Wendy's Co (WEN) 2004 Q1 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Wendy's International conference call. [OPERATOR INSTRUCTIONS].

Mr. Barker, you may begin your conference.

Thanks and good afternoon everyone.

The purpose of our investor call and web cast today is to discuss our first quarter business results for 2004, some key initiatives leading to our brands and management work for the rest of year.

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

Our corporate news release, the financial statements and other information about the quarter are available on our web site, which is www.wendys-invest.com.

From a disclosure standpoint, note that our earnings release continues to evolve and the accompanying documents today not only included the income statement and balance sheet but you will find the revenues and operating income by segment as well as our system wide rest on unit summaries and key ratios.

The agenda for today's conference call will include remarks by our Chief Executive Officer Jack Schuessler and our CFO Kerrii Anderson.

And as the operator said, following those remarks, we will take your questions.

Before we get started let me update you on just a couple IR schedule events coming up.

We do plan on publishing our preliminary April sales results for the month and that will be on May 3.

The April accounting period ends on May 2nd.

Our next analyst day in our corporate office is set for May 10 and that is being organized with J.P. Morgan.

You can probably know if you are interested in attending that meeting.

We will be doing two investor road shows in May, the 1st is on May 4 and 5 in San Francisco continuing on May 6 in Denver.

The second trip is May 12 in Chicago and May 13 in Minneapolis and we are setting those meetings up and look forward to seeing some of our shareholders in those cities.

Looking further ahead, we will host our fall analyst meeting, and that's set for September 29 and 30 and that will be right here in Columbus, Ohio.

We will be featuring the Wendy's and Tim Horton's brands and I will sending out more information about that shortly.

Now I would like to refer you for one moment to the safe-harbor statement, that is attached to the companies news release and in our most recent form 10-Q.

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

It is possible that various factors could affect results and cause those results to differ materially from those expressed in our forward-looking statements.

Some of the factors are set forth in the safe-harbor statement that is attached to the earnings release and in our most recent form 10-Q.

Finally, I would like to note that we are observing regulation F.D., the regulation encourages public companies to discuss material information in a public forum.

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

Now let me turn over to Jack.

Thanks John and good afternoon everyone and thank you for dialing in.

On Monday, I think all of us were deeply saddened to learn about the unexpected death of McDonald CEO Jim Cantalupo and I would just like to express our sympathies to the entire McDonald's organization including their directors, franchises and employees.

Than obviously Jim was a very good, outstanding restaurant operator who really understood the importance of putting the customer first.

And he touched many, many lives during his long tenure at McDonald's and I know he will be missed.

Earlier today, we had our annual meeting of shareholders in Columbus, and it was a very, very positive meeting.

All of our directors up for election were approved.

Our new equity compensation program was approved and I just want to go through some of the results top lined.

It was really a high-quality quarter.

Revenues were up 20.3% at $835 million, Wendy's US company same-store sales positive 9.1, our US franchisees at Wendy's were positive, 7.6, the Baja-Fresh system was minus 4.9, our Tim operations in Canada were positive 6.6 and Tim's US was double digit at 10.3.

Net income was $52.8 million, up 20.2% and our EPS was $0.45 cents, up 18.4.

And we have really strong momentum throughout the quarter at both Wendy's and Tim's and all the brands did a good job of cost controls.

The good news is beef prices are improving in the second quarter and as you know, we paid $1.34 first quarter of this year, second quarter this year a $1.23 and last quarter during the second quarter a $1.14.

We still have some near-term challenges with Baja Fresh but based on the strong first quarter and trends, we are raising our EPS outlook for the year.

Last year in 2003, we earned $2.05, our guidance originally for this year was 11% to 13% or $2.27 to $2.32.

With the revision, it goes to 13% to 16% or $2.32 to $2.37.

Looking at some of the highlights of the quarter, we updated our strategic plan in January with our key executives.

We began to implement elements of the financial strategy that we discussed in February.

We increased our dividend 100%.

Our new equity compensation program was approved today.

Stock ownership guidelines are in place and communicated and we continued our share repurchase program.

Earlier in February or later in February, Paul House and myself took a trip to Ireland to meet with our partners at IAWS, where we like to continue to build our strong relationship with them and discuss opportunities.

We made the change of leadership at Baja by bringing in Bill Morton.

We purchased additional 25% of Cafe Express, increasing our stake to 70% and naming Brian group as CEO.

The Business Ethics magazine ranked Wendy's in the top 100 companies as far as ethics, we are quite proud of that.

Our 2002 annual report won a national award for best report among small-to-mid-cap companies and this was sponsored by the IR magazine, the New York stock exchange and Barons magazine.

Kirk Triplett, who is a touring pro-golfer who has two adopted kids, sponsored a golf tournament in early March called the Dave Thomas Desert Classic to raise money for the Dave Thomas foundation for adoption.

And it was a quite success the first year, raising over $500,000 to the cause.

In looking at Wendy's North America, exceptional sales performance and tight controls on G&A produced just outstanding results, and I am really proud of everybody at Wendy's North America overcoming the beef prices of $1.34 per pound during the first quarter, which was up 34%.

We also re franchised some of our Florida Wendy's that we acquired last fall and we continued to build, look at our building innovation.

