Wendy's Co (WEN) 2004 Q2 法說會逐字稿

Good afternoon, my name is Crystal(ph) and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Wendy's International 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 to ask a question during this time, simply press star then the number 1 on your telephone keypad.

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

I will now turn the call over to Mr. John Barker.

Please go ahead, sir.

Thank you.

Good afternoon everybody.

The purpose of our investor call and Web cast today is to discuss our second quarter business results for 2004, some of the key initiatives in each one of our brands and management's outlook for the year.

We published our results this morning and you can find all of the results in the news release and the accompanying statement on our web site at www.Wendys-invest.com .

From a disclosure standpoint I want to make sure you note that attached to our earnings release is the income statement and balance sheet, the revenue and operating income by segment.

Our restaurant unit summary for the system is in key ratios.

The agenda for today's call will include remarks by CEO Jack Schuessler and our Chief Financial Officer Kerrii Anderson and then as usual, following their remarks we will open up the call for questions.

Let me mention a couple of things on our investor relations calendar for the upcoming quarter so-we do plan to publish our July monthly sales results and that will be on August 4.

The July accounting period ends on August 1.

We have an analysts' day coming up at our corporate office and that's set for August 9 and that's being organized with Morgan Stanley and then looking just further ahead a little bit we will host our fall analysts' meeting on September 29 and 30 here in Dublin, Ohio, where we are going to feature innovation in both the Wendy's and the Tim Horton's brand.

The meeting is going to start with a dinner on September 29, at our corporate office and, that'll start at 6 o'clock and, there you can have an opportunity to meet with some of our senior officers.

On the next day, September 30, we will begin with tours of our newest building designs and, you are going to see some technology and, other things, in both our Wendy's and, our Tim Horton's systems.

The meeting will continue at the Marriott Tuttle Hotel in Dublin and, there you are going to have a chance to hear from our leadership teams at Wendy's and Tim Horton's and, we'll give you an update on our core businesses.

The rest of our key disclosure dates are listed on our corporate and investor Web site.

Now, let me discuss an issue that we have been concerned about for some time.

Over the past few years, certain analysts and market researchers, have been contacting people, within the restaurant industry, to learn more about business trends and future plans.

Recently, we have noticed this activity picking up in the form of channel checks and, interviews with representatives of the Wendy's system, specifically our managers, employees and, franchisees at the restaurant level.

Callers are trying to determine sales trends in between our monthly reporting of sales and, then the information is used in research reports.

Unfortunately, some of the reports have been inaccurate at times and, not indicative of our nationwide sales results and, we've experienced increasing volatility in our stock price.

We believe this practice is disruptive to an orderly and fair disclosure process.

It puts members of management in a difficult position, because we are unable to respond to questions based on the sales information that is published in between our scheduled disclosure dates.

Furthermore, asking an employee or, a franchisee to disclose confidential business information, is asking that employee or franchisee to violate contract obligations to the company.

For an employee of the company, discussing confidential information is a violation of our standards of business practices and may be a dismissible offense.

For a franchisee, discussing confidential information is a violation of our franchise agreement and may be cause for default.

Therefore, we are asking you today, both analysts and researchers, to stop contacting our employees and, our franchisees, with questions about sales trends, marketing plans and future promotions.

Your calls should be addressed to me and, the investor relations department at Wendy's International.

Now, I would like to refer to you for a moment to the Safe Harbor statement that is attached to the company's news release and our most recent form 10-Q.

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

It is possible that various factors could affect the companies' 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, that is attached to the earnings release and our 10-Q.

And finally, I would like to note that we are observing regulation FD.

The regulation encourages public companies to discuss potentially material information in a public forum and, therefore, we encourage you to ask questions after this conference call today.

Now, at that, let me turn it over to Jack.

Thanks, John, and good afternoon everyone.

It's been another good week here at Wendy's.

We successfully ended today our board of directors meeting where we just discussed a lot of pertinent issues and an update on our strategic plan.

As a side-down, on Sunday and Monday of this week, Wendy's franchisee Mike Gibbons hosted a major golf tournament in Minneapolis, to benefit the Dave Thomas Foundation for Adoption.

It raised over $500,000 during this event and, we are all quite proud of Mike and his team.

Earlier today, we announced excellent overall financial results for the company.

And, I'll give you a short overview of the second quarter, and it was another high quality quarter with record revenues and income.

Revenues topped out at $909 million, 15.6 percent change.

Same store sales positive at Wendy's U.S. company, up 5.9.

Positive Wendy's U.S. franchise up 3.7.

Baja Fresh Systems was minus 6.2 and, then Tim's Canada positive 7.8 and, our U.S. business continues to crank along at 10.3 positive.

Net income, $71.6 million.

That is a 17.2 percent change and, our EPS is at 62 cents, or a 17 percent increase.

We had strong sales momentum at Tim's, both in Canada and, the U.S.

Good sales at Wendy's for the quarter.

The whole enterprise did a great job in cost controls.

