Wendy's Co (WEN) 2003 Q2 法說會逐字稿

Good afternoon.

My name is Christy, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Wendy's International second quarter 2003 Earnings call.

At this time, I would like to turn the call over to Mr. John Barker, SVP of Investor Relations and Financial Communications.

Sir, you may begin.

Thanks, Christy.

Good afternoon, everybody.

Welcome to our second quarter earnings conference call.

The conference is being Web cast over the internet and will be available for replay.

Before I get started, I would like to introduce members of our Executive Management team this afternoon.

Our Chairman and CEO John Schuessler and our CFO Kerrii Anderson, and we have several other members of Senior Management with us here today.

We published our second quarter results this morning.

Our corporate news release, the accompanying financial statements and other financial material are available on our Web site if you don't have them.

That's www.wendys.com

From a disclosure standpoint, you will note a slightly different format with our earnings release.

We have the income statement, balance sheet, systemwide restaurant sales and revenues by segment, and each one of those statements summarizes the quarter as well as the year-to-date.

Also attached is our systemwide restaurant due net summary, key ratios, income statement definitions and our Safe Harbor.

We are following GAAP and NCC rules and as a management team, we're committed to providing full disclosure.

I would like to take a minute to review a few items on our Investor Relations schedule.

We do plan on publishing our monthly sales for the month of July on Wednesday, August 6th.

The July accounting period ends on August 3rd.

As for upcoming Investor Relations events, our next analyst day at our corporate office here in Dublin is set for Monday, August 18th and it's being sponsored by Lehman Brothers.

Management plans to meet with investors from Europe September 8th through the 10th during a non-deal road show being sponsored by Goldman Saches.

Our 2003 analyst and investor meeting will be held this year on September 17th and 18th in Santa Barbara, California.

The event will begin with a reception and a dinner on Wednesday, September 17th, beginning at about 6:00.

Senior management from both Wendy's and Baja Fresh will host the dinner.

Day two will consist of presentations by Baja Fresh CEO Greg Dollerhide, our CEO of Baja Fresh, Don Greene and other members of the Baja team will be there.

Day two will include visits to several Baja Fresh restaurants.

If you need some more information on that, please get in touch with me or Meredith Russell.

Looking ahead, we plan on publishing our financial results for the third quarter on October 23rd.

Our fourth quarter and year-end results will be released on January 30th, 2004, and we plan to host analysts and investors in New York city to go through those results and look at next year, and that will be on Monday, February 2nd.

For the future reference, please note that all of these key disclosure dates for the year are listed on our Web site that I gave you earlier.

Also on our Web site is all the current investor information you might need, including power point presentations, our historical and current financial news releases, corporate governance guidelines and other information.

The agenda for today's conference call will include remarks by both Jack and Kerri and following those remark, we will open up for questions.

I would like to refer to you the safe harbor statement attached to the company's news release and in our most recent form 10-k.

Certain information that we may discuss today regarding future economic performance, such as financial goals, plans, development, is forward-looking. it 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.

You will find in our earnings release published earlier today additional information required by SEC Regulation G related to non-GAAP financial measures we refer to on this conference call.

Additionally, we plan to discuss some item on the income statement that excludes Baja Fresh's results.

We believe those comparisons are meaningful to investors since Baja Fresh's results were not in our numbers during the second quarter a year ago.

Finally, I would like to note that we are observing Regulation from the SEC.

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

Therefore, we encourage you on the call today to ask questions during the Q&A.

Now, let me turn it over to Jack.

Thanks, John, and good afternoon, everyone.

No doubt the quarter was very challenging for us, and we knew that it would be for various reasons, including strong sales comparisons from a year ago and all of our brands, an ongoing weakness in the economy, and new state tax increases.

We had good systemwide sales in total revenue growth on the top line.

Tim's in Canada and the U.S. produced good same store sales growth.

Across all of our brands, our new restaurant development is on track, and we controlled costs very effectively.

At the same time, we purchased nearly $6 million in common stock taking advantage of the good value that we believe that our shares represent.

I want to review key financial results and Kerri will go through more in detail in a few minutes.

Systemwide sales, $2.6 billion, that's up 9.3%.

Revenue is 786, that's 786 million, up 14.9.

Pre-tax income, $101 million flat with a year ago.