We have a number of them done and in test, we are getting great consumer feedback and we will show investors and analysts some of our re image restaurants during the analyst meeting in September.

During our -- the quarter, we advertised super value menu in January, followed in February by a number of new products such as Pepper Corn Caesar Chicken, in March, we advertised a highly successful Spinach Chicken Salad and last Thursday, April 14, we launched our new Chicken Temptation lineup of sandwiches.

Also during the quarter we introduced Mr. Wendy to the world as our unofficial spokesman and mind you the quality of food is still the key message for the remainder of 2004, we will be introducing a Chicken Strip Salad.

We are testing two new salads.

We have a number of promotional sandwiches that we are testing and we are quite excited about our combo-substitute program and protein platters that we are testing at present.

At Tim's in Canada, a very strong sales and also at Tim's US.

We completed the Always-Fresh roll out program throughout the Canada and US.

Madestone Bakery, which is our JV with IWS, is doing very well and it's growing its profits and we are now able to serve warm, fresh product all day long in our restaurants.

We also had a number of promotions that we ran at Tim's like the Cranberry Orange Muffin, the BLT Combo and the very popular Roll-up-the-Rim to win program.

And later on this year, some of these items will be advertised, Maple-Flavored baked goods, the Nice Cappuccino promotion, a New-Egg Salad Sandwich and our Strawberry Tort and like Wendy's, Tim's continues to look at their stores for innovation and We will feature new dining room concepts at the analyst meeting in September at Tim's.

As you know we announced the bid for best eating chain in New England.

We bid $35.4 million and they became back yesterday at $36 million.

We are going through the process and in the next couple of days we should know the outcome.

Baja Fresh grew revenues 21% to $41 million in the first quarter, but I got to be honest, the same-store sales and earnings results were disappointing with a first quarter segment loss of $2.6million.

As you know, we made the leadership change with Bill Morton replacing Greg Dawerhide and Bill is very capable executive.

He's a former CFO for Panera Bread and he has excellent knowledge of the fast casual restaurant category.

All of us are confident in Bill's ability.

He will be focused on five key areas.

One is people, strengthening the leadership team, development, slowing down our new openings so that we can digest the 35% growth in 2003.

Improving our training and development programs with our management and in-store people.

Improving store-level economics and also leveraging Wendy's core competencies.

Next week he and I will be at the franchise getaway convention in Santa Barbara and we both look forward to speaking and working with our 40 franchisers at Baja Fresh.

I am optimistic about Baja, it has outstanding food, good people, we have a new building design for softer interiors that we have tested in Dallas.

I have made a market visit to Philadelphia in March to look at our company stores in Philadelphia.

They did an outstanding job and they have very, very high volumes and I might point out we still have $1 million for AUV average at Baja Fresh.

In summary, it was an excellent first quarter, it was high quality, we have strong trends in our core businesses and that was the reason we raised EPS guidance for the year to 13% to 16% and with that, I will turn it over to Kerrii.

Well thanks, Jack.

First of all I would like to spend a few minutes reviewing the financial results a little more detail and as I do that, I think it's important to keep in mind what happened with the Canadian dollar during the quarter.

It averaged $1.32 this first quarter of 2004 versus $1.51 in the first quarter a year ago and as you well know, that can have an impact on really all the lines of the income statement, meaning that, you know, an item of $1.00 is worth $0.76 cents this particular quarter versus $0.66 cents a year ago.

And of coursed that effects both revenues and expenses.

So for the first quarter of 2004 , we send it out in March 28, we produced record results for both revenues income and earnings per share.

Our consolidated revenues increased to 20.3% to $835 million.

And Jack has already discussed our same-store sales.

So I will move on to the next key driver, which is development.

We opened up 80 new restaurants system wide during the quarter and that consisted of 41 new Wendy's in North America, 25 new Tim's, 14 new Baja Fresh restaurants.

Pretax income increased 21.1% to $83.1 million and net income 20.2% to $52.8 million.

As we look at the segment operating income, Wendy's produced segment income of $59.1 million and that was up 21.3% versus a year ago.

I think its important take into consideration some of the elements Jack talked about with beef.

Tim's produced $52.7 million, up 35.7% and Baja Fresh posted a segment loss of $2.6 million for the quarter.

So let's take look at some of the lines of our income statement.

Costs of sales were $442 million and that was 65.3% of retail sales.

As a percentage of sales, this is about 40 basis points higher than a year ago and that's primarily because of the higher beef cost we face during the quarter.

At Wendy's US, where we do operate more than 1,300 US company restaurants, food as a percentage of sales was 30.9%,versus 28.8% a year ago.

Really reflecting the 34% increase in beef.

Beef was $1.34 versus $0.99 cents a year ago.

As we look ahead, beef prices at Wendy's will be lower in the second quarter than in what we experienced in the first quarter and lower than we originally anticipated.

Beef costs per pound and, Jack said this but I think it's worth repeating, will be $1.23 in the second quarter and this compares to $.14 per pound in the second quarter a year ago.

Due to better than expected beef prices in the second quarter, we have revised our beef out look with the rest of the year and for the next nine months, this is April to December, we believe our beef costs will average 4% to 7% higher than year ago versus our prior guidance of 8% to 10%.