And, we had some near-term challenges at Baja Fresh, but I can tell you we are addressing them.

Based on our strong second quarter performance, we are reiterating our EPS outlook for the year and, the guidance is in the range of $2.32 to $2.37, over the $2.05 we produced in 2003.

And, that range is up 13 to16 percent.

Excellent performance throughout the quarter, especially at Wendy's and Tim's, the operators and franchisees did a great job and, we continue to innovate with new products, technology tools and building designs.

In addition to the quarter, our first half results were outstanding, with record results in revenues up 17.8, net income up 18.4 and EPS up 16.3.

During the quarter, our strategic planning council, we updated our consumer of the future research, which guides the execution of our strategic plan.

We continue to implement elements of our financial strategy, that we discussed in February, such as the 100 percent increase in our dividends, new equity compensation programs, stock ownership guidelines and, we continue to repurchase our stock.

We made an announcement earlier this month, that we named Jonathan Catherwood as Treasurer, replacing John Brownley, who is retiring early in 2005 and John is in the room with us today and I just want to thank him for everything he has done over these many, many years as treasurer.

Made a number of market visits throughout the year and throughout the quarter.

Spent time with Tom Mueller in the Wendy's looking at our new image units, had two trips with Bill Moreton out to Baja and I also piggybacked a trip with Adriano Paganini at Pasta Pomodoro.

If I look at Wendy's North America overall performance, very strong.

Same store sales strong.

Tight control of G&A and this is despite the beef prices of $1.23 per pound in the second quarter, up 8.4 percent from a year ago.

Comps were very strong in April and May and then slowed during June due to some key factors.

I believe we had wetter weather in the Midwest and Upper U.S.

The Wendy's marketing emphasized Super Value Menu versus Southwestern Caesar Chicken Salad last year.

We had a shift of Memorial Day Monday from fifth period last year to sixth period this year and we experienced some very heavy discounting by Burger King.

Overall, we are very, very proud of producing a 7.4 percent growth in first half same-store sales at Wendy's company units.

Our company units averaged $1.39 million in 2003 so it's a big number that we're putting on top of this.

Our system is healthy and we've had 16 consecutive years of positive same-store sales.

But we can't rest on that.

We continue to work on building innovation.

Several units in Columbus with our new image interior and exterior have been developed and we are getting great feedback from the consumers.

We are still working to engineer the costs for the remodels and we will showcase the new restaurant images during our analysts' meeting in September.

We launched during the quarter a successful launch of Chicken Temptations.

That's the grilled, home-style and spicy chicken sandwiches and the grilled sandwiches will be a platform later on for other products.

We also introduced kid's meals where you can substitute low fat milk for the soft drink or mandarin oranges for the French fries and this has been accepted not only by the kids but their moms.

And in July, just a few weeks ago, we introduced our new chicken strip salad.

Looking ahead at some test products that we're going to be running in August and September is a spicy Thai chicken-sandwich-or spicy Thai chicken salad and a chicken Mediterranean salad.

Also, we're going to looking at testing a Tuscan beef and chicken platters, our carb-pounders(ph), our create-a-combo and an entrée-sized fruit salad.

At Tim's, again, excellent sales in both the U.S. and Canada and we're really leveraging our always fresh program throughout Canada and the U.S. and we can serve now warm products throughout the day and because of the par-baking process we can have baked good promotions such as the strawberry fritter.

And the main-store(ph) bakery joint-venture with IAWS joint-venture is doing quite well and we continue to grow profits at the bakery.

Also, at Tim's we have some excellent promotions.

We had a maple-themed baked good earlier in the quarter, we introduced a new egg salad sandwich and as it got warmer in June, we emphasized iced cappuccino.

We completed the acquisition of the Bess Eaton chain in New England and if you remember, that's 42 restaurants that are now operating as Tim Horton's.

The remodeling is nearly completed in all stores and some of the elements of this are more prominent product display cases and ovens, updated colors, tables and lighting and LCD screens that spotlight products coming out of the oven as they're coming out of the oven as they're fresh.

We also had a grand opening in Providence on June 29 and we had many celebrities, hockey players and the Governor of Rhode Island.

And we'll feature new (inaudible) at our analysts' meeting in September.

We're also very excited about Tim's growth in the U.S. as we expect to end the year with more than 250 Tim's in the states where we are presently doing business, compared to 184 at year end 2003.

Just to remind you, that's a 35 percent growth.

Annually, throughout the Tim's system we have Camp Day and all proceeds from coffee sales from that day went to the Tim Horton's Children's Foundation and I'm proud to say our franchisees raised over $6 million Canadian for the Foundation.

And an honor was bestowed upon Tim's and Paul House's whole management team.

Canada's magazine-Canadian Business Magazine named Tim's the best-managed brand in Canada and 42 percent of the recipients said that Tim's was the best.

At Baja, we saw revenues grow 16.5 percent during the second quarter to $44.9 million.

Baja posted the second quarter segment loss of $3.4 million.

