Wendy's Co (WEN) 2003 Q3 法說會逐字稿

Good afternoon, my name is Shatina and I will be your conference facilitator today.

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

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

After the speakers' remarks, there will be a question-and-answer period.

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

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

Thank you.

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

Mr. Barker, you may begin your conference.

Thank you very much.

Good afternoon, everybody.

And welcome to our third quarter earnings conference call.

This conference is being webcast over the Internet and will be available for replay.

Before we get started, I'd like to introduce members of our management team here this afternoon, our Chairman and CEO, Jack Schuessler, Chief Financial Officer, Kerrii Anderson and we have several other members of management here with us.

We did publish our third quarter results this morning.

Our corporate news release, the accompanying financial statements and other financial materials are available on our website and that's www.wendys-invest.com.

Or you can contact our Investor Relations department, and the number there is 614-764-3251 if you still need a copy.

From a disclosure standpoint you will note that our earnings release today includes an income statement and revenues broken down by segment.

Each one of those statements summarizes the quarter as well as the year-to-date results.

Also attached is our balance sheet, system wide restaurant and units summary, key ratios, income statement definitions and our safe harbor statement.

We are following generally accepted accounting principals and SEC rules and as a management team we are committed to providing good disclosure.

Our release today does not include system-wide sales.

The SEC believes this is not a GAAP measure and not an appropriate financial disclosure item.

Now, I'd like to review a few items on our Investor Relations schedule.

We plan on publishing our monthly sales for October on Wednesday, November 5.

The October accounting period ends on November 2.

As for some upcoming Investor Relations events, our next analyst day is at our corporate office and that's set for Monday, November 10 and is being sponsored through Bear Stearns.

Our monthly sales for November will be released and published on December 3.

And then looking out to fourth quarter and year-end results, those will be released on January 30, 2004, we plan to host a meeting with the analysts and investors in New York City and that will be on Monday, February 2, to review the year and to discuss plans for 2004.

That meeting is going to be held at the Mandarin Oriental Hotel which is located at 80 Columbus Circle at 60th Street in Manhattan.

We will be sending out more details about that meeting in the next month.

For future reference, please note that all the key disclosure dates and other information is available on our website, on the web site we have current investor presentations in powerpoint format.

We have all the historical and current financial news releases, our corporate governance guidelines, and overviews of each of the brands, and of course, our annual report and the financial statements.

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

And following those remarks, we will open up the call for questions.

I'd like to refer you for a moment to the Safe Harbor statement that is attached to the company's news release and in our most recent form 10Q, certain information we may discuss today 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 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 as well as in our most recent form 10Q.

Finally, I'd like to note that we are observing regulation FD, the regulation encourages public companies to discuss potentially material information in a public forum, therefore, we encourage those of you on the call today to ask your questions at the end of our remarks.

Now, let me turn it over to Jack.

Good afternoon, everybody.

I must say that everyone at Wendy's is very pleased with the results of third quarter.

They were really driven by a number of factors, the improving sales at Wendy's, continued strong sales attempts, a focus on operations at all of our brands and really great and effective cost controls at the corporate level and also in the field.

Just some financial highlights, revenues were up 11.7% to $807 million.

Net income was $66 million and that's up 8.9%.

And our EPS was up 11.5%, 58 cents versus 52 cents a year ago, and I'd like point out that in that 52 cents a year ago, there was a 2-cent gain from the sale of conference cup.

Developments on track for the year to open a total across all of our brands of 560 to 600 new restaurants.

And overall, we're experiencing some very strong momentum.

We also confirmed our 2003 EPS guidance of $1.97 to $2.03, which is a 4 to 7% increase over a year ago.

At brand Wendy's, same store sales improved each month during the quarter at U.S. company restaurants.

In July, the restaurants were negative 2.1%, positive in August .4% and then really had a break through in September at plus 3.5%.

So, overall the quarter was plus .5%.

And our franchisee sales for the quarter were up .9%.

Operationally at Wendy's, we're No. 1 again in pickup window speed as measured by QSR Magazine, that's five years in a row.

And we're 30 seconds ahead of our nearest competitor.

We're also, as we speak, rolling out e-pay nationally and will have it in 75% of our restaurants by the end of November.

In September, we had a very successful marketing campaign behind super value menu, really emphasizing more of the healthier choices one has on our super value menu and that drove traffic.

We're currently in our current chicken strips promotion that we're quite excited about.

And then in November/December we'll have a promotional sandwiches will be on national TV.

Looking ahead for 2004, we have tested and looks real good is our Chicken Temptations lineup.

We also tested earlier this year two new salads that could be added to our menu of seasonal products, our spinach salad and our chicken strips salad.

And then we have two merchandise tests going on within our markets.

Four combo meals under 10 grams of fat and a kids meal with a choice of a fruit cup or white and chocolate milk.

Subsequent to the third quarter, we completed two transactions.

One in Florida where we acquired 68 restaurants from a very good franchisee of ours.

It will be neutral in EPS in '03 and it will be accretive in '04.