Net income, $61 million, down 4.1%.

And earnings per share, 53 cents versus 54 cents a year ago.

Without the tax impact, we would have been at 56 cents.

As mentioned, Tim's in Canada produced excellent results during the second quarter with some of the best same store sales in the industry.

Wendy's and Baja had more of a challenge in the U.S. where the restaurant industry is facing a weakening economy.

Same store sales for the second quarter, Wendy's U.S. company down 2.3 compared to a year ago of positive 6.6.

Our franchise restaurants, Wendy's U.S. down 2 points versus growth of 9.5.

Tim's in Canada positive 4% versus a comp of a year ago of 9.5.

Tim's U.S. positive, 3.3, and that's compared to 13.8 a year ago.

Baja Fresh as a system, down 6.8 versus a healthy 5.4 a year ago, and I will discuss what we see in this in a few minutes.

At Wendy's, our team is really optimistic about improving sales in the second half of the year, and we're confident really because the comparisons get easier.

Just want to remind you the last five months of the year, our same store sales last year company in August was positive 3.3, September positive 5.4, October 2.6.

November, positive 1%, and December negative .9.

We are also confident because we have a long-term business strategy that emphasizes our competitive advantages, and I'd like to give you an update on some of that progress.

Proud to say that our new research and development center opened in May, and we hosted a media day for the press about four weeks ago.

During the second quarter, we introduced the southwestern chicken CAESAR salad, and our product mix on garden sensations is above 10% again this year and flat toward last year's high product mix.

We're also testing a lighter side menu, which combines items from our existing menu into meals that consist of 10 grams of fat or less.

For example, in one ordered a grilled chicken sandwich, a side salad with fat free dressing, a diet coke or an iced tea, that would be under 10 grams of fat.

We'll be doing a second market test on our chicken temptation sandwiches in August and I really believe our customers will find these to be outstanding products.

The sandwiches are made with larger chicken filets, a better roll, and a new condiment build, and we've had many, many positive comments over the last few months since we introduced Chicken Temptations.

Later this year, we will introduce homestyle chicken strips, which are high quality white meat products that will position Wendy's even higher on the quality scale in quick service restaurant segment.

And also in the back half of this year, we will be running a sandwich promotion for approximately 4 to 5 weeks.

Currently, we are in the middle of our national television campaign featuring the everyday super value menu at 99 cents that we've had on our menu since 1998, and this allows Wendy's to balance traffic driving messages with our premium products.

The brand Wendy's, restaurant development is on track to open 285 to 300 new Wendy's.

Our franchisees are very, very healthy.

Our franchise royalty collection rate on time is about 99%.

We also announced today that we are rolling out systemwide e-pay, or an electronic payment system total to our restaurants.

So far, we introduced e-pay into about a thousand restaurants and we expect to be in about 3,000 restaurants by November.

The roll-out of this service for our customers is a result of the consumer research and successful market test with both company and franchise restaurants.

And we see a real opportunity with e-pay to ib increase average check, provide quicker services to our customers and meet their changing needs in our restaurants by offering the option of paying with cash, credit card, or debit card.

And overall, I can tell you, everybody at Wendy's focused on improving the results in the second half and are confident about the second half.

Take a few minutes and look at Tim's.

Again, they produced another excellent quarter in both Canada and in the U.S. with positive same store sales growth.

Tim's advertising during the quarter featured their popular iced Cappuccino drink, a strawberry theme, baked goods promotion, and their new turkey bacon club sandwich served on a baguette.

This was to be a limited time promotion, but because of the success, we're keeping it in.

In the third quarter, Tim's will continue to feature quality products with a promotion for fresh baked cookies in August.

From a development standpoint,

Tim's is on track to open about 170 new restaurants in Canada.

We continue to make progress with our joint venture par baking plant in Brandtford, Ontario.

We are producing the baguettes and other items for Tim's restaurants in Ontario and the U.S.

In our joint venture with cuisine de France is profitable, as we expected, and contributed to our other income line during the quarter.

In the U.S., we now have 162 restaurants open with most of our units in Michigan, Ohio, Buffalo, and New York.

Rochester is our newest market and sales trends there are very encouraging, and as I said before, we are gaining confidence in our U.S. business.

If trends continue, we'll be in position in the next 12 to 18 months to make a decision about Tim's U.S. being a growth vehicle for the whole enterprise.