The loss was due to lower same-store sales, higher food costs and the impairment in three markets which was $1.8 million.

As a result of the impairment, we will close five stores in the markets of Tucson, Atlanta and Charlotte.

And we expect an additional $500,000 of lease termination costs in the third quarter due to these closings.

But we're quite optimistic about Baja.

Bill Moreton and his team are executing a strategic business plan to improve our performance and it's really broken down into five areas.

First is people.

We continue to strengthen the leadership team by putting Sally Abshire in as Chief Operating Officer.

Sally is over a 20 year veteran at Wendy's and her last position was VP of training.

John Butcher is our Senior VP of Marketing and Bonita Williams, our new VP of Human Resources.

On the operations front we are continuing better training and development at the store level, looking at improving our service systems and as we speak we are rolling out theoretical food cost models and labor matrix in the stores that we initially rolled the matrix, or the theoretical food cost out we've seen improvements of 1.5 to 2 percent in our food costs.

So sales building initiatives that are starting at Baja we're going to have direct mail drops in July and October, we've created new television and radio commercials, the Phoenix market has been getting a radio campaign this month and we are looking at redesigning the dining room and menu board and we're going to look at extensive product development led by Cathy Chesnutt(ph).

As far as new stores go, as you know, we slowed down new openings for 2004 and we expect top open anywhere from 35 to 40 new units this year and we are digesting the 35 percent unit growth in 03.

We're working on a remodel program and will test it in four markets and we're using WD partners who are the same people that assisted Tom Mueller at Wendy's.

We're also looking to sharpen the development cycle time, improve our site selection and lower our building costs and we've already got $50,000 out of our building and we're looking to get another $50,000 out.

And Bill continues to strengthen the relationships with the franchisees.

We had a very successful franchise update meeting earlier in the second quarter and Bill recently formed a franchise advisory committee, or FAC, with the franchisees.

At the same time, Bill is starting to leverage Wendy's core competencies.

We are forming a shared services division here at Wendy's where we can take in accounting and stump purchasing and technology over time in order to leverage cost and competencies.

Overall, we're really confident about the future of Baja.

We have outstanding food, consumers like the concept, we have great people and we are aggressively addressing the business issues.

So, in summary, excellent performance in the second quarter, strong revenue growth, high quality EPS up 17 percent, great trends in our core businesses and we're reiterating our EPS guidance for the year to 13-16 percent.

And with that I'll turn it over to Kerrii to take us through the numbers.

Thanks, Jack.

Well, it was certainly a high quality quarter from our perspective and I want to talk to you about the detailed line items, but before I do that I want to talk about some of the elements, just to mention a few items that I think are a little different for the quarter.

First of all, as you probably know, we have worked hard to get to the right answer with respect to FIN 46 which is consolidation of franchisees.

However, as a result of the specific agreements we will-we did consolidate this quarter for the first time 77 Tim Horton's franchisees in our results.

You need to know that there is no impact to this consolidation on our operating income but certain lines in our income statement were affected, for example, retail sales, franchise revenues, cost of sales and company restaurant operating costs and other incomes and they affected those lines by somewhere between 1 to 2 percentage points of increase versus a year ago.

The other element is that Café Express, which we now have an investment position of 70 percent is included in our consolidated reporting for this quarter and of course it was not in last year's results.

And then, lastly, keep in mind that Tim's is a very important part, we talk about it being 44 percent of our overall income contribution and as a result we are certainly impacted by the Canadian dollar.

And that averaged of $1.36 this quarter, this year versus $1.40 in the second quarter a year ago.

So you have to recognize that there are impacts to each of the lines in the income statement as a result of that conversion.

Every dollar of sales at Tim's is worth 74 cents this quarter versus 71 a year ago and it also impacts expenses.

Before the second quarter of 2004, which ended on June 7, we did produce record results in revenues, incomes and earnings per share.

And Jack's already talked about the very strong same-store sales, so let's talk about development.

We opened 131 new restaurants system-wide during the quarter.

That consisted of 53 Tim Horton's, which included the 42 that we acquired and converted that we Bess Eaton restaurants previously, 57 at Wendy's and 11 Baja Fresh restaurants.

Net income increased 17.2 percent to $71.6 million and the diluted EPS was 62 cents, up 17 percent compared to the 53 cents we reported a year ago.

Our strong earnings growth resulted from outstanding sales at Wendy's and Tim Horton's as well as good management of our costs throughout the organization.

Our earnings were positively affected by about 3 cents per share from an improvement in the corporate tax rate.

This quarter, our tax rate was 36.5 percent, and that was compared to the second quarter a year ago at 39.2 and that was certainly unusually a high a year ago.

You remember talking about an unexpected Ohio and some other state tax rate increases that impacted us in the second quarter a year ago.

From a currency perspective, earnings in the quarter were positively impacted by the exchange rate that I discussed and that impacted us about a penny a share due to the improvement in the Canadian exchange rate.