As for other commodity costs, there's been certainly many reports out there from analysts and the media about rising prices, but the good news is that for Wendy's our costs will remain stable for the rest of the year for the key items such as chicken and produce and dairy.

We have annual contracts in place that help us to lock in this costs.

Moving on to store labor in our Wendy's company stores, it was 27.3% of Wendy's domestic retail sales during the quarter and that compared to 28.4% a year ago, which was down 110 basis points compared to a year ago.

We got great leverage on the sales and we managed our labor efficiency.

And further more our average crew weight for the quarter was $7.18 per hour and that's only an increase of 0.10th of a point versus a year ago.

Company restaurant operating costs were $51 million and that's a 22.4% increase.

As a percentage of sales that 70 basis points hire than a year ago and we call it clock, it was impacted by higher bonuses, versus a year ago, tight to higher performance, higher insurance cost and the addition of course of new Wendy's and Baja Fresh company restaurants since last year.

Operating costs.

We are $35.6 million, and that is 4.3% of revenues.

As a percentage of sales, that was 10 basis points improvement compared to a year ago.

The actual year-to-year increase in operating cost is primarily due to rent extend and warehouse cost and equipment sales at Tim, which were all impacted by the stronger Canadian dollar.

General administrative expenses were $67.8 million up just 4.6% versus year ago.

G&A as a percentage of revenue was 8.1% and that's 120 basis-point improvement over the last year.

We continue to focus on controlling G&A spending during the quarter while continuing to make investments that help the company grow in the future.

As for depreciation, it increased about $6.7 million versus to year ago to $44.8 million and that's due to the addition of the new restaurants, currency translation and investments in technology.

As a percentage of sales, depreciation dropped 10 basis points compare to year ago and it was in line with our expectations.

The other income line, we produced $210,000 in income compared to an income of $3.2 million year ago.

The income and expense line, we talk about this every quarter, includes such items as the income from the Tim Horton joint venture par baking plant with Madestone Bakery, income from losses of investments - income or losses from our investments, legal reserves, severance and other non-operating item.

One significant change in the line is related to actually currency, in across border what we call receivable.

Last year we had a favorable currency impact as the Canadian dollar strengthened.

This resulted in a favorable gain on certain receivables a year ago.

We subsequently hedged those receivables.

We talked to you about it in midyear, last year and they are no longer impacting the income.

Let's spend a few minutes talking about a detailed look at our earnings per share for the quarter.

Diluted EPS was 45 cents, up 18.4% compared to 38 cents a year ago.

A strong earnings growth resulted from exceptional sales at Wendy's and Tim as well as good management and cost of our organization.

From a currency perspective, earnings in the quarter were positively impacted.

About 3.5 cents per share due to the improvement in the Canadian exchange rate.

As I've said, the exchange rate was $1.32 versus $1.51 a year ago.

This is important since Tim does generate over 40% of our segment income.

But offsetting the currency benefit in the quarter were really three items.

The 34% increase in beef prices, which impacted Wendy's and Baja, a tax rate of 36.5%, which was 50 basis points higher than the first quarter a year ago and the segment loss of $2.6 million for Baja.

Looking ahead, we do expect Baja to have short-term challenges and we anticipate a segment loss for Baja for the full year of 2004 to be similar to that of a year ago, which was $2.5 million in 2003.

As jack mentioned earlier, we're raising our annual 2004 EPS guidance from the range of $2.27 to $2.32 to a revised range of $2.32 to $2.37.

This is really based on strong performance and our confidence in our core business.

Our previous guidance represented was 11% to 13% increase in EPS, versus last year's $2.05.

The new guidance is a 13% to 16% increase in EPS for 2004.

Our long-term annual EPS growth goal continues to be 11% to 13%.To take a minute to focus on the balance sheet.

We did repurchased a total 1.3million shares for the quarter approximately $55 million.

And that brings our total repurchase since 1998 to about $939 million.

We currently have $311 million authorized by the board remaining for share repurchase.

As for a cash position, we ended the quarter with $159 million on the balance sheet and from a dividend perspective the board approved our 105th consecutive quarterly dividend, which will be paid on may 17.

The payment will be 12 cents per share and you probably remember that as part of our financial strategy, we raised our dividend rate in February to 48 cents per share.

The goal is to produce a yield of 1.1% to 1.2%on our dividends.

In summary, we're optimistic about good results the rest of the year.

We have a strong momentum in our core businesses and beef costs are coming down.

Other food costs are stable and new restaurant development is on track for the year.

So let's turn it back to John for Q&A.

We're ready for Q&A, operator: If you can ask listeners to queue up

[Operator Instruction].

Thank you.

Your first question comes from Coralie Witter (ph) of Goldman Sachs.

Hi.

The first is just I wanted to make sure I understood what you said correctly, at Baja fresh, were you intending to say that the loss this year would be the same on a per-share basis for the full year as last year?

And then the other question I have is on G&A, which over the past four quarters has shown some nice improvement.

Is this a run rate that we can look forward to continuing going forward?

OK.

In response to your question on Baja, what I have just indicated is that we would expect that the segment loss for Baja would be similar to what it was for 2003 and it was a loss of $2.5 million on a segment basis last year.

Is that helps to answer that question.

Yeah, I think in the last year did you guys -- it was nine cents last year, right?

