Wendy's Co (WEN) 2004 Q3 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Wendy's International quarter three results 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 than the number 1 on your telephone keypad.

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

Thank you.

I would now like to turn the conference call over to Mr. Barker.

Please go ahead, sir.

Thank you, good morning, everybody.

The purpose of our call and webcast today is to discuss third quarter business results for 2004, some key initiatives at each of our brands and management's outlook for the rest of the year.

We published our third quarter results yesterday.

Our corporate news release and the financial statements and other investor information is available on our website which is www.wendys-invest.com.

You can find that there or you can contact our Investor Relations department if you still need a copy.

From a disclosure standpoint note that our earnings release includes the income statement, a balance sheet, our revenue and operating income by segment, our system-wide restaurant unit summary and some key ratios.

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

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

Before we get started let me update you on just a few things on our IR calendar.

We do publish our October sales results and that will be on Wednesday, November 3.

The accounting period for October ends on October 31.

For future reference please note that key disclosure dates are listed on the IR website.

Now I'd like to refer you for just a moment to the Safe Harbor statement that is attached to the company's 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 and development is forward-looking.

Various factors could affect the company's results and cause those results to differ materially from those expressed in our forward-looking statements.

Some of those factors are set forth in the Safe Harbor statement that is attached to the earnings release and our most recent Form 10(Q).

I would also like to note that we are webcasting today's conference call in accordance with Regulation FD.

The regulation encourages public companies to discuss potentially material information in a public forum.

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

And finally some of our comments today may reference non-GAAP financial measures in the event that we reference these non-GAAP information a reconciliation to the most directly comparable GAAP financial measure will appear on our website as mandated by Reg G. Now let me turn it over to Jack.

Thanks, John and certainly good morning, everyone, and thank you for joining the conference call.

Yesterday we announced the overall financial results for the company and let me give you an overall review of third quarter.

We produced record revenues and income and we accomplished these results despite the weather challenges that we told you about last month.

Revenues in the third quarter were up 13.3% totaling 914 million.

And year-to-date our revenues are 2.7 billion and that's positive 16.2%.

For the third quarter net income 69.1 million up 4.2% and then year-to-date 193.5 million and that's up 12.9%.

EPS for the quarter 60 cents up 3.4 and year-to-date we are at $1.67 and that is up 12.1%.

This was achieved due to strong sales momentum at Tim Hortons in Canada and the U.S. and Tim's does represent about 44% of our business.

Performance at Wendy's was good considering the challenges from the hurricanes and rising beef cost and we continue to address the challenge at Baja Fresh with new menu initiatives, leveraging food and labor tools to drive P&L improvements.

Let me move on to discuss our core businesses.

Wendy's North America, as you know, our comps were positive in the third quarter.

They did turn negative in September due to some key factors that we've discussed, hurricanes and increased competition and discounting, new product introductions and extended late night hours.

A couple key initiatives we had during the quarter, we introduced in July on national media the home style chicken strip salads and also in August we tested two new salads, the Spicy Tai Chicken and the Mediterranean Chicken, both doing quite well.

In the fourth quarter to date the sales challenges have been more difficult than anticipated with 7.6% comps in October of 2003, and increased competitive convergence.

This resulted so far in October that Wendy's same store sales decline are in the 6% range.

But we continue to focus on operational excellence.

For example, our pick-up window performance was just ranked number one in average service times by QSR Magazine and that's the sixth straight year we have won this award.

We also had many new product initiatives in place during the fourth quarter.

Wendy's will promote Kids Meal Combo Choices and then next week start Home Style Chicken Strips and then end the year with a Wild Mountain Cheeseburger and Wild Mountain Chicken Sandwich featuring our spicy chicken fillet.

Both the strips and the Wild Mountain have performed very well in the past.

Fourth quarter test products include our Ultimate Grill Chicken Sandwich, 2 new flavors, Bacon Swiss and the Sun Dried Tomato and Garlic Chicken and so far it's been received very well by the consumer in our test markets along with our fresh fruit salad that's an entree sized platter or a cup.

From a product standpoint I believe we are very well positioned for next year.