However, a year ago this quarter, currency positively impacted our earnings by 4 1/2 cents in the second quarter a year ago and that more than offset the positive impacts in the currency this year when you compare year-over-year performance.

Also impacting earnings in the quarter were the three other key items that we've been talking to you about.

The first being the penny a share expense for restricted stock grants to employees which we announced in February.

We awarded our first restricted stock shares in April and began to expense them this quarter.

The segment loss for Baja, and Jack talked about it, was $3.4 million and that's compared to an income that we experienced at Baja a year ago of $1.5 million.

We had an 8.4 percent increase in beef prices during the quarter and that affected certainly Wendy's and Baja.

As we look ahead at our 2004 annual EPS guidance, and Jack's already said it and reaffirmed it's $2.32-2.37 and that represents a 13-16 percent increase over the $2.05 a year ago.

Our guidance does reflect a strong performance in the first half of this year, but we do have certainly more challenging same store sales at Wendy's in the fourth quarter, but we do have a 53rd week of our company operations during the fourth quarter this year.

We anticipate less cost pressure from beef prices in the second half of the year and as we disclosed in our press release today, we will be paying $1.31 per pound in the third quarter, versus $1.17 a year ago.

And as we look out, you know that we paid $1.29 in the fourth quarter a year ago.

So I think we've talked to you about guidance for beef in the last three quarters of this year compared to last year and we've given you guidance of 4-7 percent and we feel comfortable with that.

Other commodity costs and there's been many reports out there about rising prices, I think Wendy's has good news.

Our costs we expect to remain stable the rest of the year in key items such as chicken and produce because we do have annual contracts in place that will lock in our costs, and we had a risk management program in place for cheese.

Included in our earnings guidance is how in the 13 to 16 percent increase is an update on expectations for segment earnings for Baja Fresh.

We do now expect a segment loss from Baja for the full year of 2004 to be in the $5-6 million range and that compares to $2.5 million a year ago.

This expectation reflects certainly the current results today, the impairment charges that we took this quarter and also the third quarter lease termination costs that Jack talked about with the closing of the five stores.

You know, I think we said all along Bill and the team are working very hard and very diligently but it is going to take some time, hopefully more towards year end we're going to see some of the fruits of their initiatives and the long term impacts of that in Baja.

Longer term, our EPS growth goal continues to be in the 11-13 percent range.

Now, to spend a few minutes to take a closer look at some of the line items on our second quarter income statement.

Cost of sales were about $475 million and that's a 64.2 percent of total retail sales.

As a percentage of sales this is a 20 basis point improvement compared to last year and as you know at Wendy's we do operate about 1300 company restaurants.

Food costs as a percentage of sales was 30.6 percent versus 29.4 a year ago and included in that is 8.4 percent higher increase for beef and slightly higher costs for bacon and dairy.

And beef was $1.23 per pound for the for the quarter.

As you move to store labor in the Wendy's company stores it was about 26.4 percent of the domestic retail sales during the quarter, and that's compared to 27 percent a year ago, and that means we improved 60 basis points.

We got good leverage on our sales and we managed our labor efficiently.

And, furthermore, average crew wage for the $7.19 an hour and that's a .2 percent increase from a year ago.

Next line item is company restaurant operating costs.

They were $158.7; they were an increase of 21.4 percent of sales.

As a percentage of sales this is certainly 70 basis points higher than a year ago and CROC was impacted by a number of items, certainly higher performance bonuses as we are performing at a higher level than a year ago, an increase in insurance costs, but probably more important is the addition of both Wendy's and Baja company restaurants since last year along with the new Tim Horton's Bess Eaton conversion restaurants in the quarter and the consolidation of Café Express.

I think it's important to know that Wendy's CROC actually improved 30 basis points during the quarter versus a year ago and what you're doing in seeing some of the offset of some of the other items so our core business is getting leverage from sales.

Operating costs were $36.1, that's about 4 percent of sales.

And again, we always give you the definitions.

Operating-you got to keep in mind that the operating costs are really tied to Tim Horton's performance and they move in line with their-the change in real revenue growth and that was up 19 percent for the quarter and it has to do with the actual warehouse and equipment sales that occur at Tim Horton's as well as rent expense for properties that we leased to our Tim Horton's franchisees and that's reflective of the growth that is occurring with new restaurant openings and higher sales as well as the strengthening of the Canadian dollar.

Depreciation increased about $3.75 million versus a year ago to $44 million and it's due to the addition of new restaurants and in our investment technologies which we believe our paying off.

As a percentage of appreciation we dropped 30 basis points compared to a year ago.

G&A was expenses for the period were $71.8 million and as a percentage of revenue that's 7.9 percent, and that's a 10 basis point improvement over last year.

We continue to focus on growing-controlling G&A growth and the G&A line did include the additional compensation of incentives that relate to the strong performance that we are delivering compared to a year ago as well as the expensing of the restricted stock to employees which we have been talking about and G&A expenses for Café Express which is now consolidated into our financials.