Now, let's look at Baja Fresh.

I must say, first of all, we're disappointed with the 6.8% decline in system same store sales, but at the same time, we're comparing against a strong quarter a year ago of positive 5.4.

Baja Fresh is growing revenues and operating income at rates the industry has rarely seen for a 13-year-old company.

And it's doing it profitiblely, unlike numerous competitors and predecessors.

Again, what we disclosed in our segment income was Baja for the second quarter had pre-tax income of $1.5 million.

Additionally, we are still the over-the-top volume leader with Auvs.

More than $1.4 million. 50% more than Qudoba, and they have a smaller base and have not moved out of the original market, and I can say this also.

We could have discounted heavily like Rubio's and drive comps for a while and weakened the brand for the future, but we chose not to do that, and we will suffer through the tougher economic times by being creative and being a leader in the industry with campaigns like Lighten Up, and the bottom line is this.

Same store sales increases doesn't necessarily equate to profits, and we've also had a saying at Wendy's and Baja believes it and Tim's believes it that sales have to be profitable.

Ba had had a total -- Baja had a total of 241 restaurants at the end of the second quarter.

Of that total, only 154 restaurants were in our comp base, or about 64% of the system.

Out of the 154 Baja restaurants in the comp base, 42% of those are located in the Los Angeles market, where we are growing rapidly and penetrating the market to build share.

And in addition, the California market is being impacted by competitive discounting, and weak economics in the state have affected customer traffic.

Now, of the 6.8% down in sales, we can attribute 1.5 of that, or 1.5% is cannibalization caused by 18 new units.

These units were negative 16% during the quarter.

So if you would back out that 1.5 cannibalization from the 6.8, the rest of the system was down about 5.3.

I can tell you that the L.A. market is in that range.

Since the end of the second quarter a year ago, Baja has grown from 173 units to 241 units by building 68 new restaurants.

That's an annual growth rate of 39%.

The brand is already a significant contributor to our top-line growth and generated $38.6 million in revenues during the second quarter.

Baja revenues represent 4.9% of our tell revenues during the quarter.

New restaurant development is on track for the year and we expect to open 70 to 80 new locations in 2003, and we'll reach an important milestone during the next few weeks when our 250th Baja Fresh restaurant is set to open.

And in Boston, we just recently opened a non-traditional restaurant in Fell Hall Marketplace.

From a menu and product standpoint, we're emphasizing all fresh quality ingredients and made-to-order preparation.

While we're focused on the highest quality, Baja competitors in California have resorted to deep discounting, and deep discounting may impact our sales in the short term, but we are building for the long term and establishing a bond with our consumers.

To meet the challenging needs of consumers, we recently introduced a new Lighten Up menu that features low fat, low calorie meals, and they all come in under 10 grams of fat.

For instance, the enchiladas verano with char broiled chicken and onion and peppers, the vegetarian burrito, and the bear burrito in the bowl that has the ingredients in the bowl and not the tortilla, and the shrimp enchilada and the mahi mahi enchilada, and they're going over well with our consumers and I'm terribly optimistic about Baja Fresh business.

We face easier comps in the back half and the concept is right on trend with the consumers.

In summary, the second quarter for the entire enterprise, we face some challenges with the economy and some tough sales comparisons.

Even with those challengers, we produce excellent revenue growth and $101 million in pre-tax income.

And today, we reiterated our 4 to 7% EPS growth goal for 2003, and that range is $1.97 to $2.03 per share compared to $1.89 a year ago, and we're also sat the same time maintaining our 12 to 15% long term EPS goal, and we will be evaluating the impact for the higher tax rate as well as other factors for 2003.

Looking ahead, all of our brands are well positioned, and I would like to turn it over to Kerri.

Thank you, Jack, and I would like to take some time to review our financial results on a little more detail and discuss some of the initiatives we have completed, but before I get started, I want to make sure that everybody does know the fact that our second quarter result does include the consolidation of Baja Fresh and our revenues and our cost of sales and our company restaurant operating costs, GNA and operating expense, and the other element I want to talk about is a question that comes up quite often is how does what is happening with currency affect the elements of all financials before I start going through them.

As most of you know, we talked a lot about Tim's and its impact being about 40% of our income.