And along with the test products we are continuing to do research in testing on a creative combo that I think will be a big idea for us.

At Tim's very strong overall sales and earnings performance continued, especially strong momentum both in the U.S. and Canada.

New product promotions in the third quarter included a new egg salad sandwich, strawberry bake goods, cookies, doughnuts and steeped tea.

The Tim's brand continues to gain leverage in both Canada and the U.S.

In Canada, Tim's recently ranked number 1 out of all QSR chains with 26.7% of customer traffic.

This is nearly 10% higher than the next closest competitor, McDonald's.

We are also excited about Tim's growth in the U.S. as we recently announced our goal of 500 units by the end of 2007.

Currently we have 233 Tim's in the U.S. and we expect to have about 260 by year-end.

You know, we have many competitive advantages at Tim's in the U.S.

First, it's a great cup of coffee.

Second is our coffee prices are 15 to 20 cents -- 20% per cup lower than the competition.

We have 24 hour operations, drive-thru windows, all day fresh baked goods, expanded lunch menu and modern, updated restaurants and this gives us confidence moving forward with Tim's in the U.S.

Fourth quarter promotions at Tim's will include Hot Chicken and Roasted Pepper Sandwich, and that's really Tim's first hot sandwich offering, along with our Beef Stew in a Bread Bowl, fourth quarter looks to be another strong one for Tim's.

And then during the holiday period we will be offering a special commemorative 40 year anniversary coffee products.

At Baja we grew revenues 13.6% during the third quarter to 45.7 million.

While same store sales were disappointing we have weaned ourselves from the high discounting of a year ago which will hurt comparable store sales in the short-term but improve profitability in the long run.

Baja posted a third quarter loss of 1.6 million and in these results included lease termination costs to close a total of 5 stores in 3 impaired markets and severance related to moving certain functions to headquarters in Dublin as part of our shared services strategy.

Key initiatives improved our P&L at Baja.

Theoretical food costs decreased -- helped decrease the cost of food by 90 basis points and our new labor guideline metrics helped lower labor costs by 90 basis points also.

The total savings from these food and labor initiatives in the quarter was $780,000 versus a year ago.

And we are beginning to see the results from the tools we are giving our operators.

As noted in the release we will evaluate our Baja markets in the fourth quarter and we may close several stores.

We cannot offer any more specifics until the review is completed.

We are also making changes to enhance the total dining experience.

On November 9th Baja will roll-out several news products, two new salads, the Chipotle Glazed Chicken Salad and the Chili Line Chicken Salad.

And also we are introducing 4 new kids meals, the Mini Quesadilla, Chicken Taquitos, Kids Nachos and Mini Bean and Cheese Burrito.

And all these offerings will come with a side of apple sauce and a side of rice with a choice of either juice or soda.

Also on November 9th we will be rolling out our redesigned menu boards for ease of use.

Baja also began phase 1 of store redesign program during the quarter to make the store interior more comfortable and appealing.

This is just the first wave of a number of initiatives we will introduce over the next 18 months as we leverage the enterprise resources to enhance the overall consumer experience dining at Baja.

We are all confident about the future of Baja Fresh.

We are aggressively addressing the business issues and we are definitely making progression.

Let me touch upon the balance of the year.

As you noted -- as we noted we are revising our 2004 EPS goal.

We are basing this revision on our fourth quarter sales trends to date at Wendy's and the new estimate is a range of $2.19 to $2.25.

This is a 7 and 10% increase over 2000 earnings of $2.05 cents per share.

We are not going to overreact to the short-term challenges we are facing.

We will continue to keep a tight lid on G&A.

We will move forward with our long-term strategy and we will not jeopardize the health of our business for the sake of short-term gains.

Historically aggressive discounting has proven to be a short-term strategy that is not sustainable.

We know our franchise partners don't like it either.

Now I would like to talk to you about our most recent analyst day and two other enterprise initiatives.

Many of you attended our analyst meeting here at Dublin, Ohio, September 29th and 30th.

We had a chance to meet with many of you and we highlighted our long-term strategies and innovation at both Wendy's and our Tim Horton brands.