On the other income line we produced $1.2 million of income compared to $1.5 a year ago and you just keep in mind that the other income and expense line just includes items such as the income from the Tim Horton's joint venture, income from our other investments, legal reserves, currency adjustments and other non-operating items that are not in primary to our key primary business.

For the second quarter the income statement line included the Baja Fresh impairment expense and you can see that we certainly took that into the quarter and the other change that impacted this quarter is something we talked to you about second quarter a year ago and that was that we had from time to time certain currency adjustments that occurred from receivables.

We actually were required to mark those to market and that's what we did a year ago when we had a favorable currency benefit a year ago.

We subsequently in second quarter a year ago hedged those receivables and we no longer generally see benefits reflective of any kind of currency change.

From a balance sheet perspective we did repurchase 670,000 of our common shares in the quarter for approximately $25 million and our total repurchases since our inception in 1998 totaled 38.8 million shares, or $963 million.

We currently have remaining on our authorization from the board $287 million for share repurchases.

As for our cash position, taking into consideration we were busy during the quarter, we acquired the Bess Eaton, we bought stock back, we still ended the quarter with $141 million on our balance sheet and we have repaid all of the commercial paper borrowings that were outstanding both at the end of last year as well as the first quarter.

From a dividend perspective the board approved 106 consecutive dividends.

The quarterly payment will be 12 cents a share and, again, we have raised our dividend reflective of our overall integrated financial strategy to hopefully produce a yield of 1.1-1.2 percent for our investors.

In summary, we are optimistic about producing an excellent year with 13-16 percent EPS growth.

We've had a great first half and we are really proud of all the operators and franchisees that really are responsible for these results.

We did control costs effectively throughout the organization and continue to be a focus on that here.

So at this point I would, John, I think I would like to turn it over to you to Q&A.

Operator, if you could ask individuals to queue up for questions we would be happy to take Q&A.

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

Your first question comes from the line of David Palmer with UBS.

Hey guys.

I was wondering if you might go a little into Tim Horton's with regard to some of the initiatives you've done there.

Maybe you can remind us how you've made some changes with regard to the par-baking systems, some of the progress that's being made there with regard to perhaps development deals with franchisees.

How has that really increased the potential for that chain in its home market of Canada.

Well, first of all, the par-baking, we have a 235,000 square foot plant in Branford, Ontario and the old way to bake was you had a day bake and a night bake and the bake would have to last for 12 hours.

So everybody knows that after about two or three hours baking these products-the quality starts going downhill and if your baker doesn't show up then the owner or the manager has to come in in the middle of the night to bake so it's going to help quality of life.

Second because it's par-baked it arrives to the store frozen and you bake it off in about a minute and a half, two minutes so now you have baking going on and the aromas in the restaurant all day long.

Plus, now you can do promotional items like we just finished our strawberry fritter.

In the past that would have been too labor intensive just to do a promotion like a strawberry fritter, so now you can start building sales with promotions so the impact it has is it's a quality of life issue, it's a quality issue that you're always baking fresh and now you can do more promotional products.

Does it have anything-has it done anything to make the sales to investment ration much more attractive, returns more attractive and therefore essentially magnify the ultimate penetration potential for the concept?

Well, I'm not sure what you're driving at.

You said Canada and we have 2500 restaurants there so then we have about another 1000 to 1200 to go.

You can grow too fast and outstrip your people base and some one's got to be careful.

We're not looking at this in order to build restaurants faster.

What it did allow us to do in the U.S. is it makes a conversion of a Bess Eaton where we did it in 6-8 weeks done very quickly when we bought the Rack's Roast Beef restaurants in Columbus and the Hardee's in Detroit, approximately there was 40 restaurants in each market.

It took us over a year to convert.

So this allowed us a much quicker conversion and training of our people.

Thank you.

Your next question comes from the line of Mark Kalinowski with Smith Barney.

Hey, just wanted to ask about two things.

First wanted to ask about two things.

First wanted perhaps some more information on how the Bess Eaton conversion is going, particularly from a customer's perspective.

Curious what your hearing from the people that are popping into those stores.

And second, just a theoretical question for you, Jack, just wondering what your thoughts are regarding the burger segment.

Do you think that Wendy's, McDonald's and Burger King can do well simultaneously for long stretches of time or is this more of a market share game where there's always going to be or mostly going to be one odd man out?

Thanks.

You know, I really don't think about things like that.

What I really worry about is Wendy's, and we've been in all types of environments for the past 17 years.

And we've had 16 years of consecutive same-store sales increase.

On the positive side, when McDonald's does well, they don't do any silly discounting and things like that, so that's always positive for us.

The reports we're getting from Burger King is the franchisees are not too happy with their sales increases because they're not profitable increases due to couponing.

So we'll see how long that goes on.

Again, my main focus is always building our business, gaining market share and building sales.

As far as Bess Eaton, I think the customers love it.

You know, first of all, we have great products there.

We have soups and sandwiches on the lunch menu.