And also we completed the sale of 15 restaurants in Columbus to the children of Dave Thomas and as we mentioned, we have a 1-cent gain in the fourth quarter from this transaction and other facility actions.

Well, after this meeting we're all going to be heading to Las Vegas for our national convention.

Everybody's going to be going into Vegas very positive and we have attendance at over 3,000 next week.

At Tim's, same store sales were excellent, each month during the quarter.

In Canada, we were positive 5.5% and in the U.S. positive 6.8%.

Tim's generated $204 million in revenues during the quarter, up 24% compared to a year ago and will contribute more than 40% of our income in 2003.

We had some excellent new products during the third quarter.

We promoted Maple Pecan Danish that everyone loved.

In the fourth quarter, we're rolling out a new sandwich, a BLT.

We're also testing bag of bagels, party trays and coffee for 10 in a box container.

And right now we're promoting our sandwich line in baguettes.

And then in November on national TV, we will advertise our very successful chicken stew in a bread bowl.

I think many of you know that Tim's has successfully marketed par bake bagels since 1996, selling one out of every two sold in the QSR industry in Canada.

And then our Mainstone Bakery, that's the joint venture in Brandtford, Ontario between Tim's and Cuisine DeFrance, has been producing par bake baguettes for Tim's launch program.

The expertise that has been developed with at Mainstone and with the bagels is now being applied to Tim's donuts and Tim bits.

Tim's has done extensive consumer and in-market tests with these new products and I can tell you, we've are very good results.

We're in the process of rolling this out to the system.

The benefits of these products is that Tim stores will be able to bake off smaller batches, providing fresh quality and more consistent product throughout the day.

And right now, Paul and his team have started their fall regional meetings with their franchisees and again, everybody is very positive about this year and the upcoming year.

At Baja, same-store sales were down for the quarter 4.1%.

But I can tell you the trends are improving compared to the second quarter when they were down 6.8%.

Baja generated $40 million in revenues, up 14% compared to a year ago and Baja is now 5% of our total revenues.

We've had very good customer reaction to Lighten Up menu, which has several meal options with 10 grams of fat or less.

And then new restaurant development is on track for the year and heavily weighted to the fourth quarter.

We are revising our dilution guidance to 6 to 8 cents for the year and the previous guidance was the dilution of 4 to 6 cents.

And here are the key reasons.

Lower than expected sales, higher commodity costs but at the same time, Wendy's supply chain is really working with Baja in firming up contracts to add more stable commodity prices for next year.

We're also made investments in technology to help our operators run theoretical food costs and labor matrix that will start rolling out for the system.

And as I mentioned, store opening costs are heavily weighted in the fourth quarter.

I know Baja is facing some short-term challenges, but the brand is well-positioned, we have a strong base of operators and franchisees, our growth is on track and we're giving our operators better tools to run their business and we're also helping with supply chain.

In summary, I think our performance in the third quarter is quite improved.

Our operators did a good job and I can tell you, everybody's trends are encouraging, whether it's Wendy's, Tim's or Baja's.

And we have good momentum and we're very, very optimistic about the fourth quarter.

And now, I'd like to turn it over to Kerrii.

Thanks, Jack.

I'd like to review the financial results, but before I do, I think there were a couple of points to make.

Number 1, this is the first quarter where Baja Fresh is in both this year's results and last year's.

So, as we talk about increases, it's important to note that we do have comparable numbers for the quarter versus a year ago.

And then secondly, we've all talked about the Canadian dollar.

It actually averaged this quarter $1.38 versus $1.56 a year ago.

So, when you think about that, each dollar of sales in Canada were worth 64 cents last year.

Theyre worth 72 cents this year.

And that is also true of expenses.

So, that's just something to keep in mind as you do walk through all of the lines of the income statement.

For the third quarter in the September 28, 2003, we produced record results.

Jack said it, in terms of revenues, income or earnings per share.

Consolidated revenues increased 11.7% to $807 million.

The two components of revenues both increased, that's retail sales were up 12.2%.

And franchise revenues up 9.6%.

Jack's already discussed the same-store sales results, so, let's talk about development.

We opened 138 new restaurants systemwide during the quarter.

And closed 23 for a net total of 115 new units.

The openings consisted of 68 new Wendy's, 56 new Tim Horton's and 14 new Baja restaurants.

It was a good quarter for restaurant development and we are on track to meet our goals of 560 to 600 units for the year.

It is going to be a busy fourth quarter.

Domestic operating margins for our 1200 company stores declined 140 basis points to 14.3% and that was due primarily to lower than expected sales and higher food costs, primarily beef and tomatoes and we will talk about it.

I think one important note here and we've continued to talk about margins, but we were able to produce good, overall results this quarter, even though our margins were down.

I think it does continue to demonstrate while domestic margins are important, they are not as critical today as we continue to diversify the enterprise.

So, let's take a little closer look at some of the cost items.

At Wendy's, food as a percentage of sales was 29.9% versus 29.1% a year ago.

And that's reflecting just higher costs for beef and tomato.

