurants open versus a year ago.

So that is really driving - and that's at Tim's - and so, that is driving your increase in franchise revenues, you know, because there's four streams.

They get - you know, the franchisees have royalties of course, but they also have rental income on the real estate.

Okay.

I will wait for details in the queue to circle back with you.

Question on the other income line, kind of walk us through how the foreign exchange ends up on that line, and, you know, even so, it makes you look like the Cuisine de France profitability - if we got back at 1.8 million on that line for foreign exchange, which would be a penny, Cuisine de France looks like it's well ahead of your expectations in terms of profits.

I was wondering if you could address first how the foreign exchange ends up on that line, and then just whether Cuisine de France is a lot better than you thought.

How does the currency end up on that line, this is various kinds of inter-company, cross-border kind of arrangement.

We have money constantly going back and forth, and, of course, you're required to mark that to market through your P&L as it does.

And we had a lot of activity, and, of course, the rate changed quite a bit.

So when you mark it to market, it happens to come out to roughly a penny, if you will, and gets recorded on that line.

As opposed to, as Kerrii explained, the entire operations are translated, but that comes through just wherever it comes through; comes through sales, cost of sales, wherever.

So there are two separate things, but both related to the Canadian currency changing.

And together they added to 1 1/2 cents.

Right.

Okay.

Lastly, could you update us on your beef cost outlook?

You were talking sort of 6 to 10 percent for the full-year.

Has that outlook changed at all?

Actually, Joe, what we talked about was 3 to 5 percent increase.

I'm sorry, that's correct.

That's all right.

In the complete year, and I will tell you that we think we can be on the low side of that, but I think we're still 3 to 5 percent range.

We think you'll see more pressure towards the back half of the year to get to that 3 to 5, and, I mean, like I said for second quarter, we're looking at it basically almost flat with where we were a year ago.

Okay, thank you.

Your next question comes from Peter Oakes of Merrill Lynch.

Good morning.

I have a few questions.

If we look at Baja's comps since you acquired it ten months ago or so, they basically track at about a flat performance.

So even excluding the impact of weather and what you saw with the sniper there with late last year, looks like you're below where you would have thought at acquisition.

Do you have any more color as to why you think it's underperforming?

I think it's everything we have mentioned before and some of it is as we're going into newer markets, there's a tendency as you build it out to cannibalize oneself.

I know we're still very pleased with the acquisition, and I think they're going through, Baja is going through the general market conditions that we all are.

So, you know, as those relive itself, I think they will come out of it.

So we're still very positive about the brand.

Okay.

They're still averaging very high volumes.

Jack, maybe relatedly, I know there's an evolution as far as the AUVs, how they perform.

Has there been any shift in that evolution process?

From 0 to 14 months and 14 to 28 and so on?

As their open, is that--

Right, but I guess if you look at it by layer as far as evolution--

No, you're right.

It really hasn't changed, the relationships.

One of the things, keep in mind, we share with Baja averaging system-wide a million 5 a store, well ahead of anybody in that segment.

Okay.

Moving on, has there been any material shift in your salad mix versus a year ago?

Not material, no.

Not when you run - you know, it is a seasonal product, so you have to run March versus March and so on.

It's not material.

Okay.

And then elsewhere, I guess on the mix side, has there been any material shift in your super value menu?

Again, that is affected by advertising, and I think a little bit of the economy.

I think the super value menu is up a couple points versus a year ago.

Okay.

Is that why the average check fell?

You were down here in the quarter, and that's the first time I can remember in some time.

Exactly.

And what that tells you is there's less disposable income, and people are going for the least expensive items.

Again, that's part of our strategy, and those customers will come back and reward us as things improve.

Lastly on the SARS, I think in John Glass' question, you mentioned there's 32 units in the metropolitan Toronto area.

That's just Wendy's, correct?

That's not Tim Hortons?

That's Tim's.

If you remember, inner city Toronto, urban Toronto was one of the last parts of Canada that Tim's decided to go into because the expense.

And as we improved our overall sales, it was easier to, you know, afford the real estate in urban Toronto.

So should Toronto represent less than 2 percent of Tim's total units?

Well, whatever the math is.

That's really sort of - they talk about it in different ways, but that's what they call the downtown part of Toronto, and Tim's is paying a lot of attention.

They have a good plan in place, and they're very confident.

Okay.

Thanks, guys.

Your next question comes from John Ivankoe of JP Morgan.

Thanks, just one question.

Could you talk about the lunch program at Tim Hortons, the progression since it's been launched?

Any initiatives you may have for 2003 and kind of like a reasonable kind of expectation in terms of what one's sales could be as a percentage of Tim Hortons sales this year relative to last year and going forward?

We're not predicting that.

You have to see how the year plays out.

We have a number of initiatives, but it's a very balanced approach at Tim's as it is in Wendy's, and you have to drive a number of your items, just not concentrate on one.

So, you know, we have a good program out there.