We showcased our new store designs at Wendy's, the simple and fresh design, and the Tim Hortons/ Wendy's combo unit along with our redesigned Tim Hortons unit featuring the cafe style interior and par-baking process.

And we sampled many of the new food items from both Wendy's and Tim's and we received many positive comments from all of you and we would just like to thank you -- those who made the effort here for the event.

We also announced we made an additional $4 million investment in Pasta Pomodoro.

That's our California based Italian dining chain.

We have a total of 44 restaurants in California and Arizona.

It has high quality, contemporary, fresh Italian food.

We made an initial investment a few years of $12 million for 25%.

We now own 29% of the chain on a diluted basis.

A couple organizational changes.

Kathy Chestnut, the EVP of Research and Development is taking on an enterprise roll.

She will focus on identifying food trends, consumer insights, new concepts and driving synergies across all brands.

She will be revising, along with Bill, working with Bill Moreton, the Baja Fresh menu.

And Lori Estrada, who worked for Kathy Chestnut, as our VP of R&D will head Research & Development reporting to Tom Mueller.

Lori will focus on Wendy's comprehensive menu strategic.

Despite the challenges we are facing just want to emphasize their year-to-date performance has been solid, we're focusing on operations and cost controls for the remainder of the year and we will continue to bring innovative new products to the marketplace and implement our long-term strategies.

And now I would like to turn it over to Kerri.

Well, thank, Jack.

I just want to note several items as we discuss the quarter.

This is the second quarter that our income statement has been impacted by FIN 46 which does mandate the consolidation of 78 of our Tim Hortons franchisees and our results.

And, again, although this does not impact our operating income it does have an effect on certain line items such as retail sales, franchise revenues, cost of sales, company restaurant operating costs and other income.

Also Cafe Express is included in our consolidating reporting this quarter, as you remember we own 70% of it now and last year it was in the other income line.

The Canadian dollar did average 1.31 this quarter and that's versus 1.38 in the third quarter a year ago and that of course impacts all the lines of the income statement.

And lastly the company did expense restricted stock this year that we granted to our employees and that impacted earnings in the quarter about a penny a share.

So far the third quarter of 2004, which ended on September the 26th, as Jack has said, we produced record revenues, income and earnings per share.

Jack's already talked to you about the third quarter revenues.

You've got the same store sales in the press release so let's talk about new restaurants.

We opened up 107 system-wide during the quarter, that was 61 Wendy's, 38 Tim's and 8 Baja Fresh restaurants.

And net income increased 4.2% to 69.1 million and diluted EPS was 60 cents a share, up 3.4% compared to 58 a year ago.

Our earnings growth resulted primarily from the strong increases at Tim Hortons' new store openings and, of course, good management of cost throughout the organization.

However, Wendy's did experience certain challenges both in same store sales as well as food costs.

Our earnings were positively affected by about a 1 cent per share from the improvement of our corporate tax rate.

Our tax rate this quarter and throughout this whole year has been 36.5% and that's compared to last year's third quarter of 37.34.

And of course it was higher than usual last year because of some state tax rate increases.

The tax benefit was, however, offset by the currency impact.

Earnings in the quarter were positively impacted by currency about 2.5 cents per share but this was less than the 3.5% that we recorded last year.

Also impacting earnings, of course, is the 1 cent per share expense of stock options, I mean of restricted stock brands.

Now, let's talk about the operating margins of our business.

The enterprise operating margin was 13.1% and that's below the prior year operating margin for the third quarter of 14.4%.

I want to breakout the components of this 1.3% decline. 90 basis points came from what happened in the Wendy's business. 20 basis points came from Tim Hortons and about 20 other basis points came from corporate expenses.

Now Wendy's operating income was 70.9 million and that's down 1.9 million from a year ago and the operating margins were down about 130 basis points.

Operating margins were 11.6% compared to 12.9 the prior year.

The income and the margin decreases really resulted from a combination of factors: Higher beef cost which we talked about, you know, and gave guidance for early, and some other food items, as well as the sales impact of the recent hurricanes.

Operating income at Tim's was 66.8 million.