So, as we look ahead for a minute, beef prices at Wendy's will be about 8% higher in the fourth quarter than we had anticipated.

And as a result, our annual beef price for 2003 will be up about 7% for the year and that's compared to 2002 year.

As you probably remember, our previous guidance was in the 5% increase.

There's been a lot of speculation about beef prices going into 2004 and the recent spike in the beef market really is related to a seasonal cut in production.

Concerns about the U.S. not opening its borders to Canadian beef and honestly fewer cattle being slaughtered.

However, there has been some recent decline in beef prices early in the fourth quarter.

This is a very positive sign.

Our preliminary outlook for 2004 is that ground beef prices will be manageable.

Again, I say our preliminary outlook is for an increase of 4 to 6%.

And we do believe that increases will be weighted more evenly throughout the year compared to what we have experienced in 2003.

We will provide specific guidance on beef as we hold our analyst meeting in February 2 in New York.

Moving on to store labor, it was 27% of sales during the quarter and that's up 30 basis points compared to a year ago.

While we absolutely managed labor very tightly, the increase in labor is really a result of the lower than expected sales.

On the positive side, our average crew weight for the quarter was $7.19 per hour and that's only a 1.3% increase versus a year ago.

Company restaurant operating costs as a percentage of sales, improved 10 basis points compared to a year ago and as you know, company restaurant operating costs increased about $14.5 million.

And that's 11.9% increase compared to the third quarter a year ago.

But you got to remember, we added 126 Wendy's and Baja Fresh company restaurants since last year.

And we did experience higher costs per insurance in the quarter, just as we expected as we began the year.

Moving to operating costs, as a percentage of sales, they improved 30 basis points compared to a year ago.

Operating costs increased about $1 million or just 3.5% to $32.4 million.

The increase in operating costs is primarily related to four items.

And it's really Tim Horton's, higher rent expense related to Tim Horton's opening new restaurants.

A higher percentage rent due to the same-store sales growth we experienced and higher warehouse costs, as you know, we have a distribution business related to the sales growth at Tim's.

And at the same time, those were somewhat offset by lower equipment sales because Tim's had eight less store sales in the quarter versus a year ago.

General administrative expenses, I'm proud to say they improved 80 basis points as a percentage of revenues.

From 8.8 to 8% this quarter.

G&A increased just $1 million or 1.5% in the quarter to $64.5 million.

We have focused on controlling G&A, Jack said both at the corporate and the build level, and at the same time during the quarter, we have continued to make investments that allow the company to grow in the future.

G&A does reflect a lower incentive bonus pay, which is all performance-based.

As for depreciation, it was up about $6 million versus a year ago or 18.1% to $40.5 million.

And that's due to the addition of the new restaurants and our investments in technology.

As a percentage of sales, depreciation was up to 30 basis points, compared to a year ago and line with our expectations.

On the other income line, we've produced $900,000 of income compared to an expense of $1.4 million a year ago.

The main reason for the increase was the positive income from our Tim Horton's joint venture par baking plant with CDF.

A year ago also in this line, Tim Horton's had sold the conference cup plant in Canada and we recorded a $3.2 million pretax gain and that was in this line last year.

So, you've got that netting out.

Earnings, let's just spend a few more minutes talking about other items of income.

Pretax income was up about -- was $105 million, up about 9.9% from a year ago and the corporate tax rate for the third quarter was 37.34% compared to 36.75% a year ago.

We talked a lot about taxes this year and this increase reflects the higher tax rate in the state of Ohio, where we are based, and that was announced earlier this year in the second quarter.

Also, strong earnings performance by Tim Horton's in Canada, which Canada has a higher tax rate than the U.S. and as a result, we had better-than-expected effect from the Canadian currency, all resulting in a 25-basis point increase in the tax rate for the quarter.

Looking ahead, the company's estimated rate for the fourth quarter is 37% and that reflects the increase expected tax rate for the year of approximately 37.5%.

Net income for the quarter was $66.3 million and that was up 8.9% compared to a year ago.

And diluted EPS for the quarter was 58 cents, up 11.5% compared to the 52% a year ago.

Again, when it had 2 cents from conference cup in it.

It's the best earnings performance of the year.

From a currency perspective, earnings in the quarter were positively impacted by about 3.5 cents per share, due to improvement in the exchange rate we talked about in the beginning.

It is important since Tim's does generate more than 40% of the company's income.

And as I've already said, the Canadian exchange rate was $1.38 versus $1.56 in this quarter a year ago.

And the exchange rate in the fourth quarter a year ago, we will be comparing, would be $1.57.

As a rule of thumb, we do believe that for about each penny of improvement in the Canadian currency rate versus a year ago, Tim Horton's operations generate an additional $250,000 to $350,000 in pretax income in a quarter.

Offsetting the currency benefit during the quarter were two items.

The two-cent gain that I spoke to from the third quarter sale of conference cup last year, the business at Tim Horton's.

It was a one-time gain and it was booked in the other income line.