Remember, coffee is 50 percent of our sales, so that's what you go after.

You want to continue to drive that.

Lunch and sandwiches, soups is 11 percent, and we want to make progress over time.

But, you know, you're going to go with your lead cart here, and that's coffee.

Has there been any change with the launch of the Big Baguette in terms of that mix?

Has that been a driver of sales, in other words?

Yeah, it's gone up, but remember, Tim's overall sales, same-store sales are huge, their increases.

So your lunch business may go up, but so is your coffee business.

Okay.

That's fine.

Thank you.

Your next question comes from Robert Derrington of Morgan Keegan.

Hi.

Good morning.

Can you give us a perspective on the targeted shares you expect in your earnings guidance for 2003?

Yes, with respect to repurchases, as you all know, we have repurchased about $36 million of stock to date, and we usually target to offset dilution, which is somewhere about 1.8 to 2.2 million shares.

So just, you know, hopefully that helps answer your question.

Okay.

As we look back to mix shift, has garden sensations and the addition to the product line coming up - do you anticipate that will have a benefit to cost of sales or a pressure on cost to sales overall?

What we want to do is increase sales, and when you increase sales, you bring more dollars to the bottom line.

And anything we do is profitable.

So, you know, we have very good cost structures, and we're going to bring money to the bottom line, and that's how we view things.

And sometimes you have promotions that will drive costs up a little bit or a little bit down, but at the end of the day, you want more dollars on the bottom line, which increases our earnings per share.

It appears as though the pricing changed by about 5 percent on the garden sensations versus last year.

I don't know where you're getting your information from.

Inside your restaurants.

Don't know that.

Okay, very good, thank you.

Your next question comes from Andy Barish at Bank of America Securities.

Two quick questions on the promotional side, can you just refresh my memory on the super value?

You mentioned in the 2Q, is that an additional pillar, or did you do that last year in the second quarter?

Secondly, on the operating costs, kind of a reflection of some franchise costs associated with, I guess, primarily the Tim's business.

That number has been creeping up and was up 30 basis points year over year.

Can you go into what's going on with the mix there, and what you would expect for the full-year?

Let me address the super value menu pillar.

I believe we have the same amount of value pillars, four of them this year, as we did last year.

I think last year was where we increased it by one versus 2001, Andy.

Okay.

With respect to operating costs, Andy, what we had disclosed in February is we would anticipate seeing that continue to stay, you know, in the 20 percent range of increase over the prior year for a couple reasons.

In that number is the cost of the operations of the warehouses that supply our product to the franchisees at Tim's, and it is Tim's, you're right, it's primarily all Tim's.

The other piece of that is, it also includes rent expense for those properties that we would then rent and turn around and collect rent from our franchisees, so you see that going up with the number going up in units.

And lastly, it is equipment costs that, as we talked about some of the - always fresh roll out and putting more equipment into the stores, it goes through that line.

So those costs continue to be up, and that was our expectation going in to the year.

Remember, those costs are up, but so are the revenues, Andy.

Warehouse, as we build 200 more stores, you know, you have revenues all across the brand in the four streams.

So you also have costs going up in the warehouse because you have 180 more restaurants to deliver to.

So, you know, costs go up as do revenues.

And does things like Cuisine de France, where you're now sourcing Baguettes from an internal source, does that ...

No, we're making them.

Does that help that line or no effect?

Really has no impact on that line.

Because it's a joint venture.

Okay.

Thank you.

Your next question comes from Janice Meyer of CSFB.

Hi.

Thank you.

Two questions.

One, I apologize on Baja, but if Baja comps stay where they, can the cost savings you're seeing, which would seem to maybe be a little more than you thought, keep the dilution at 2 to 4 cents for the year?

And secondly, if you could give us an update on how CDF (ph) products maybe could play into sales at brands other than Tim's over time?

I think I remember, way back when with the salads, you used to give a bread stick or a roll.

Is there an opportunity to maybe do something like that, augment some of the Wendy's offering?

I think you can always have those possibilities down the road, and what we wanted to do is get this bakery built and supplying.

We're also just going to be expanding it because it's been successful.

So we just broke ground on the expansion this past week.

So I think as we get our products and the plant operating at a greater capacity, I think there's always the opportunity to look down the road at what else you can be doing.

But it's not anything really on the radar screen now.

)) And with respect to the dilution of Baja, as you know, our guidance was that dilution would be 4 cents, and that is based on, you know, hopefully achieving comps of 2 to 3 percent.

Certainly, we can absorb some.

I think we have some good initiatives, but I think it's difficult at this point to say, you know, it can be totally absorbed if comps, you know, remain negative.

Thanks very much.

At this time, there are no further questions.

Okay, Charlene, thank you very much.

We appreciate everybody joining in on the call.

If you have further follow-up questions, you can reach me later today via telephone or e-mail.

Thanks again and have a good day.

Bye.

This concludes today's Wendy's International first quarter 2003 earnings conference call.

You may now disconnect.