We have promotional products.

We're going to introduce this small beef in a bread bowl.

Customers are going to love that.

And a lot of comments we're getting that are very positive is two or three areas; one is our prices of coffee for the average cup of coffee is 15 to 20 percent lower, so they like the value.

And the second thing is they see that you know in a lot of cases we're more convenient and we have better-looking restaurants.

You know, I think we'll probably sometime this fall be on TV to start building our business, and we'll probably emphasize you know two or three promotions in the fall.

Sounds good, thanks.

Your next question comes from the line of Howard Penney.

Hi, thanks very much.

Jack, I know you've mentioned the comps in June and I don't know if you're going to get any more specific, but now is the time to ask.

Can you may be talk to the trends in traffic or check relative to the first quarter?

And more specifically, as you headed into June and what was an apparent slowdown, especially in light of the other competitors and your major competitors didn't seem to slowdown as much as you.

So was there something more Wendy's specific as to the check that drove it down?

And the second question is on Baja Fresh.

With the loss being greater this year, and taking in apparent charges, is that it in terms of where you think the assets are impaired or are we going to see more of that as you begin to assess things in the third and fourth quarter?

Thanks.

Well, I'll answer the first one and we'll let Kerrii answer the second one, has that?

You know, I think the whole industry started slowing down in June.

As far as the second quarter, we released information that transactions were up 2.1 percent, average check up 3.8 and price .6, so you know, that's good numbers in any quarter.

You know, I think we gave you the reasons what our take was in the quarter as to the reasons, and you know, -- I mean in June, but I think it was overall was a great quarter.

And you know I'm very positive about the back half of the year.

I can't give you any more information than that because we're still in July.

The one thing we did mention when we were talking to some people, remember -- I think Wal-Mart was at about two percent same-store sales in June, so there was clearly something going on with the consumer beyond Wendy's.

But there is good news, and the good news is consumer confidence remains strong, so we'll see what happens in July, August, and September.

And then to answer the second part of the question, Howard, first of all, you know, as you know, Bill got into place right at the end of March, first of April.

We felt it was important to look at each one of our markets, and we did a -- we completed a market by market review, you know, from the impairment perspective, and we did identify from that review three markets that needed to the impaired, and of course Jack talked about which three that was.

So at this point in time, you know, that is what we've determined is appropriate.

I mean I have to always say that, you know, as facts and circumstances change, and you look at the business result, you know, decisions may change, but I think we're confident today that we've taken the impairment that's necessary.

Operator, we're ready for the next question.

Yes sir, your next question comes from the line of John Glass with CIBC.

Thanks, a question about your financial planning.

As a general matter of practice, at Wendy's specifically, do you ever allow for the possibility of negative same-store sales?

I don't know how to answer that one.

You budget -- we did the best we can at budget, and we said overtime it's -- you know, the financial model says two or three percent, and you adjust from there.

I mean ...

Well I mean but occasionally you'll ...

When you had 16 years of consecutive sales and growth, it doesn't come into mind that you're going to be negative.

Even in a specific quarter, that's not a factor in your planning and then?

Sure, I mean that's why you control G&A, that's why you take some other steps.

Of course, as businessmen you tweak things that you have control over.

Some things we won't do is cut back on customer service or cut back on quality.

We'll never do that, but from the opportunity it sales go a little soft, then yes, you do take advantage of what you can control.

And we're certainly cognizant of you know certainly as we get into fourth quarter, it is more difficult to surpass, you know, and eighth percent f than it is a two, so ...

OK, thank you.

Your next question comes from the line of Joe Buckley (ph) with Bear Stearns.

Hi thank you.

I have a couple of questions.

The release mentions the check increase associated with credit card transactions.

I think 35 percent.

I guess I'm curious what the overall check experience is in stores that have been excepting credit cards.

Are you getting an overall lift in check in those stores?

That's 35 percent, but basically goes from $5.00 to $7.00 on those transactions.

Yes, but I'm talking about overall, if you just take the store and look at the overall mix, cash and ...

Yes, it goes up.

The average check is up for the second quarter, 3.8 percent.

Yes.

That's what Jack talked about earlier.

Yes, average check is up or the quarter 3.8 percent.

Yes, but that's not all credit cards, Kerrii , right?

That's right, that's average total checks.

But that represents -- I mean ...

Some impact ...

Some impact because ...

7 1/2 percent ...

7 1/2 percent of all of our transactions are credit cards or debits, eight now.

OK.

Your next question comes from the line of Harry Miller, with Prudential.

Hi.

I was just wondering if you could comment on Best Eating was it accretive or diluted in the quarter?

And then I have a follow-up.

I think we said it was neutral.

OK.

And then Kerrii , can you put some parameters around the company restaurant operating expense line, how much was from bonuses, and how much was from the Bess Eaton , Cafe Express and Baja expenses that you were talking about?

Hello?

I'm sorry, I'm going to respond to you.

In total, as you well know, company restaurant operating costs were up about $26 million.