Right, after interest and all that but on segment basis $2.5 million.

So would it be nine cents again?

Yes.

As far as G&A improvement, a couple things.

We've been fairly clear that we've tied our incentive plans to performance.

And if you remember last year we delivered 8.5%, which was good, but it wasn't in our growth rate of 11%to 13%.

As we more reach our long-term growth rate, we generally would have higher bonuses being paid, which would result in higher G&A, that's number one.

Number two, the first quarter, as you know, does not reflect expensing of the restricted stock, which will begin in April, as the plan has been approved and the awards made.

And we've indicated there would be two cents impact to that, two to three this year , as to the expensing if restricted stock expense that will begin in April.

So your run rate on G&A would generally be a little hire going forward.

OK, thanks.

Your next question comes from Mark Kalinowski (ph) of Smith Barney.

I wanted to ask what the average hourly crew rate was in the first quarter or the increase percentage wise?

$7.18 and it was 0.1.

Good to hear that wage inflation isn't an issue.

You did increase our stated earnings for the year by five cents.

Just wondering if any of that represented a change in the currency outlook for better or worse maybe.

With respect to currency Mark when we gave originally gave guidance, we said we thought we would see benefit from the first quarter because we knew we were facing the current rate against $1.51.

After, that we said we would expected to be constant currency similar to the share, which was - similar to 2003 average, which was $.40.

As you probably know, the rate moved up yesterday, I think to about $1.355.

Our outlook as we said consistently does not anticipate benefit from currency going forward.

OK.

Good to hear, too.

Good quarter.

Thanks.

Your next question comes from John Glass (ph) of CIBC.

Thanks.

I have a question on the Tim's business.

Has the addition of the parr-baking element to your business changed your ideas about how much you can do with corporate ownership versus franchising, particularly in the U.S.?

And if you are to win the best eating's business would you intend to run the New England region for example as a company on market or re-franchise that?

Initially if we want it we would run it as a company market.

And you're right.

The parr-bake has made it a lot easier to operate the restaurants.

I think over time, though, we would still franchise the restaurants once they were converted and running to our satisfaction.

Great.

Thanks.

If I could ask another one.

Last year you went through a painful period of same-store sales declines, could you elaborate successful same store sales the prior due to salads I know some of that had to do with weather, but how should we think about this year with the comparisons in the back half?

How do we know it's not going to be another boom-and-bust cycle and how this time mate is different from an economic and product cycle point?

Well, think back to when this hit.

We started seeing it go south on us in August of 2002.

And there's a number of things that happened.

It was competitive discounting.

We saw a lot of that.

The one good thing about beef prices is it will prevent people from discounting quarter-pound hamburgers and such.

Another positive this time around right now the consumer confidence index is a lot higher than in the fall of 2002.

So there are differences.

We don't have right now an overhang of war.

That can change, though.

What's different is three or four elements as we look into a crystal ball.

Thank you.

Thank you.

Your next question comes from Peter Oaks (Ph) of Piper Jeffrey.

I have a couple of questions.

First on the re-imaging plants, I was hoping you could share what you are looking for here in 2005 and how does it set the groundwork -- I mean, 2004 and how does that set the groundwork in 2005 as far as the magnitude, of the re imaging program would it be units or cost and then I will follow-up.

We're still testing.

Some of it is the re imaging of existing restaurants.

And some of it is we're going to look at making new restaurants with the new image.

Right now we have a requirement with our franchisees and recent and we include the company stores that need to be re imaged every five years.

And the current re image we're looking at is may be 15% higher than what we normally do.

And I think as we work with it more and more and we can get some costs out, but it's similar and I would say if everything proceeds that I would say you would re image over a course of five years and we did it in the late 1980's and early 1990's and it took about that long.

OK.

That's helpful.

Jack, what do you learn as far as consumer reaction?

Because it's definitely a material shift as far as what the store environment communicates to the consumer?

We've had really positive comments and 65% of our sales go through the pickup window.

Another 10% goes inside the restaurant and carries the food out.

So 25% is in the dining room and we feel that's an opportunity to build our business without shifting people from the pickup window.

It's more family friendly.

I think it would be better for kids.

I think in the afternoons, which is a growing day part, I think it's a place where people can go in and relax a little bit and those are the things that we want to make sure we're correct, but that's what we're seeing.

OK.

On the G&A line, a year ago part of the increase was attributable to investment spending of Baja fresh.

Are we seeing some of that reversed given the expansion plans being adjusted as they are?

I don't think we -- remind me.

Investment spending at baja first quarter last year?

Maybe from a G&A perspective, training?

We did some training, yeah.

To me we're going to continue to train our people.

That's the key.

You're not relocating Baja's headquarters or anything like that, are you?

No.

OK.

And then I was hoping one last one on some of the recent product efforts, both spinach salad and chicken temptations.

Can you give us a sense as to how the reception has progressed so far relative to what you were look for besides a good reception?

Is it a mixture?

Are you seeing a consumer preference in that area?

Are people getting the message on the improved attributes, particularly the chicken temptations?

It's only been on TV for a week, but we thoroughly tested it and to your point we saw positive results in everything you brought up during the test.

The one thing, as you know, is we're good at reading tests and implementing on a national basis and results are usually just as good, but it's too early.