And also dilution from Baja Fresh, it was approximately 2.5 cents per share this quarter compared to 1.5 cents per share a year ago.

And nearly all of the dilution is due to interest on the cost of the borrowings.

As I mentioned earlier, we did have a higher tax rate during the quarter.

As we look ahead, we have reiterated our guidance today for the 2003 full-year earnings per share growth in the range of $1.97 to $2.03 or a 4 to 7% increase over last year's $1.89.

Our long-term annual EPS growth goal continues to be 12 to 15% and as we've mentioned before, we are evaluating the impact of our tax rate among other factors.

As we focus on the balance sheet for just a minute, just want to be sure you know that we repurchased a total of 284,000 common shares during the quarter, for $8.4 million and that brings our year to date repurchases to 1.88 million shares for $50 million.

The company is currently $173 million authorized by the Board for share repurchase and we have repurchased, since 1998, $878 million worth of stocks.

As for a cash position, we ended with a very strong cash position of $213 million.

I do want to note that we did borrow $50 million in short-term commercial paper on the last day of the quarter and then it was used to actually fund the purchase of the Wendy's restaurants in Florida, along with some cash off our balance sheet.

From a dividend perspective, the Board approved our 103rd consecutive dividend.

That dividend being a quarterly dividend of 6 cents, it will be paid to shareholders of record on November 17.

In summary, we are optimistic about producing good results in the fourth quarter and my confidence is based on our overall strong momentum.

The increasing same-store sales trends at Wendy's and easier sales comparisons.

Excellent sales at Tim Horton's in Canada and the U.S. and the new menu items at all of our brands.

And the Canadian exchange rate, which continues to be in our favor versus what we experienced last year.

We do have challenges with higher beef prices and the dilution of Baja, but we have momentum in all of our brands and the positives outweigh the challenges today.

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

Operator, we'd be happy now to take questions from those on the line.

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 keypad.

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

Please hold for your first question.

Your first question comes from Coralie Witter with Goldman Sachs.

Ms. Witter, your line is open.

Hi, sorry, I was on mute, can you hear me?

Yes, we can .

Okay, I wanted to focus in on the 2003 guidance.

Given that you have such a strong third quarter, ahead of expectations, that you have good sales momentum, currency's on your side and you're able to quantify some of the cost pressures from beef and taxes, et cetera, what are the items, the variable items that cause you to leave your range as wide as it is for the fourth quarter?

Well, first of all three weeks don't make a quarter.

So, we're early in and although we are very optimistic, we are entering into the winter time, it takes just three snowstorms to ruin things here.

So, that's one.

Also, our cost.

They are higher.

And we want to make sure before we do anything that those costs have been stabilized.

So, I think we're taking the prudent and conservative approach to this.

Okay, so what I understand is really sales trends is the biggest variable?

No, not really.

Let's look at what the history has told us in the last couple of years.

I mean, first quarter was the worst winter we ever had.

If we have a couple of bad weeks in November or December during the heavy shopping of bad weather, that could throw a lot of things off.

I think we're just being prudent as we approach late fall and early winter.

Okay.

Thank you.

Your next question comes from Mark with Smith Barney.

Hey, Mark.

Hi, how you doing?

On the commodity cost front, you've commented preliminarily on beef costs.

Just wondering if you could comment also on poultry costs and just more generally on commodity costs combined?

Thanks.

Yeah, I mean on poultry we're in the first year a three-year contract.

So, you know, that's a fixed rate.

We're currently negotiating with our produce suppliers and growers and right now as we're still talking, we think the costs are going to be relatively about the same.

So, we feel good about commodities except for the beef and it's very manageable.

All right, any comments on healthcare and insurance costs?

Well, I think we all believe that healthcare and insurance costs are going to continue to increase more in the double-digit range, and that's what we talked about this year and I think you have to expect that.

And there can be some offsets to that increase in cost.

Sounds good.

Thanks.

Your next question comes from Mitch Speiser with Lehman Brothers.

Hi, Mitch.

Good afternoon.

Couple of questions.

First, you have stated in the past that you do plan on taking some price fleets.

I wondered if you expect to take the same type of price increase you have in years past or perhaps a couple more percent or basis points?

And just in terms of the super value menu at 99 cents, just wondering how iron clad that 99-cent price point is going forward?

Or in the near-term?

And then secondly, on the joint venture with Cuisine DeFrance, can you talk about capacity increases?

And what that might mean in terms of incremental earnings out of the joint venture in '04?

Thanks.

Well, that's a lot of questions!

What was the first one?

Oh, price increase.

For the last 10 years our historical price increase has been about a half a point.

And Thomas Mueller and his operations team is taking a look at that and when he feels comfortable that he's got all the information, then he will take the action and then we will be able to let you know.

Super value menu that is no way!

That's been with us for 14 years.

It represents about 25% of our sales.

It's very stable and what we look as a blended food cost.

When you look at the blended food costs of super value menu, it is actually lower than it was 14 years ago when we started.

So, it is a cornerstone of how Wendy's delivers value to the consumer and we believe it's a very important cornerstone to our success.