As you know, the currency a year ago this same quarter was $1.55.4, that was our average translation rate, and this quarter, it was $1.40.

If you look at those as multipliers.

In other words, if I have a dollar of revenue at Tim's a year ago, it would have been worth 64 cents.

Today, that same dollar of revenue is worth 71 cents, and that as you look at each one of the elements of the line items, whether it's, you know, revenues, cost of sales, operating costs, GNA, all of those elements are impacted by this multiplication factor of currency, and I want to make sure that each of you understand that and that's how the Tim's statements get consolidated and translated into each element of the financials.

With that, as John's already mentioned, our financial statements do include earnings release and our income statement as well address our balance sheet this quarter, systemwide restaurant sales, revenues by segment, key ratios, and systemwide restaurant unit summary, and in our objective is really just to continue to provide more transparent formats to hopefully help you interpret the financial statements appropriately.

For the second quarter, our systemwide sales grew 9.3% to $2.6 billion dollars.

In consolidated revenues increased 14.9% to $786 million.

Baja Fresh contributed 5.6 points to our revenue growth, and we do expect Baja to continue providing having to revenue growth during the rest of the year.

We do view the brand as an important element of our strategy to diversify the enterprise over time.

We already discussed the same-store sales, so let's move on to the development.

We opened 94 new restaurants systemwide during the quarter and we closed about 21 for a net of 73 new units.

The openings were 52 new units at Wendy's in North America, six new franchise units at Wendy's international market, 21 new Tim Horton's and 15 Baja Fresh restaurants.

It was a very good quarter for restaurant development, and we're on track as Jack indicated to meet the guidance of 560 to 605 total units at Wendy's, Tim's, and Baja.

Continuing down the income statement, let's discuss our cost line.

Domestic operating margins, and these, again, is the Wendy's company-owned restaurants, about 1,100 units, declined 190 basis points to 15.1%, really due primarily to lower than expected sales.

With the lower sales volume, we did not get the leverage on labor.

So let's take a closer look at some the cost items and a lot of people questioning, you know, what's going on with costs.

Overall cost of sales increased about 20% to $411 million, and if you look at the domestic Wendy's costs, food as a percentage of sales was up about 30 basis points to 29.4%.

This really reflected a shift in product mix to more super value menu items, which was really reflected in our overall lower check of 1.1%.

Yes, beef was up slightly, but it was offset by other cost decreases, so if we look ahead, our outlook for the beef price increases for the year is still in the 3 to 5% range, but we do now expect prices to come in at the high end of that range.

Store labor was about 27% of sales, and that's up 90 basis points compared to a year ago.

The increase on the labor lines was a result of lower than expected sales.

On the positive side, our average crew rate for the quarter was $7.18 per hour, and that's an increase of only 1.6% versus a year ago.

Moving down to the company's restaurant operating cost line, it increased about 16.5% to $132 million.

Overall costs as a percentage of sales were, again, impacted by lower than expected sales at both Wendy's and Baja Fresh company stores.

Many of these cost, such as insurance, your rent, your utilities really are fixed or basically semi fixed, so when the company restaurant operating line are crocked, the costs for Baja are included this year, and of course, we had no costs a year ago.

Operating costs increased about 8.9% to $29.1 million.

This increase is primarily due to Tim Horton's, and the good news is that the Tim Horton's increase in operating costs are more than offset by the chain's higher franchise revenues.

Increases in the operating cost line included higher rent expense related to the opening of new Tim Horton's's restaurant units, with you we ultimately then lease and collect rent from the franchisee and higher warehouse costs relayed to the growth in sales.

The operating cost line increase was also lower than we might have normally expected because Tim's only opened up 25 new units during the quarter.

A year ago, we opened up 39 new units and as we all discussed, we do sell equipment packages to our franchisees at Horton's, and the costs of those packages are reflected in this operating cost line.

You'll see more activity in the second half of the year as we do open up more Tim Horton's restaurants in the back half.

G&A, G&A were up -- our expenses were up 7.5% for the quarter to $63.2 million, and I think it's important to note that excluding the costs associated in the G&A area with Baja, which didn't exist a quarter a year ago, our G&A expenses rose only 2.8% for the quarter.

We are focused on controlling G&A and spending during the quarter.

While we continue to make investments to grow the company for the future.