Right.

Thanks a lot.

Thank you.

Your next question comes from Joe Buckley of Bear Stearns.

Thank you.

I had a couple of questions as well.

First, Kerri, on the Baja fresh segment loss comments, I think was the first quarter loss $2.6 million and the full year would be $2.5 million?

I said it would be similar to 2003.

It may not be exactly that, but in the range, uh-huh.

What I'm asking you is was the first quarter loss there basically the full loss that you expect for the year so it's break even from here on out?

Right.

But I think we have short-term challenges in the quarter with commodity prices in the near term.

So I think it's not to say that you will not have -- you may have continued detriment and then offset to that so that by the time you settle off to the four-quarter tears will be similar last year.

OK and the difference between the first quarter loss and break even is, severance in the first quarter?

severance is not allocated to the segment.

OK.

But we did allocate it to the income statement in the first quarter.

OK.

It's in the other expense line?

It is Joe and we talked about in the past.

OK.

As it's part of corporate.

Here we have negative variance on that line of $3 million in the quarter.

How much of that should we think about being at one time?

I don't know if you can break out the severance or how much of it is one time.

It's really not something that I think we get into looking at the different pieces of it, Joe.

Certainly as we seed we have income from the joint venture, which continues to be positive.

Reserves.

Yeah, and other things that are unusual in nature.

And I think we go back to we gave original guidance at the beginning of the year as to what we would anticipate on that line.

And that hasn't changed?

No.

You mentioned, jack, I think you mention over the franchisee some of the Florida units.

Any gain or loss on that transaction?

Or how many units did you do?

It was flat.

The reason we did it was to provide opportunity to franchisees that were land locked and a couple minority.

OK.

One last question.

To re image restaurants Jack I think you mentioned

Joe, it was only 10 stores.

Oh, OK just 10 stores.

On the re image restaurants, you mentioned the cost and I recognize you're still engineering that cost down, but 15% greater than normal.

What is normal on re image cycle?

Just a dollar amount that -

I would say in the range of $70,000 to $85,000 it depends on the condition and how busy it is.

Again this is something, as you know, we set aside capital for every year.

So as far as you know, will it be a big hit on our capital?

I would not think so.

OK.

Have you done any of those other than Columbus?

No, but we may look at a couple markets that we're looking at to do.

OK.

Thank you.

Thank you.

Our next question is from Paul Westra, SG Cowen.

Hi.

Good afternoon.

I was wondering if you can give us an update or summarize the always-fresh initiative and, again, what equipment replacing took place and when did it wrap up and when -- was there expense associated with that in the current quarter of a one time nature and what the margin impact will be on the new system?

Well we wrapped up always fresh in January.

And it was not very many stores.

So I don't think it was a material either way.

Any customer feedback you got for us?

You've had some time now?

They think it's great.

The product's fresh.

It's warm.

And the sales speak for itself.

I mean, they love it.

Have you gone in and done some research on that?

Oh, yes.

OK.

No more questions.

Thanks.

Thank you.

Your next question comes from Mitchell Speiser of Lehman Brothers.

Thanks.

I got some various questions.

First on the G&A line, I thought that you said that bonuses hit the operating cost line or does that hit the G&A line?

Bonuses affect both lines, but the way was speaking to is respect with company restaurant operating costs, we pay incentive bonuses to our managers into our regional (inaudible) keep on the field and that's based on store performance and division and regional performance.

It was, as you might guess, strong in the quarter, so there were additional bonuses accrued related to that performance and that's in a --.

Overall, bonuses are also higher national G&A and that will be more associated with corporate and that's because, again, 20% performance is a significantly improved and so a little bit in both lines.

Sure.

And just on the actual G&A line given there were performance dollars in there, where did the savings come from?

I guess on a year-by-year basis it was only up about $3 million, yet you have hundreds of more stores just trying to get a sense of perhaps what you did do some very effective cost cutting.

Well, I think for one thing we thought it would be a very tough quarter.

We talked about that when we gave guidance and we held tight head count and replacements in the first quarter.

But we thought like you know we are going to be challenged by beef costs and at that point we were not projected 9% sales increases.

And so we did very much effectively focus on head count in the quarter.

And deferred spending to the extent it would not hurt our business long term, projects that were discretionary.

So that was the area of focus for us.

And we went up almost $3 million, but it was -- the sales grew so well at the top line and we controlled the G&A and got the leverage to the bottom.

Got it.

Great.

Moving along, is the drive-thru mix, is that continuing to go up?

Do you see any flattening out in the drive-thru mix?

Not in dollars because the more money -- the more dollars you have, the dollars go up.

As a percentage, it's gone up slightly over the last three or 4 years, but the big thing is the dollars and that's what you take to the bank.

OK.

And on credit card usage, you can give us a sense of the stores that have had it now for, say, several months, if the percentage usage is going up and maybe what that actual percent number is?

Well, overall as a percentage of sales, it's around 7 and it continues to build as an awareness is there.

And our check average is about 35% higher on credit cards versus cash.

And 80% to 85% of our stores have credit cards available at Wendy's.

Right.

And you still find that the speed of service at drive-thru and per counter is quicker with credit cards?

It's faster.

The one thing is you don't need a signature for anything under $25.