In fact, we're going to keep on advertising, that's how confident we are with it.

The JV, the capacity to increase: Right now as we speak, we are adding more capacity.

We're under construction, we're building new lines and we think that will be completed and ready to go probably in late winter/early spring.

Your next question comes from Janice Meyer with Credit Suisse First Boston.

Hi.

Thank you.

Hi, Janice.

Hi.

The drive-thru survey, your speed was great, but your accuracy actually fell.

Do you think the two are related?

And what do you think you can do to improve the accuracy?

Well, I don't think the two are related.

I think what you look at is the components and it seems like the biggest mistake is lack of napkins.

That's easy to fix.

And I know Tom and George Condos [ph] were pretty upset over that and I know that it's going to be addressed.

If you never had problems, then you don't know how good you can be and we like to see some of these problems because then we can fix them.

If I can follow-up just on the labor side this quarter, despite relatively flat comps at Wendy's, you actually held your labor pretty nicely up only, I think it was 30 basis points, do you have a sense for given the low level inflation, at what comp rates you might be able to start to get some leverage on that labor line?

You mean at the comp?

It's only grown about 1.5% so.

Right.

I'm guessing right now, but I would imagine about 1.5 to 2%.

Terrific.

On the labor line.

Great.

Thank you.

Your next question comes from Jeff Omohundro with with Wachovia.

Hi, Jeff.

Hi, thanks.

Just, first on the 80-basis points of G&A leveraging, I wonder if you could just segment how much of that approximately was related to the lower bonus accrual?

And then second was maybe you could give us an update on the lighter side menu effort that's going on at Wendy's?

Well, the lighter side, we don't really call it that, we have four meal combos that we merchandise, current combos, current products, all under 10 grams of fat.

For instance, it would be a grilled chicken sandwich, a side salad with low-fat or no-fat dressing and a Diet Coke or a iced tea.

We also have that same offering, we have a baked potato, salad and drink.

We have junior hamburger, salad and a drink.

And then for the kids, we're testing in about five markets, instead of fries, they have a choice of fruit cup or a choice of chocolate milk or white milk in the chugs that are very popular with kids.

I can tell you, the fruit cup was very popular.

The adults are ordering it.

We had to go out and put menu strips on the board, ala carte, $1.39!

So, we think it's pretty good here.

Great.

And on the G&A?

And on the G&A, Jeff, I will tell you that the majority of the improvement came from lower bonuses.

Bonus accruals related to performance versus a year ago.

If you remember last year we delivered about 15% increase in EPS.

Yeah.

Okay, very good.

Thanks.

Your next question comes from Joe Buckley with Bear Stearns.

Thank you.

A couple of questions, as well.

Kerrii, you mentioned that the 4 to 6% beef cost increases next year would be more evenly spread.

Are you changing the quarterly pricing mechanism that's been in place the last couple of years to achieve that?

No, Joe, we're not.

We're still on a quarterly pricing that lags a quarter.

I think we just all know that the situation that happened in Canada certainly had a very drastic impact and as we look out, we would expect things to be more even.

But evenly priced, Joe, if you remember in the first quarter, our beef price was actually under a year ago.

So, you have under a year ago and then what it is in the fourth quarter, one would hope that would be more weighted evenly throughout the year.

Okay.

Actually it was the decline in the first quarter this year that made me think your first quarter beef costs would be up much more than that?

No, what happens is, whatever the price is during, let's say the fourth quarter of this year, that's what we charge our stores in the first quarter.

So, there's a lag.

So, what we do is take the 13 weeks in the fourth quarter, you average that and that's the price you pay in the first quarter.

Okay.

Question on the extension in the par baked approach to the donuts, talk about the -- it sounds like a potential cost savings as well in terms of distribution to stores and things of that sort and are we correct to think of it in that way?

Well, the main reason we've done it is really for our higher quality product.

And as you know, the way we used to do it is we had bakers, and they would come in and they would do two bakes a day, a night bake and a day bake.

And the product would have to last for 12 hours.

I can tell you as you get about halfway over that product, six hours, it's not as good.

So, with par baking, you can bake off product all day long, you don't run out and it's fresher.

So, we think we have a sales opportunity there.

Donuts represents about 22% of our total product mix.

There could be some cost savings but this is not the reason we're doing it.

Okay.

And just one more if I could, Kerrii, you talked about the operating expense line and I guess the very modest increase seems even more surprising given that the Canadian currency, am I thinking about that the right way?

Are those costs fairly Canadian currency cost related to Horton's?

Okay, which line are we talking about, Joe, are we talking about the operating cost line or other income.

The operating cost line.

Yeah.

Operating cost line, as I've said, we've got increased costs at the warehouse, we've got increased cost in the rental property.

We have more property being leased to -- leasing ourselves and ultimately been collecting rent on them.

But at the same time, we had a decrease in equipment costs.

If you remember, we've talked about this line, what happens is Horton's also sells equipment to their franchisees and the cost of the equipment runs through this line of the income statement as an operating cost.