It was up 10.5 million from a year ago but the operating margins were 26.8 compared to 27.6 in the prior year.

That 80 basis point margin decline resulted primarily from the startup expenses that we have incurred related to the Company's expansion in the United States.

And then corporate expenses contributed the additional 20 basis points in the G&A area and that includes restricted stock, which was really the biggest driver, along with some adjustments to legal reserves.

Now, let's take a look at the key lines of our third quarter income statement.

Cost of sales of 483 million, that's 65.1% of retail sales and as a percent of sales that's 80 basis points higher than last year.

Again Wendy's food cost is driving this increase with the greatest impact coming from higher beef.

And that -- I'll tell you the good news was that that increase was partially offset by slightly lower store labor cost in our Wendy's Company stores which were actually 20 basis points lower as a percentage of retail sales than a year ago.

Company restaurant operating costs were 160 million and that's 21.6% of retail sales.

As a percentage of sales that's 50 basis points higher than a year ago.

And, again, this increase was impacted by lower than expected sales at Wendy's and Baja, the 42 new Tim Hortons units in New England which are Company operated and then the consolidation of Cafe Express.

Operating costs were 36.8 million and that's 4% of total revenues.

As a percent of sales it's the same as last year but the year-over-year dollar increase of 4.3 million is really due to the higher rent expense due to the increase of the number of properties that we lease to our franchisees at Tim which is a result of their growth and their higher sales.

Depreciation increased 6.1 million versus a year ago to 46.6 million, primarily due to the increase of the addition of the new restaurants.

As a percentage of total revenue depreciation is up about 10 basis points over last year and that's due to accelerated depreciation on the grills and some of our story remodel activity.

G&A expenses were 70.4 million and that's a 30 basis point improvement as a percentage of total revenues over the third quarter a year ago.

And as Jack said we continue to focus on controlling overhead during the quarter while continuing to make investments to grow the Company.

On the other income line we produced 2 million in income compared to 900,000 in income a year ago.

The other income and expense line typically includes such items as the income from the Tim Hortons joint venture, par baking plant with Cuisine de France, adjustments to legal reserves, currency adjustments and other nonoperating items not as a part of our business -- primary business.

For the third quarter the line also included the Baja Fresh lease termination fees of about 500,000, we had talked to you about them in the second quarter and we closed those stores in the third quarter and recorded those fees, as well as previously disclosed net increase in legal reserves related to the settlement of litigation.

From a balance sheet perspective we've repurchased about 33,000 of our common shares in the third quarter from 1.2 million and then already in the fourth quarter we have repurchased 100,000 shares.

That brings our total repurchase activity for 2004 to 2.2 million shares and that's $83 million through the end of the third -- through the end of -- currently and we have 282 million remaining under our repurchase authorization from our board.

Given that our cash position was very strong at the end of the quarter.

We ended with 205 million on our balance sheet.

From a dividend perspective the board declared, as you know from the press release, our 107th consecutive quarterly dividend which will be paid on November the 15th and that payment will be 12 cents a share.

As Jack mentioned we have revised our 2004 annual EPS estimate to 219 to 225 which is lower than our previous estimate of 225 to 230 but still represents a 7 to 10% increase over the $2.05 from a year ago.

That estimate reflects a solid year-to-date performance.

And as you know we are facing some year-to-year -- year-over-year challenges in the fourth quarter.

Although we are facing these challenges we have controlled costs effectively throughout the organization and will continued to so the rest of the year.

The strong sales momentum at Tim's continues both in Canada and the U.S. and our unit development is on track.

Our long-term annual EPS growth goal continues to be 11 to 13%.

So at this point I would like to turn it over to John Barker who will begin our Q&A.

Operator, if you could ask listeners on line to queue up for questions we are ready to take Q&A now.

(Caller Instructions) Your first question comes from the line of Larry Miller with Prudential Equities.

Hi, just a question on your guidance.

You know, we are into the fourth quarter and it's a pretty wide range, can you help me understands what the ends of the range might assume?

Thank you.

First of all, I think, some of the sales decline was, in the quarter, was unexpected.

And we still have some uncertainty in pricing in the near-term so we believe sales will stabilize but we need to give a range that we are comfortable with.