A very small percentage of that is Cafe Express, you know, in dollars.

But -- and we generally don't break down by category what the different components are.

As I started out by saying, I think it's important to understand that when you look at company restaurant operating costs as a percentage of sales, Wendy's actually improved.

The dollars went up, but they improved the percentage by 30 basis points.

What you've got to remember is that line -- the dollars are up, but it consists of maybe more company restaurants, so the dollars are automatically going to go up.

Thirteen or 14 more Cafe Expresses, so the dollars are going to go up.

For the portion of the 42 Bess Eatons that were opened, you know up and running from end of May to June, that adds dollars also.

So -- And the Baja Fresh company opening, so you're going to have an automatic increase because you're opening more restaurants, and that takes a certain amount of dollars to run them.

I was just getting at it from a percent of sales going forward perspective.

It sounds like if it's more from bonuses, then in the third quarter you did pay some bonuses last year, it may start to update, is that correct?

In that line item yes, but you're going to have approximately 100 and some odd more restaurants adding dollars to it.

Yes, and hopefully, you know, we all recognize that you're not getting to leverage of some of these costs at Baja with sales decline and hopefully as we continue to improve the performance there, certainly get leverage on this line with their sales.

Right.

OK, and just on the Baja impairment, I think I missed that, what did you say it was going to be in the third quarter?

$500,000 approximately related to lease termination costs.

I mean not that you need the accounting lesson, but you know, if you say why didn't we take it this quarter, you're not allowed to book and expense for termination costs that you have not negotiated nor had you closed the location, so we're just trying to make it clear that you know next quarter you'll see that coming.

Thank you.

Yes.

Your next question comes from the line of Peter Oakes, Piper Jaffrey.

Hi, actually have a couple if I may.

Just kind of following up on Baja, what kind of comps are embedded into the second half performance to hit the targeted operating loss that you shared with us ...

We never disclose that.

OK, maybe another way, Jack, is does that assume there's any improvement in comp in the second half?

Yes.

OK.

Following up on kind of the explanation of the weak sales that you saw in June, it by kind of look at the three items, the nature, it seems like one could identify more on the area of one timer as opposed to something you would expect to continue for some time.

What you characterize -- would you agree with that characterization, Jack?

Well, Memorial Day is a one timer, as we know, OK?

You know, the discounting at Burger King, I mean they did a national mail drop, so that's not going to go on forever, and you know, we do marketing programs that make sense for a balanced marketing program, you know?

Over a year's time, so I don't know if you can call all of them one timer's.

I mean the marketing program is what it is.

You know?

But I do think there's a couple things in there that are one timer's.

Good, thanks.

And lastly if I may, besides e-Pay, is there anything else you can share with us as far as efforts to further improve your speed of service function to the pickup window?

That's just working it everyday hard, and our operators -- you know, we're down to 116 seconds and best in class is 92 seconds, so that's our Dallas market and we can make that a heck of a lot better overall in the system, so keep on doing throughput, you serve great food and you have a clean environment and you're going to increase sales.

You know, we're going to leverage a number of things.

One thing you're going to see is our two-sided grill that's in test, and that really reduces the cooking time of our hamburgers from about 330 seconds to about 85 seconds.

You know, we think we can get a pickup on speed there.

And another thing we're going to cover at our meeting in September, when this is implemented one can save about 20 hours a week of labor times seven, that's $140 a week per restaurant, so it mounts up.

If we can get this thing implemented, it's about $10 million cost savings just on company restaurants.

OK, they're two sided grills, that's the clamshell type grill that we ...

No it's not, it's proprietary technology that we've been working with for over four years, and we're to the point now where we're going to start looking at rollout plans for 05 and 06.

OK, thanks a lot.

And we'll have a lot more details and you'll get to see it in September.

Good, thank you.

Your next question comes from the line of Mark (inaudible) with Morgan Stanley.

I just wanted to focus a little more on the beef cost guidance.

The range you got there seems to imply we're going to see flat to falling beef costs in the fourth quarter versus what you are expecting for the third ...

What we said was back half of the year would be four to seven.

And right now, if you look at second and third, it's about five percent.

And what kind of feedback are you getting from your beef buyers on what they're seeing in the market place that's going to drive that?

I mean it's the input we get from them.

No, just -- you know, if you look at the numbers we've got for each quarter there, it looks like the fourth quarter has to be down to hit that range.

Well, let me look here.

Well, I mean we did disclose that we paid $1.29 in the fourth quarter a year ago and ...

Right now, we're at five percent, so it's $1.29, we get $1.31, it's still within the four to seven range.

OK, maybe other quarters have blended together there, but just looking at the quarter to quarter -- you know, from our side, it looks like it needs to be down.

Well, John can send me the math, OK?

John just got his MBA, so he knows what is doing.

Up to now, we weren't so sure.

OK, and further on the costs side, you know, you indicated you've got some protection there with the chicken because of a longer-term contract.

How much longer does that last?