And a credit card is a lot faster than someone going through their pants pocket or purse looking for change for exact change.

Great.

My last question is just on the QSR. category and may be putting aside what some of the recount perhaps you are saying, but with you and McDonald's collectively doing about 20% or 10% comps a piece, can you give us a sense of where you might betaking market share from outside of the defined QSR. category or perhaps are you just taking share within the defined QSR. category?

Thank you.

I would be guessing right now, but I do have a couple opinions.

I think we're increasing within QSR, but we've said for a couple of years now that we have an opportunity space where we can take business from casual and past casual.

And I think our high-quality offerings of salads, sandwiches and so on, chicken, that we're getting now.

And I think we have the unique position of playing in many arenas here.

OK.

Thanks.

Thank you.

Our next question is from Andrew Barish of Banc of America Securities.

Just a follow-on I guess on that on the same have store sales side.

When you look at the numbers on a two-year basis, you guys are running at about 3%, which is kind of your long-term, historical average.

So do you see anything, you know, that's really changed or you are bouncing back significantly from year-ago levels and some of that being check average as you talked about versus the discounting that was going on a year ago, but didn't that start to wane in the spring of 2003 as well?

The Key party.

I didn't understand the question.

I understand it up to the point except what started what is started wane was point.

The discounting from your largest competitor and -

That really started waning in January and February.

It started in October of 2002.

Right.

And I believe Burger King stopped the 99-cent whopper at the end of January.

They stopped it early.

Right.

So the question was is on the two-year comps you are still running 3%.

Is anything really changed in that category?

I don't know what -- I don't know.

I mean, I really don't understand the question.

You are at 9% this quarter versus negative 3% in the year ago first quarter.

So on a cumulative, two-year basis it's 6%.

For an average of 3% per year.

OK.

Which is a terrific number inline with you're historically.

Which is our historically, it's 3.5%.

I understand that, but I don't understand the question.

Wondering has anything really changed in that category?

I don't -- I mean, you look at, you know, the trends in the environment over a two-year period of time, some was better, some was worse and I don't understand what you are trying to turn at here.

OK.

Maybe Barker is smarter than me.

We'll talk about it later.

Thank you.

Your next question comes from John Ivankoe of J.P. Morgan.

Hi

Hi.

Hopefully I can keep this little simpler.

When you look at Baja fresh either on a unit-by-unit is or maybe market-by-market basis, in terms of -- I assume there is some kind of a bell curve in terms of performance and you were given comps and some units and some probably have been very well and some probably not so well.

Do you look at it in terms of percentage of units of Baja fresh units that are open today that are cash break even or earnings break even?

Can you give us a sense of the disparity of performance in that concept and whether it does at some point make sense in terms of becoming a more profitable company, but a smaller company out of that business?, just initial parts these things

No.

I think there's opportunities to leverage our supply chain, to get costs going into the restaurant, food costs down.

We're putting in a new labor guideline that wasn't here before to manage our labor better.

A theoretical food cost.

A Unit economics had creeped pretty significantly over the last couple years.

The cost of building a new restaurant.

Those are all things we're looking at to get the cost down.

To your question, we're really looking at unit level economics, to get a more realistic, to a company like Baja or other restaurant companies, where we have the sales; you can make a good profit.

And we're averaging $1.4 million.

We had a couple new markets open up in Louisville, Kentucky, this past March.

Their market average, store average, is considerably higher than the overall AUV's within the company and so is Philadelphia.

So, I guess it sounds like in terms some of your existing units that may be slightly underperforming, it's not really a sales issue, per se, its more just a cost issue that brings them into profitability is, that fair to say?

I will say that a lot of it is that, but we do have some sales issues.

And those are what - that's the other part we got it correct.

Some of it is operations.

Growing 35% new stores.

Having new managers not running the operations as well as we want them to be.

That affects sales.

And those are all things that we know how to fix.

Great.

Thanks.

Thank you.

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

My first question, I think you just answered.

You said the $1.4 million sort of what the high and the low areas, what's the variability and whether there are any commonalities?

It sounds like what you are saying is the commonalities are that maybe the poor-volume stores are not running very well.

Do you think it's a site selection issues offer there?

I think one could say that.

But then again, once that's identified, you can make the difference through marketing and running top-level A. operations.

A operations can solve a lot of things.

Right.

Can you give me a range of what the AUV's are around that 1.4million average?

I can't do that.

I mean, I can tell you at When this it's between $5 million and $500,000.

It doesn't do anything.

Well, maybe it t could be more relevant, but, OK the second thing is in Kerrii excuse me, I still don't understand why crock didn't get leverage given the good comps.

You had better crock numbers when you had negative comps and we're not hoping for that.

So can you go through that?

Do you hatch the darn best paid people?

Well, a year ago we were not acts crewing bonuses.

So as a result, you going to you know certainly you have got almost a swing, you know where you might have had less you were taking bonuses away and you are adding on that particular quarter

Can you quantify that in basis points, last year versus this year?

On the bonuses

No.

We haven't specifically got into, you know to talk about what exactly bonuses were as a percentage.

You have a couple of things happening of the biggest percentage of the increase is from Wendy's domestic.