The revenue piece comes out at franchise revenue.

So, what we had were eight less sales by Tim Horton's of equipment than a quarter a year ago.

You've got some things going up and that being offset by less sales.

Okay, but what was I asking in the currency is aren't those Canadian dollar costs that would translate into our U.S. dollar costs?

The 3.5% increase looks very, very modest to me.

Right.

And what is happening, the eight sales -- you're exactly right, just like I said in the beginning, $1 of expenses, 72 cents not 64 cents versus a year ago.

But you're getting it offset by lower equipment running through that account in this quarter because of less sales.

Okay.

Thank you.

Uh-huh.

Your next question comes from Stacy Gemarro with Trison Capital.

Hi, I wondered if you can give us an idea or quantify how much your sales would need to increase over the next several quarters in order to keep margins flat with the cost inflation that you've described?

I think it's still around that 1.5%.

Modest costs on labor and manageable costs of food and a little bit of price. 1.5% to 2%.

Thank you.

Your next question comes from Howard Penney with SunTrust.

Thank you.

In your more conservative guidance for the fourth quarter, not that I'm looking for your guidance on same-store sales, but does that include, do you have a more conservative assumption for same-store sales in the fourth quarter?

Well, let me put it this way.

Consensus is at 52 cents.

That's an increase of 18%.

I was asking about the revenue side.

Do you have a more conservative assumption of same-store sales?

You eluded to being a little bit more conservative so I was just wondering.

No, we're just being cautious.

Okay, thanks.

Your next question comes from Paul Westra with SG Cowen.

Hi, everyone.

Two questions or three here.

Can you give us a better summary or maybe a little more color on the other operating income line, remind us what's in there beyond the Cuisine DeFrance profit?

And remind us your goal for the profit level of the cuisine deFrance?

Well that, and Kerrii is getting the information, but there is a lot of stuff that goes into the line.

Many times you will see reserves or in the past two quarters and we have disclosed this in our conference call, there were some positive currency impacts in the first and second quarter.

I think we disclosed about a penny each quarter.

We have no impact to the quarter in that line on currency because we've been able to lock in those current exchange rates.

And so the items in there are usually currency, other items in the Cuisine DeFrance.

But what is really causing that to move, we're very pleased with Cuisine DeFrance, the joint venture, our share of the income and it is continuing to be more profitable each quarter.

Okay.

Same question on the Chicken Temptations, is that coming out of a promotion?

Well, what we've done is tested Chicken Temptations and as a management group we are looking to see if we want to roll it out nationwide as we're putting together a marketing counters for next year, so, it is an option.

It's been in test.

It's a high-grade excellent chicken product with different condiment builds, much like we also have options like chicken strip salads we can slate in or spinach salad.

We're laying out our plans right now for next year and we're not going to tell the competition what we're going do.

Good enough.

And then follow-up on the G&A question, just trying to get to the sustainability for the low, and I think most expected G&A line.

You know it's not sustainable.

I mean when you're having pressure with your sales, you're going to do all you can to lower your G&A without hurting the customer.

We've always said our G&A is going to be below revenue growth and we're currently saying we're doing about 6 to 7%.

Increase over the prior year is generally what we've given guidance.

Great, okay.

Thank you.

Your next question comes from John Glass with CIBC.

Thanks, good afternoon.

A couple of questions.

First on Horton's U.S. business, a couple of quarters ago, maybe it was just a quarter ago, you said you were reviewing plans to roll it out in the U.S. more aggressively --

No, we didn't say that.

We said we're doing new market entry and if we think new market entry is successful, then we would look at being a little more aggressive.

Okay.

So, I guess what are your criteria for making sure you are getting this right in the U.S. before rolling it out more aggressively?

It is it a couple of more markets?

Are there a couple of milestones you need to pass in order to make the decision?

Some of it you have to give a little time, because earlier in the year, I said we needed to look at another 12 to 18 months.

So from that it's about another 6 to 12 months.

You don't make a decision on one week of sales.

Okay.

And then shifting gears to the Wendy's business, can you give us a little sense of how the chicken strips faring now that you have national media behind them, maybe their portion in the overall mix?

Any kind of metrics to quantify how they're doing?

Well, it's only three weeks, we're still evaluating it.

As far as, we get daily figures, but this is a promotion and you expect it to be high during media time.

And what you look at is was it run during media, was it run after media's over and how does that compare to your test markets?

I can tell you it's probably doing a little better than our test markets at this point.

Mainly because media, national media is more efficient.

Got it.

The customers are loving it, I will tell you.

The chipotle dressing, man!

That's good to hear.

And then just a final detail, does the penny gained in the fourth quarter, that's included in the guidance of $1.97 to $2.03?

Yeah.

Thank you.

Your next question comes from Andrew Barish with Banc of America Securities.

Hi, just, I guess one follow-up and sort of one further explanation.

On the fourth quarter numbers, I guess the thing I'm trying to understand that, I think I know and correct me if I'm wrong, is incrementally higher beef costs are going to be hurt by a couple of pennies and the Baja Fresh dilution is a couple of pennies more than you thought.