It goes to the end of this year.

OK, thank you.

Your next question comes from the line of Dean Haskell with JMP Securities .

Good afternoon.

Going back to the Baja question, are there any -- how many markets total is Baja in right now?

Well, I'd have to get the sheet, I think it's 27 or 28.

Twenty-seven it is.

OK, so 27 markets, we're going write-down three of them.

Are the primary best markets still on the West Coast?

No, I think you know there's great markets.

I mean our Washington- Baltimore is a great market.

Our Philadelphia's a great market, so it's not primarily West Coast.

OK, Washington, Baltimore and Philly are good markets, OK.

How many markets would you think are on the bubble out of the 27 -- of the 24 remaining?

I'll just go back to what Kerrii said, Dean, and that is we looked -- Bill looked at every market, and at this time, we thought these three are impaired, and we took it.

So it this time, that's what we believe is right.

OK, and did you say how many units were involved?

I don't remember if you did.

Five.

Five total in three markets?

Yes.

Right, and that completely takes us out of those three markets.

Yes, two Atlanta, two in Charlotte, and one in Tucson.

Thank you very much.

Your next question comes from the line of John Ivanhoe with J.P. Morgan.

I may follow-up on that Baja question.

What were the shared characteristics of those closed markets if any for Baja?

Probably a number of factors.

So you learn from these.

Bill knows what to do.

I mean would you attribute it to just poor operations or you know Charlotte and Atlanta being big competitive markets, maybe it was penetration.

Was it, you know, locations, operations, I mean is there anything ...

All of the above.

OK.

All of the above.

On a completely completely different subjects, and actually has to do with your advertising campaign, and as you've you know had some -- you know, speaking specifically to Wendy's, as you've had some time to you know gage consumer reaction to the new Mr. Wendy campaign and maybe comparing that to the old Dave Thomas campaign, is that -- do you think that's the proper direction for where you want ago, whether -- relative to what your expectations were in test or relative to maybe how some of the competition is doing with getting their brand message out?

Thanks.

First of all, you can't compare campaign to the 16 year Dave campaign that was in place.

I mean it was a one-of-a-kind.

He's an icon, so anything will come up short on that one.

So we just take that one out of the equation.

If you look at the Mr. Wendy campaign, and from the trade magazines and from the consumer research, we feel it's right on, and we feel like that it's going to have some legs here.

It's only right now five or six months old, but all indications look very good.

I mean what would those indications be?

Is it just like recall or awareness?

I mean what's ...

It's recall ...

... brand attributes ...

Yes, I mean it's that and it's also sales.

I mean you've got to say -- you can have all these attributes, but if it doesn't drive sales, then you know, maybe you're not getting the message across properly.

So you know, when you look at how media works, we're pretty happy right now.

OK, Thanks.

There is a follow-up question from the line of Joe Buckley with Bear Stearns.

Thank you.

I had two actually.

I was wondering when you were going to ask me the second one ...

I got cutoff, Jack.

I thought you got bored with me.

That wasn't me, that was Barker .

It figures.

Two questions.

Kerrii, you mentioned a five to $6 million for Baja for the full year.

I just wanted to know if that's operating loss, net loss, you know, what that number relates to.

We intended it to be a segment loss, you know, as we disclose segment, which you know in our financials is basically the income before corporate charge, before any interest, before any income tax, so it is segment loss as we disclose it in our financials.

OK, that implies sort of a breakeven or better for the back half (inaudible) what the segment is for the six months.

Right.

OK, and then Kerrii, another one I guess for you, on the Bess Eaton -- you know, I think it was a 40 -- was there a $42 million investment for the ...

41.6.

OK, just kind of walk through sort of how you thinking of that investment from a return standpoint, and you know, if there's any sort of, you know ... market entry aspect to it in your thought process.

Well, I mean, when we did the financials on the deal, it was a little bit lower than our cost of capital by about 30 basis points.

But we thought this was an investment for the future.

It gave us a foothold into New England.

For us to go develop 42 new restaurants from scratch in New England, that would take a while.

So, we really positioned this as a strategy to enter New England and to build the brand.

And it was close to our cost of capital.

Certainly it's not going to hurt us, 42 restaurants, to do it this way.

OK, thank you.

Hey, Joe, I do want to clarify one thing.

As you know, when we report segment income, we call it development brands.

That includes both Cafe Express, which does have a small loss, half a penny or something, generally.

So I just want to make sure it's clear, because year to date, we have recorded 6.7 million.

And as I talk about the segment loss for Baja, the five to six would just be Baja.

OK, yes, I know.

I saw the footnote on Cafe.

Thank you.

I just want to make sure it's clear.

Thank you.

At this time, there are no further questions.

Mr. Barker, are there any closing remarks?

Other than thank you all for joining ...

Thanks, everybody.

And we'll talk to you soon.

If you have any follow up questions, you can reach me later tonight or tomorrow.

This concludes today's Wendy's International conference call.

You may now disconnect.