Our good G&A control is also reflected lower incentive bonus pay, which performance is very performance based.

Total G&A really was in great.

As a percentage of systemwide sales, it was 2.4%.

That's down 10 basis points from a year ago, and total G&A is a percentage of revenues and was 8%, and that's versus 8.6% a year ago.

On the other income line, we produced about a million and a half roughly in dollars versus a break-even or $39,000 a year ago.

The main reason for the increase was the positive income from our Tim Horton's joint venture par baking plant with cuisine de France, and as Jack said, our income and our plan is on target.

Now, let's spend a few minutes taking more detailed look at the overall earnings.

Net income was $61 million and diluted earnings per share were 53 cents.

Our net income and EPS results include the impact of the state tax law changes during the June which increased the company's effective tax rate for the second quarter to 39.2%, and that's compared to a rate of 36% in the first quarter.

Excluding the impact of the tax rate change, the company would have reported 56 cents per share in the second quarter, and it would have been a 3.7% increase over the prior year.

Looking ahead, our guidance for 2003 full-year earnings per share growth is in the 4 to 7% range, and the guidance does include several items I would like to mention.

Our effective tax rate for the third and fourth quarters expected to be approximately 36.75%, and that's, again, up from 36% in the first quarter.

We believe that the tax rate change will result in a 1 to 1.5 cent per share impact on EPS over the last half of the year, and again, from a currency perspective, earnings in the quarter were positively impacted by about 4 cents due to the improvement of the Canadian exchange rate and certainly this is important as Tim's continues to generate a significant portion of our income.

I will tell you that as a rule of thumb, we believe that about a Penney improvement in the Canadian currency rate versus a year ago, Tim Horton's Canadian operations usually generate about $250,000 to $350,000 in pre-tax income for a quarter and I would like to remind you that the Canadian exchange rate last year was $1.56 in the third quarter and $1.57 in the fourth.

And our current guidance does assume a continuation of the Canadian currency trend.

Also in our guidance is our revised outlook for Baja Fresh.

And as mentioned in our earnings release today, we have adjusted the delusion outlook for the year to 4 to 6 cent per share due to the tough economy in California and the discounting environment.

Previously, we expected the dilution of Baja to be in the 3 to 4% range.

Dilutions in the second quarter were a Penney and a half, and that is down from two cents in the first quarter of 2003.

The good news is Jack already said they generated a million and a half dollars in segment income, and that's before interest and taxes during the second quarter and the business is on track to become accretive to the company's EPS in 2004.

Focusing on the balance sheet for just a minute, we did re-purchase a total of 200,500 shares, common shares in the quarter for $5.7 million.

Since the end of second quarter, we re-purchased an additional 50,000 shares for $1.4 million, which brings our total share re-purchase since 1998 to $870 million.

As for a cash position, you can see from the balance sheet, we ended the quarter with $148.6 million dollars, and we have pro-actively managed our balance sheet over the last two years and will continue to do so.

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

In summary, we contin to be optimistic about the second half of the year for several reasons.

Jack said it.

We have easier same store sales comp comparisons.

We have excellent, new menu items at Wendy's and Baja Fresh and Tim Horton's continues to produce excellent sales results in Canada as well as the U.S.

We believe we have manageable costs for the remainder of the year, and our team at Wendy's, at Tims, and at Baja are focused on producing good results.

So at this point, I would like to turn it back over to John Barker for Q&A.

Christy, if you could, ask the analysts to queue up the questions and we would be glad to take those now.

Your first question comes from Mark Kalinowski of Salomon Smith Barney.

Sir, your line is open.

Mark?

Your first question comes from Michael Albrecht Salomon Smith Barney.

Hi Mark had to jump on another line.

Sorry about that.

You mentioned Rubio's doing discounting.

I wonder if anyone else was putting pressure on discounting.

Secondly, on commodities, you notice the price is up 3.5, which is in your previous stated range, but in the higher end.

Are you guys seeing anything on the dairy or produce type, spice that you expect to put pricing margins on, as well?

Other than Rubio's and smaller changes southern California, Chipolte has been doing discounting, I think all across the U.S.

On the cost side, we did speak to beef, as you said.