Other than that, I guess we have to wait for sales and all that, is that all we know right now?

Yeah.

Okay.

And and we do know that currency is going to be more favorable.

At this point, I think the Canadian exchange rate was $1.33 or $2, Dan? $1.30.

And we were $1.57 a year ago ago in this fourth quarter.

So, we have some belief that that will be favorable.

Okay.

And then on the G&A side, are there any permanent cuts or changes that you've made to the business?

I know you've kind of gone the other way in new R&D facility and doing some new things in that regard, but have there been any changes either in the field or in headquarters that have kind of permanently taken out a layer or some costs?

Of course we don't do that.

We told you that it was mainly bonus money and we do have discretionary amounts of G&A.

And if you can, with the bonus, you're not meeting your performance levels so you know you're not going to pay as much out.

Each department has discretionary project money.

We review those and if we say we can put that on hold or push it someplace else, we will.

Those projects that we feel are most important to business, we continue to fund.

It's just managing a business very well and with some common sense.

Thanks.

Your next question comes from John Ivankoe with JP Morgan.

Yeah, hi.

Hi, John.

Thanks, yes, hi, how are you?

Two questions, the first on advertising.

As you're kind of, I guess finalizing or have finalized your 2004 calendar, how are you viewing amortizing waits for Wendy's for the year?

And if you could also compare that to kind of what your average cost per view or however you look at that is going to be?

The up-front looks like it's about 10% higher and we do everything in the front in the way we charge our stores.

We charge each store, company and franchise, 3% of sales.

And then as you add more stores, add 300 stores a year at Wendy's, you have more national income and that usually offsets your media and you have plenty of money to do great things.

And so do you think the total weights, let me just -- I'm not able to do the calculation in my head, do you think total weights will be up or down '04 relative to '03?

Up.

Okay.

That's fine.

And secondly, and I hate to ask this question again about G&A, but I mean it would appear that the Canadian currency in and of itself would have driven up G&A costs significantly higher.

What would G&A have been without Canadian currency effecting that part of the G&A?

We don't get into minutia like that.

Well, I think the point a lot of people are asking is was there any actual reversal in the third quarter or was it all just bonus that wasn't accrued in the third quarter.

Well, remember, Wendy's has a bonus program and Tim's is on a bonus program.

If Tim's is overperforming or they're on performance levels, then they're accruing at the proper rate all year.

If you're overperforming like Wendy's did last year, we had to accrue more money, if you remember.

If you're underperforming, you accrue less money.

It's not a reversal of some extent that may have been recorded in the prior quarter.

Okay.

It is just less expense required to be accrued in the quarter versus a year ago.

Very helpful.

Thank you.

You have a follow-up question from Mitch Speiser with Lehman Brothers.

Thanks.

And just the beginning of the year, Kerrii, I believe you mentioned that operating costs line was going to be up 20%, and three quarters into the year, it looks like it's running up 10% and just should we expect a big increase in an operating cost and in the fourth quarter?

Or is it just a line that's coming in lower than expected?

And I guess the question is, where should we see the line in terms of the year-over-year growth for full year '03?

Thank you.

And perhaps out to '04.

Thank you.

I will comment just on '03.

As we indicated, we were expecting it to be in the higher levels, around 15 to 20%.

I think we still expect it to reach that level.

As you remember, we've talked about it and we've given you exactly how many units have been opened up by Tim's so far this year.

We target about 200 units at Tim's, 180 to 200.

As a result, we have a lot of units to open up in the fourth quarter.

The equipment expense will go through that account in the fourth quarter related to the opening and sales of that equipment to franchisees --

But you get income on the other --

You get income on the franchise income line.

As a result, I think you would expect to see that increase in the fourth quarter.

Your next question comes from Larry Miller with Prudential.

Hi.

I just wondered if you could give us the delta on the CDF income?

It looks like when you look at the other income line, especially when you back out the Tim, the conference cup gain, I'm curious if you can talk about that.

What we said at the beginning of the year that would provide significant income growth for us, and we said on a yearly basis between $5 to $7 million.

And we have recorded a penny loss the prior years.

So, in 2002.

And I could say that we're probably at the higher end of that range.

Okay, thanks.

Also, I wanted to follow-up.

I thought you said the plan was to take a .5% increase in the fourth quarter.

Has your thinking on that changed?

No, every year we said we review it in the fourth quarter, and that historically we take about a half a point.

And Tom and his team are reviewing it now.

Okay.

So, no decision on that at this time?

We're gathering information.

Okay.

And lastly, I wanted to know if you had identified and you can talk about your new markets you're planning for Tim's in the U.S.?

No, we don't want to drive up real estate costs.

Okay, fair enough.

Thanks.

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

Your next question comes from Coralie Witter with Goldman Sachs.

Hi.

I wanted to follow up on the JV income -- or the CDF JV income.

You mentioned earlier in your prepared remarks about ramping up capacity, I think you said capacity a little bit.