Okay.

Thank you.

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

Hi, 2 things I wanted to ask about.

First just wondering if recent sales trends have caused the rethink of the Mr. Wendy advertising campaign?

And second just wanted to ask about the expensing restricted stock grants, if you could remind me how that will impact 2005?

Thanks.

First with, Mark, with the Mr. Wendy campaign, you know, we started it at the beginning of the year and as you know our first half results were quite strong.

So I don't think, you know, some of the sales softness really attributed to our advertising campaign.

And in any campaign that you have you do tend to tweak it from time to time.

When we are on the 10 year run with Dave Thomas we tweaked it from time to time and I suspect we will tweak Mr. Wendy from time to time.

And then from a restricted stock perspective, Mark, okay, this year we had 3 quarters, not even 3 full quarters I would say, 2 and a half, of expensing this year on this year's awards.

Next year we will have a full year of this year's award and we'll also have about 2.5 of the awards we will make into the new year.

So you have got kind of a multiple impact.

You just don't have -- to this point we've had about 3 cents impact.

Next year you would generally expect that to be at least double, if a little more.

Okay.

Thank you.

And part of it depends on the price of the stock at the time they are awarded which is how you determine what the expense will be.

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

Hi, guys, two questions.

What's your early assessment for beef costs for the first quarter?

Looks like the comparisons get a little easier there?

And secondly, can you give us help in guessing the potential margin impact from the double sided grills both in the roll-out phase and post roll-out?

Thanks.

On the double sided grill will give us a reduction in labor hours of about 20.

So -- and our average hourly rate is $7.19.

But then it's going to be a roll-out that's going to really last over 2.5 years.

So you don't get the full benefit from day 1 but over time.

When we are in New York, I think in February, we will have a little bit better, and I know we will have a handle on the rollout and the impact each of the next few years.

Then from the beef perspective, as you well know, we've pay a $1.34 in the first quarter of 2004 for beef.

And we are paying today $1.39 in the fourth quarter.

I would -- what we have said from an expectation is that we believe beef will be, you know, flat to slightly up next year but you will see a lot less volatility than we have experienced this year quarter by quarter.

We didn't hear that, operator.

David, you may continue.

The double sided grills, are you rolling those out market by market so the Company stores get them at the same rate over the next 2.5 years?

We are still working the roll-out schedule but what we will do is we'll roll-out whole markets at a time.

So for instance, if Pittsburgh is on the schedule, Pittsburgh is mainly a Company market along with some franchisees, the whole market would get it at the same time.

Thank you.

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

Thank you.

I have a couple of questions, as well.

Jack, it seems like any discussion of sales you've broadened the sources of potential weakness to include competitive conversions and I'm assuming by that you mean McDonald's and maybe even Burger King, you know, mimicking a lot of the things that Wendy's has been successful with.

Curious if you'd talk a little bit more about that and how long you think that impact might last?

And then I had a question on chicken.

I thought your chicken contract expires at the end of this year and just what you're thinking in terms of '05 year-over-year comparisons on chicken costs?

On the competitive convergence, Joe, I mean, it's no secret that not only Burger King and McDonald's but a lot of the regional players over the last 18 months have introduced upgraded products, salads, McDonald's is advertising right now their version of our chicken strips.

As you know they've done salads.

Burger King has done some discounting, some major discounting in September and October.

So I think it's just the force of these and, you know, we feel that we have a good strategy of differentiation and we will continue that.

We have some products in the pipeline that would be very difficult for our competition to duplicate.

So we will continue to move along those lines.

Innovation, we are working on inside service times.

The remods, the grill that will save us 20 hours.

So I think we just continue have to get after the differentiation and meeting consumer needs in a better way than our competition.

Any thoughts on when some of those new products might come out of the pipeline in '05?

Yeah, we have definite thoughts but I'm not prepared to discuss it right now.

I can tell you what we like.

I think we are setting up well.

This create a combo is testing very well and the competition can't duplicate it.

They don't have chili.

They don't have baked potato that can be substituted for french fries.

The entree fruit salads' working very well.