We have annual produce contracts, so from our perspective, we're not anticipating, you know, any, you know, unusual increases in produce, and our indications on dairy and cheese, we have not -- it does not have any unusual concerns at this point, so we believe our costs to be manageable.

great.

Thank you.

Your next question comes from Coralie Witter of Goldman Sachs.

Good afternoon.

I wanted more information on the revised guidance for the year, and what kind of assumptions are you making for sales trends at Baja Fresh that would drive that 4 to 6 dilution?

I'm assuming some kind of recovery with the easier comparisons.

Secondly if you could talk a little bit more about what you're seeing in the beef market.

It sounds to me like what's going on with the Canadian border is what's driving you back to the high end of that 3 to 5% range, but any intelligence you have on that situation would be helpful.

Thank you.

The lowering of guidance from 7 to 10 to 4 to 7 is a result of the tax impact that we experienced in June.

We do not update our guidance in terms of sales and margins and so on during the year, as you well know.

As far as the beef, the Canadian border, the closing it down has affected the beef costs.

do you have any --this might be speculation, but do you have any sense of what the estimates are when that might be reopened?

If I had a krial ball, I would be playing the lotto right now.

fair enough.

Thank you.

Your next question comes from Jeff Omohundro of Wachovia Capital.

can you give us turnover trends of laner and management at Baja Fresh and Hortons?

And your marketing, where do you stand on that and should we expect any changes?

At Baja?

yeah.

First of all as far as the turnover trends at Baja, I don't have them offhand.

We can certainly get them for you.

John Barker can.

As far as the marketing, as you know, we only have 250 restaurants, so it's really street marketing.

It's getting the word out.

It's consumer sampling.

You know, the lighten up menu is doing pretty well right now, we believe, and we've got a good customer acceptance, but as far as the marketing goes, nothing's really changing except it's guerrilla warfare when you have a young, start-up company.

very good.

Thanks.

Your next question comes from Mitch Speiser of Lehman Brothers.

this is actually Jeff Bernstein on behalf of Mitch.

Just a question on the operating costs.

I know you had mentioned in your commentary that the growth was around 9%, I guess, for the quarter.

I just wonder, I guess, I believe the full-year target had been for like 20%.

I know you mentioned maybe sales to the Tim Horton's franchisees were down a quarter.

I was wondering if you are still targeting that 20% growth for the full year, whether you know, foreign exchange had a major impact in the growth being so much lower than expected?

Actually, I will tell you that we are, as far as we're concerned, I think our initial guidance in being at 20% is still on target, but interestingly enough, just like I was given the translation, if I had a dollar in operating costs a year ago, it would be translated to 63 cents U.S..

Now, at this point current rate, what we experienced this quarter, a dollar in operating costs this quarter got translated to 70, you know, 4 cents, so from that standpoint, we continue to think the overall increase is going to be where we anticipated, but you might see some of the dollars go up if the currency continues to remain as it is today.

Just a couple issues to point out there.

You're right.

It's really all related right now to this quarter to the fact that we didn't have as many openings and equipment sales as we anticipated, and you will see it more load to the back half.

the equipment sales specifically, is that mostly the new refrigerators you're rolling out?

Just general equipment.

As they open up new restaurants at Tim's, we sell them their equipment packages, the equipment in the restaurant.

thank you.

Your next question comes from Janice Meyer of CFSB.

Hi. there.

Two question, one is on the Wendy's business.

You can update us on the late-night trends, how that's doing?

I know McDonald's started to focus there, as well.

Are you seeing any impact at all from that?

On Baja, if you can give me more detail on L.A..

You said you're going in there and cannibalizing.

Is that in effort to gain media efficiency in the market?

Are you already media efficient there?

If not, is that where you're headed?

Is that why you're doing this?

When might you expect to be media efficient so maybe you can get back some of the sales that you know, you're losing in the comp base.

First on the wasn't side on the late-night -- Wendy's on the late-night trends, we see pretty much across all day parts, you know, decline on the 2%.

I think we're a little bit better on late night.

I mean, it's pretty similar.

Janice Meyer okay.

As far as Baja, if you go to L.A., again, we have of the comp base 42% of our stores there, and if you look at building the market, penetration is a key in building a brand.

L.A. is a very, very expensive media market, and you know, the reason we're penetrating L.A. is because we're very successful.

We have very high volumes there.

Last year, it was over a $1.5 million in volume.