A little bit of Canada, because we do have Wendy's restaurant in Canada and that gets blown up by Canadian currency, but you have more stores than had a year ago and higher insurance.

We knew we were looking at that from the perspective of company restaurant operating costs.

Is it fair to say that going forward you might expect leverage on that line item at less than 9% Comp or you know you are always opening more stores and I don't think this quarter was having any particularly strong

The big thing here Janice is the bonuses.

Right.

I mean, there's a huge swing.

Right.

And is it fair to say we won't see a swing of that magnitude necessarily?

Well I hope it swings there because that means we're doing 90% comps.

So I am in favor of that.

Yeah, I understand that.

Was there -- I mean is, there any -- anything extra in there for the rest of this year?

I mean, if you do a -- if you do a 9% Comp, your crock will be up 70 bits?

Well, because it was deflated so much because of the bonus.

So for instance, I am throwing out a number.

If lets say on $100 we make more money and our bonuses go up 10%, OK, last year they probably went down 10%, so the swing is20.

So that big of a swing.

Yes.

Its is a very big swing

OK.

And you also I mean you do have more stores, of course, and we did have improved performance.

So you will not see the be average on you see in the first quarter and the fourth quarter where we had a dynamite, and people are paid quarterly, I have to tell u.

Might we see it in the second quarter, though?

The same sort of panel.

You could, yes.

OK.

We hope you do.

Thank you.

Your next question comes from Larry Miller of Prudential.

Hi

Hi

I want to follow-up on Baja.

I am trying to understand you know, you said the operating loss was $2.6 million in the first quarter, yet I think at the analyst meeting you were talking about the major issue would be beef costs.

You are seeing beef costs come down at Wendy's.

So, why shouldn't dilution be less for the year?

I mean, I have another question as well.

Well there are other things that make up your profit-and-loss statement other than food costs.

The one thing in food that Baja is getting hit with is chicken prices.

And where Wendy's was locked in last year, or this year, Baja wasn't.

Those are the kind of things that we're going to leverage for next year is, to get locked-in prices, so Baja is not hurt by fluctuations.

That makes sense.

Jack, you said the sales promotion was highly successful.

Can you put parameters around that?

Was it similar in terms of a percent of sales?

Oh, yeah.

It was a great promotion.

Great.

And there is one follow up against the question, about the leverage ability of the model.

If you cannot leverage 9% Comp and you may -

What do you think the beef costs -- how do you think that affected us this year in the first quarter?

It was $7 million, almost four cents.

1.6%.

1.6% on the margin.

If you can't get on the crock line some leverage, you can get it elsewhere on the p & l?

G & a seemed to be one area and it sounds like you will get bonus there's as well.

Where might we see that leverage if the Comp were higher?

Certainly cost of sales from beef.

That was Jack's point.

What we endured this first quarter was a $7 million increase in beef costs, which was 1.6%margin on cost of sales.

OK.

That makes sense.

Thanks.

Thank you.

Your next question comes from Dennis Milton of Standard & Poor's.

I mean yes, I was hoping you would discuss some of the success you had in same store sales at that Tim's, particularly with respect to the improved bread product.

Are you seeing a lot stronger sales particularly at the lunchtime and certainly you could quantify the average check in that period in traffic?

Well, whenever you have the same-store sales increase like Tim's has, it's usually across the board, which it was.

So, but the majority of our dollars are before noon, OK?

And so that is growing on a dollar basis quicker than other parts of the business, but may be not on a percentage.

I mean that is so afternoon is, that growing as fast or not as fast as before noon?

Let me go back to add to Jack's answer also on Tim Hortona's.

I mean one of the things, and we talked about it that's the parr bake allows you to bring in donut of the month products.

Before you had to train a baker how to bake something for four weeks and it was basically impossible.

So, you know where Wendy's has always had promotional items, that come in and off there menu up until now with parr-baked products, it was difficult to do at Tim's.

So now think they are bringing a special (inaudible) of the month, cranberry or special donut at the Maple, Maple, which is actually ranked this coming period.

So what change in parr-baked in the bread really have allowed us to do is to bring in more special products and new news to our customers to excite them that when they buy their coffee they have something to go with it.

And Dennis you know Jack mentioned, we did promote the B.L.T., which those kinds of promotions do have done well for Tim.

I would just expect that promotions like that to really raise your average check and I was just wondering if it having more of an impact in that area than it has in the past.

I think it's bringing in transactions, customer counts.

OK.

Thank you.

Thank you.

Your next question comes from David Palmer of UBS.

Hi.

Thank you.

Two investor worries that are out there I think is gasoline prices, which I am sure you have heard queries about that.

And the overall competitive environment in fast food, it seems that other players are raising the bar out there, at least for themselves or following your lead in certain ways.

Are you concerned that the customer satisfaction gap may be closing between you and other players that may be doing their wellness menus, the re-imaging of restaurants, focusing on drive through speed?

I mean, we keep an eye on the competition, but I think our track record over the last five years has been pretty good.

In speed of service at the pickup window the closest competitor to us is 30 seconds.

We made great strides, when we first started, our speed is 180 seconds, it's a 116.

I think the average in that survey is probably 160, 165.

Food, we continue to raise the bar on ourselves.

We don't sit around loggy gagging saying, we are good.