Our ultimate grilled chicken, 2 terrific products would be hard to duplicate.

So, you know, these are just a few.

They are being finalized in test and going to be put on -- in the cupboard and we will pull it out when we feel it's necessary.

But I like it.

And then, Joe, to you -- to answer your question with respect to the chicken, we are currently negotiating our contract, as you point out, we've been on a 3 year contract.

I think we all know we've seen some improvement in chicken prices from what they were earlier this year if you were buying in the market and I think we are feeling pretty confident, you know, that we -- any cost increase is going to be manageable.

Remember, Joe, it was a very, very good corn crop this year which will help input costs.

Yes.

Okay, thank you.

Your next question comes from the line of John Ivankoe with JP Morgan.

Thanks, hi.

My question is on Tim Hortons in the United States.

Firstly -- first if you could talk about the conversion of the best seating units to the Tim Hortons brand and what happened to the volumes, or what's happening to the volumes of those units because we do know they started fairly low and whether there's any success in franchising those markets or that market that you bought.

And a related question is how long, in your opinion, will the start up costs at Tim Hortons in the United States be negative on a year-over-year basis as you continue to build out the brand here, thanks?

Well first on the conversions, they are all converted.

We've added our lunch program.

We are starting to see some volume increase there.

We've gone on TV, I guess it was 2 weeks ago, to advertising lunch.

We advertised coffee in September to build awareness.

And, you know, it's going to take a little time.

The volumes are up but they start at a low level and we've had it for about really 4 or 5 months.

You know, the year-over-year, I mean, you are going to have increased costs really for the first 12 months within your statements.

And that was our expectation when we purchased it from a franchising perspective, John.

It's not our intent at this time to franchise this market until we get it up and operating really for the next couple of years.

And so it was part of our overall strategy.

However, I will tell you that we believe that our other markets are certainly help, you know, helping to offset that in the U.S.

So I think we've -- .

I mean, for instance, our Buffalo market, 48 restaurants, they are going to average around 1.6 million this year and that's U.S. dollars.

So we see the rest of the U.S., Detroit and Columbus going to do about $1 million average this year.

So these volumes are getting pretty hefty.

My question in start up costs wasn't just related to best seat in New England but perhaps, you know, longer term.

I mean, in otherwards, is this a multi-year issue where --- you're aware that you have the start up costs in the United States and various markets and obviously you need to get to 500 now -- .

The start up costs would be related, I think, more in -- if you bought third party real estate had conversions.

If we went into a new market and built 3 restaurants the start up costs would be on par with what you would have normally any way.

You know, we are going to open -- to get to 500 restaurants by '07 you are going to have to open 80 restaurants.

This year with the new builds and also the conversion it's going to be up around 80 restaurants.

So you are going to have apples-to-apples on new store start up costs.

And just one last question on that.

Of those 80 restaurants a year what percent Company, what percent franchise?

Most of it will be franchised.

But in the New England market it will be Company and the reason we are keeping it so we can make more rapid progress faster because we have total control over those restaurants.

And then when the volumes get to the level we will start franchising.

Okay.

Thanks.

Your next question comes from the line of Peter Oakes with Piper Jaffray.

Peter?

Mr. Oakes, your line is open.

Hi, good morning, Jack.

You've implied here again this morning that BK has stepped up their discounting and I was curious if you could share with us what exactly do you mean by that because on a national basis I really wasn't aware that they had any --

Well, it's a lot of local discounting.

For instance, just got a thing from the Toledo market, buy a Whopper, get one free, all their offers were revolved around the chicken and the Whopper, buy one get one free.

Then they put out -- I know in Columbus here they did a big insert in the Sunday paper about a month ago.

And normally coupons are staggered with expiration dates.

These were good all the way through November 2.

Okay.

I know when we talked competitively historically you have viewed, you know, Burger King and McDonald's kind of going after each other, yet, you know, looking at McDonald's numbers it's pretty much been bullet proof.

Why do you think, you know, at this juncture it seems to be coming more out of you than it would necessarily out of McDonald's or even some of the other regional folks?

You know, I just see this as more short-term right now.