So you want to continue the at-large pet build the brand out in L.A.

I think at some point in the future.

We would have the presence to be on media, but I can tell you this, L.A. is a very, very expensive market.

Great.

Are there any other markets where, you know, there's the next L.A., whether it's D.C., where you may be bringing more stores in and cannibalizing in order to gain media efficiency?

I know we've had some media tests -- well, timing was rotten, but we did do a media test in San Diego starting in March.

What happened was the Iraqi war started three days into the test, so we pretty much canceled, tried to cancel the remainder of it.

will you be going back with that test at some point?

Probably will.

Thank you.

Your next question comes from Joe Buckley of Bear Stearns.

Hi, Jack.

I have a couple of questions.

You mentioned check average being down in the quarter with the super value menu mix being up.

Kind of a general perception that the pricing environment and QSR might be getting better.

Your check average experience would seem to deny that.

Just kind of walk us through what you're thinking about the competitor pricing scenario.

Competitor price, I'm not sure.

I can tell you this, and I need to ask a clarifying question then.

We've had an increase in mix of our super value menu.

What we translate that into is people ordering less expensive items because of their pocketbook.

As far as the pricing environment, in QSR, the pricing environment's always tough.

It's just by the consumer and who uses QSR is price sensitive, and for the post, oh, 12 years, our average menu price increase is around a half point, and we always feel comfortable in that area.

okay.

You think it's more the consumer trading down within the menu than competitive pricing pressures.

Yes.

okay, and then question.

Did Tim Horton's retail sales growth continues to be quite strong driven, I'm assuming by the warehouse business, and anything in there that's tied to cuisine de France that we should be aware of on sort of a go-forward basis that might level off a little bit?

I'm not sure of the question.

You know, there's four streams of income.

It's royalties.

We own the land.

It's rent.

We do own the distribution.

We sell the food, and we also sell the equipment, and rule of thumb is for every dollar of increase at Tim's, 13 cents increases on our profit.

I mean, they're all kind of directly related.

Okay.

I just thought that warehouse sales growth was kind of above normal this year, you know, with -- we can check on it, but we didn't notice anything.

Joe, as you may remember, franchise store development helps average same store sales percent, helps that and the impact of the Canadian currency, those are all benefits in that line.

Right.

last quarter, you talked about the currency impact on the other income line.

Was there anything significant on that other income line this quarter?

The answer to the question, Joe, is we talked about the fact that about 4 cents during the quarter was a result of currency, and much of that, I would probably say a majority of that comes through all those different lines being translated from Tim's, as I discussed, but there is an element of it where you have to mark-to-market certain items, and they do come through that other income and expense line, and probably a little over a Penney and a half on the quarter was related to that line.

okay, and last question.

Jack, just clarify, again, what you're telling us on L.A.

I'm assuming that's where that big cannibalization impact happens.

No, the cannibalization happened -- there were 16 stores that were cannibalized during the quarter.

And somewhere in L.A. -- and some were in L.A. and some were in other parts of the country.

There was 18 of them, I'm sorry.

Those 18 stores cannibalized -- were down 16%, okay.

And then of the 6.8 down, that represented 1.5 of the 6.8.

You with me?

I am.

Okay.

So if you say okay, take out those 18 stores, back out the cannibalization 1.5 from the 6.8, you're down about 5.3 for the rest of the system, and that's about where L.A. is, but they are all 42% of our comp store base.

okay.

Thank you.

Okay.

Your next question comes from Howard Penney of SunTrust.

Sir, your line is open.

Your next question comes from Dennis Milton of S&P 500.

Hi, I was noticing you have only opened two Tim's stores in the U.S. net so far, and I was hoping you could talk about the expansion plans going into next year, and also I was hope you could speak tour profitability in the U.S. this year versus last year particularly with respect to the upstate New York marketplace.

Well, first of all, upstate New York, our Buffalo market, is our highest volume market in the U.S.

Our 38 restaurants in Buffalo average 1 point $2 million U.S.

As far as expansion plans, I think we said we're going to fill out our existing markets at Tim's, and our guidance was, I think, 18 to 20 restaurants in that area.

You know, new market entry was in Rochester and I think we have a good model going forward.

We still want to evaluate Tim's in the U.S..

We are very positive on it.