So, should I be expecting a ramp-up in the back half of next year in that line item?

I think when we go to New York in February and meet with everyone we can give a little bit more clear guidance, okay?

Okay.

But as we make additional investments in the plant we would expect an additional return.

So...

And those investments are coming now in the fourth quarter?

Right.

Yes.

We have been under construction here for what?

About three or four months.

Since June, I think, July.

Does that get netted out into that line item or does that just go through Cap Ex?

Yes, Cap Ex.

Okay.

Thank you.

Your next question comes from Dean Haskell with JMP Securities.

Good afternoon.

On your balance sheet between 2nd and 3rd quarters, inventory jumped by 50%, can you talk to that, please?

Yes, we certainly can.

In Canada, they have a capital tax and we had additional funds available in the form of cash.

We invested those in a short-term investment, which exceeded 120 days and as a result of that, that is solely why the inventory line went up during the quarter, versus the period it's being compared to.

We took money out of cash in the short-term and it helps reduce our capital taxes.

And that increases inventories?

Yes, because it cannot be considered to be cash and other, because it's really inventory and other in that line.

Ah.

Okay.

So, the notes that you bought as an investment --

Go into that line.

Okay.

And that was approximately $25 million worth?

Yes.

Thank you.

Thank you.

Your next question comes from Mark Lotimus [ph] with Morgan Stanley.

Hi, good afternoon,.

Hi.

Given some of your thoughts so far on what costs could be for '04, what kind of comps do you think you will need at Wendy's in order to deliver --

This is the third question we've gotten on this.

Let me back up.

It's been different variations.

Historically to increase your margins by 20 to 30 basis points and that's our stated goal, you need, at Wendy's, about 3 to 3.5% same-store sales growth.

Okay.

And if you could comment at all on how you're doing in the markets where you're more competing head-to-head with the McDonald's, I know you've had good momentum here with your U.S.

Wendy's comps and McDonald's is still showing very strong comps.

If you could just comment on the head to head competition.

I can't, they're doing well and we're doing well.

It's probably the best of both worlds for everybody.

I think and I've been talking to you about this for probably a year, and that's Wendy's unique brand positioning.

It's at the top end of QSR and we can gain market share not only in the QSR segment but also outside of that within casual and fast casual.

That's what I suspect is happening, that we're getting outside of our segment and getting customers and McDonald's is staying in.

Okay.

Thank you.

But I can't prove it.

Thank you.

You have a follow-up question from Mitch Speiser with Lehman Brothers.

Thanks, just one more follow-up.

You mentioned that you were going to maintain your dividend, just wondering if perhaps any particular reasons why you didn't take the opportunity to increase it, and separately, I think you did mention some hedging of the Canadian dollar, I wondered if that's new in the third quarter?

And do you plan on perhaps hedging the Canadian dollar more aggressively or more so going forward?

Thank you.

As we said, the dividend policy is under review and we want to stay consistent within a year and if there's changes, we like to be in person and talk to people about it.

So...

Let's wait and see what happens here in February.

With respect to hedging, you're exactly right, Mitch, one of the things and it's not necessarily this quarter, over this past year, we've been certainly fortunate to see the improvement of the Canadian currency.

We had some specific transactions that we have hedged and you therefore get hedge accounting treatment so the impact doesn't go through the P&L.

And that is the position we are now in.

We cannot hedge, however, translation such as, Horton's income, Horton's revenues and expenses.

So, those we can hedge specific transactions such as coffee purchases.

We have done that for a number of years and we are doing that type of hedging in all specific receivable transactions, but not earnings.

You have a follow-up question from Dean Haskell with JMP Securities.

Thank you.

On that same line, Kerrii, then the 1 penny that you eluded to in the first and second quarters of this year from Canadian foreign exchange were profits from hedging transactions?

They were actually profits from not being hedged, but to that point, we wanted to be able to lock in the gains that had been recognized in light of the declining Canadian rate.

So, as a result we locked them in so we do not see the movement and the risk going the other direction.

Should it go back up.

Okay.

And one last question on price increases, just to irk Jack.

To what?

Irk? [ Laughter ] Thanks, Dean.

No problem, Jack!

What was the last price increase and how much?

Dean used to be a crew member of mine!

All would say on that question is grab a mop and do the floor!

Yes, sir.

The last price increase and how much, Jack?

The last price increase was I think beginning of December last year and was in the half-point range.

Okay, so 12/02, thank you.

Your final question is from Larry Miller with Prudential.

I wondered if you can talk about the average check trends you're seeing in transactions so Wendy's doesn't --

Traffic is up.

They're both up.

And check is up.

Do you have any points of data --

Yeah, here we go.

This is for the third quarter, and that's what July, August and September transactions up almost a half a point.

Average check about a half a point and price about a half a point.

Great, thank you.

Okay, operator, we thank you for helping us with the call and we'll talk to you later.

Thanks.

You're welcome.

Have a good day.

Thank you.

You're welcome.

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

You may now disconnect.