We are pleased at sometimes with our results, but we have never, never satisfied.

The whole idea at Tim's, at Baha, at Wendy's it's continuous improvement.

How do we get better today -- tomorrow, than we are today?

And in the D.N.A. of everybody in these three brands.

So we don't worry that what the competition is doing.

We worry about topping ourselves.

And on gasoline prices, what's been your experience over the years or may be you have done studies on it to what the impact could be on your business?

Well, we like low gas prices, but I tell you, this is -- I think there's a number of positives that are offsetting the negative gas prices.

There's only one other period in my career where I saw high gas prices and you still saw expansion of same-store sales, a meaningful expansion.

And in those years, there was offsets to the gasoline prices.

A year ago, year and a half ago, there wasn't offsets plus you had more negatives like the war in Iraq and winter weather and things like this.

So I think the consumer has factored it into their budgets.

And I think one cannot underestimate that e-pay has a positive impact.

I mean a year ago, we were not taking credit cards in our restaurant.

We know that sufficient it is increased over the last few months as we have monitored it and it is easy for the people to pay for there purchase through some type of a debit card or credit card.

And I think that's just you know another competitive advantage for us today.

You know there was a tax decrease last summer.

So, I mean all these are positive.

You do you have the gasoline, but you have a lot of positive offsets.

Thank you.

Thank you.

Your next question comes from Jeffrey Omohundro of Wachovia Securities.

It seems like you have recently made some real progress on your marketing creative with the Mr. Wendy's campaign.

I just wonder what your research scores on that look like and how we should think about the longevity of the campaign and how it might be scoring relative to some of Dave's great numbers.

Well, it's too early to tell that.

I mean you have to really look at this over time.

We have had very favorable comments from a lot of the trade magazines.

Before we really selected the campaign of Mr. Wendy, we did a lot of consumer testing ahead of time.

And it all suggests that it could be a very strong campaign.

Will it last 13 years like the Dave campaign?

That would be a rarity, OK?

But from what we see and in the feedback we have gotten, it's been well received.

So at least I know we should consider it to be in place for the next few quarters?

We think it will be longer than that.

Yeah.

Great.

OK.

Thank you.

The contract with have with Mr. Wendy, the actor, is for three years.

Thank you.

Your next question comes from Dean Haskell of JMP Securities.

Good afternoon.

It's J.M.P. securities.

Hi, John sounds goods quarter.

Hey, Dean how are you doing?

JMP.

Well, we got to get it right somewhere along the lines.

Two questions.

First one regarding e-pay.

If I do the math the number of increased check average times a percentage of usage times the number of stores that is available, and gives me a 2% increase in check average from e-pay.

How much is check average up in general?

OK.

Here is what is it was in the first quarter.

Transactions this is total data.

OK.

For Wendy's.

Transactions were up 5.8.

Average check 3.2 and price 0.6.

OK.

Thank you very much.

We were very impressed by the transaction numbers.

Thank you.

Second question, you and your colleague off to Ireland for a week of meetings with IAWS, is that a Wendy's and/or Horton's plan for international expansion, whether that's the U.K. or perhaps the continent?

No, it's not.

So, it's more joint venture along the production side of the business then?

I have a very good relationship with Phillip lynch, who is the chairman at IAWS.

We like to get together once a year.

He either comes to the United States or I go there, Paul and I go there.

And we just have business discussions on our current businesses and our joint venture.

And he took me to play a round of golf it and it was 42-mile-an-hour wind and 40-degree temperature and I froze.

But you score shot below 90?

I always shoot 90, it's just what hole is it on. 13 holes.

And who is keeping score.

Kerrii.

Yeah.

OK.

Thank you very much.

Thank you.

Your next question is from Howard Penney of F.B.R.

My question is on e-pay.

Does (inaudible) of that technology allow you to do a loyalty card and if it does, does it work?

We're looking at loyalty cards, gift cards, from -- you with all the brands.

That's the logical extension.

The technology allows you to do that?

Oh, yeah.

As we talked to you the last couple of years, as Kerrii talked about new store technology why this allows these types of offerings.

We have the infrastructure in place today to be able to leverage that.

Thank you.

Howard, welcome back in to FBR.

You are too kind, John.

Operator, we'll take one more question.

Thank you.

Your last question comes from Joe Buckley of Bear Stearns.

John, I'm actually well set.

Do you want take one some one else.

I'm fine.

Thank you.

Thank you Joe.

Another question.

Your last question is from Peter Oaks of Piper Jeffrey.

I'm getting nervous.

I got to make this thing count.

I have one question with 25 parts.

No, no.

I will save that for someone else.

Yes I have a question on a just kind of follow-upon Wendy's food costs.

You told us basically that the food costs for the quarter were up 210 basis points and beef was 160 of that.

And then you also said that chicken, produce and dairy were stable.

So is that stable essentially account for that 50 basis points?

Is that kind of the run rate to think about?

Well, some of it can be impacted by mix, too.

You have got dairy products with frosty and cheese a little bit.

So I think you are going to see some impact to cost and, of course, as Jack always say, which we take some price generally in December.

Otherwise, we think it's very manageable.

Certainly we're quite proud of all of our operators and we certainly thank all of you calling in and we wish you the best and look forward to seeing you in the near future.

Thank you.