We had pre-tax income of 263,000 last year.

We expect that to grow this year, and you know, we're evaluating, and we've, you know, over the next 12 to 18 months, to see if we can be more aggressive in rolling out Tim's in the U.S., and if we do that, then you would say that Tim's in the U.S. would be a growth driver for the enterprise.

thanks.

Your next question comes from Dean Haskell (ph) from J & P Securities.

good afternoon, everyone.

How are you?

Two questions.

Check average for Wendy's in the second quarter?

To answer your question, the average check average was down about 1.1%.

We'll get the real one.

Do you have that?

What is it in absolute terms?

I do not know.

Is that what you wanted, absolute?

always absolute.

That's what I thought.

I knew you.

yep.

Given Kerri's comments earlier given GNA expenses being related to Baja Fresh, I calculate an 11% EBITDA margin for Baja Fresh.

What kind of add-back should I be using for pre-opening expenses in what would normally be a strong second quarter to get a formalized margin for the concept?

Quite more detail than I have time for right now, and John will give you a call back on that one.

We'll dig into that one, Dean.

Thanks.

Your next question comes from Howard Penney of SunTrust.

Thank you very much.

I was trying to reconcile your comments about the economy and the impact on Baja Fresh.

Is the Wendy's business performing similarly in that market, the California market, or are there other QSR operators reporting comps that don't seem to be as impacted as Baja Fresh?

I don't know what every competitor is doing.

Our Wendy's business, you know, we're doing -- it's really a newer market for us, and we're up about one and a half percent in L.A.

I can tell you that there's been a lot of couponing in the Rubio's and the Chipolte's.

it's the competitive issue versus the economic issue.

Well, it's both.

I don't think you can separate the two.

They go hand in hand.

You know, a lot of restaurant concepts when traffic gets soft, they'll discount.

Why is the traffic soft?

Is it bad operations, bad food, economy?

Probably a little bit of both. remember, we average 7.5 on the ticket at Baja.

thank you for that, and just one more on the beef costs.

I don't understand your guidance correctly.

You're talking about a -- you said 3 to 5% in the beginning of the year.

Are you looking now for a 5% in the second half of the year, or is that kind of the third quarter guidance, and you might hope that prices will come down in the fourth quarter?

We originally said 3 to 5% annual increase over the prior year, and we did discuss the fact that beef was down in the first quarter of this year compared to a year ago.

It's slightly up this quarter.

You're going to see a lot --you're going to see more pressure to get to that 3 to 5% number in the back half of the year.

We originally said 3 to 5% annual increase over the prior year, and we did discuss the fact that beef was down in the first quarter of this year compared to a year ago.

It's slightly up this quarter.

You're going to see a lot --you're going to see more pressure to get to that 3 to 5% number in the back half of the year.

just tell me, what was it up in the first half?

It was actually down in the first half.

I believe we disclosed about 7% down over the prior year.

okay.

So you're expecting a significant increase in the second half of the year?

I would not say significant, but it's well within our range to meet our assumptions.

I'm trying to understand what the guidance is.

Thank you.

Your next question comes from James Irwin (ph) of GIC.

good afternoon, folks.

Hi, Jim.

two quicks ones for you and I'm not sure if you are disclosing too much on this, but chicken strips, can you share some of the test market data in terms of same store sales impact?

No, I can't tell you that.

I can tell you this.

It's a whole breast filet strip cut.

It's very good product.

We have three great sauces.

There's a chipolte sauce, a ranch sauce.

It's just a very, very good product.

okay, and I guess really the same question for e-pay, given the

We love e-pay.

any numbers you can share in terms of speed of service or same-store sales in your test markets?

We did test.

In the test markets -- in fact, the transfer of payment was quicker, and that's really due to the fact that any transaction under $25 does not need to be signed for.

So as Jack would say, you don't have people digging around in their purses trying to find change and dropping it.

Right.

Also, based on the 400 store tests, we did see some uplift in check average, but there is a range to it across markets, so we would not be comfortable enough to say it's going to be x.

great thank you.

Again 401(K) would you like to ask a question at this time, press star one on your telephone keypad.

There are no further questions at this time, sir.

Okay Christy, Thank you for the help today.

We appreciate everybody on the call, and we'll talk to you later.

Thank you.

This concludes your conference.

You may disconnect.