I mean, if you would look at, you know, what McDonald's has done, there's no question that, you know,they've upgraded their offerings.

And if you look at salads, I think we have a higher quality salad but, you know, to some people their salads are now acceptable.

We had a very strong chicken strip launch last October.

They are doing it this October.

So, you know, I think it's short-term.

We will continue to work the innovation, the new products and the operations.

On the one thing that, you know, we haven't really seen a whole lot of improvement from McDonald's is really the state of their tired buildings and also some of their operational attributes.

Okay.

Is there any indicators out there that suggest that Wendy's system has had some erosion in its operational execution?

We looked at our latest attribute ratings.

We are number one in 45 of 56 and that was actual up a couple points.

Our service excellence continues around the same run rates that we've been running in the last 6 months.

All those type of metrics, nothing points to this.

Okay.

Then lastly given what's going on with tomatoes, are you at risk of any of your salad inputs causing you to shift how the salad prospects might look down the road?

Thanks.

No, tomatoes is short-term.

I mean, we will be out of this when the California and Mexican crops come in in December.

So, you know, the tomato crops rotate between Florida, California and Mexico.

This is strictly a short term phenomena.

Okay, thank you.

Your next question comes from the line of Janice Meyer with CSFB.

Hi, thank you.

Good morning.

Hi, Janice.

Hi, there. 2 questions on the product development side.

A lot of what you're talking about is not hamburger product development but still in chickens and salads, I was just wondering, you know, what your thoughts are on the burger, you know, sort of product line itself?

Is there, you know, do you still see less opportunity to build sales there versus other areas in the menu?

And then, you know, how do you make sure you're not neglecting that core burger customer in that core business?

And the second question is, you know, given the -- you know, your competitors copying you and your sense that you need to focus on more unique products that they can't copy, if you have to, you know, sort of step-up the product initiatives, you know, how are you going to make sure you've balanced the menu size going forward?

Let me start first with the hamburger advertising, our hamburger.

Janice, one thing that, you know, we know we all have our national logo pillars and emphasis.

Layered above that that a lot of times people our ages don't see on TV because it's appealing to the younger, youth market, is a whole year of hamburger equity advertising.

So we do stress hamburger all year long and in different ways.

For instance, Rolling Stone Magazine and other media outlets that attract younger people.

If you look at how we've really approached our menu strategy over the past few years, we looked at the salad lineup and redid the salad lineup.

We looked at our chicken lineup and came with Chicken Temptations and the new grilled chicken.

We are also looking at our hamburger lineup.

And some of the things that we talked about at the analyst meeting, you know, different bread carriers for our products like Focaccia roll, that could play a role in the future of some of our hamburger products.

We have also mentioned the double sided grill, Janice, that will produce a product that --

Is better.

very good.

So we are looking at it different ways and we are not going to walk away from the hamburger, that's the bread and butter.

And in terms of the menu size?

Again, it's how you approach it.

When you have promotional items, they are on the menu for 8 weeks and comes off the menu for 8 weeks.

When we look at our salad lineup, you know, we have a good idea that we may want to change what our core offerings are in the future and you do your 4 strongest salads.

So you keep it manageable.

Okay.

Would you say that the menu size right now is optimal?

I think we are comfortable with it.

When you have improvements in productivity and equipment like the double sided grill, it could give you a range that you could do more things and room to grow.

I mean, really what the two-sided grill has done for us has really unlocked any capacity issues we may have.

Okay, thanks.

Your next question comes from the line of Mark Wiltamuth with Morgan Stanley.

Hi, Mark.

Hi, good morning.

Wanted to focus a little more on the October comp and if there is some way you could parse out how much of that negative 6 was just the effect of lapping the difficult year ago and how much was due to the discounting and other near-term pressures?

Well, if I could do that I would quit my job right now and just bet on every sporting event and I'd win.

It's going to be a great series between the Sox and the Cardinals.

That's really difficult.

I mean.

Well, if you'd stated the June, July run rates -- .

I can't get there, Mark.

I'm sorry.

Okay.

Was the decline mostly traffic?

It's traffic, yes.

Okay.

Thank you.

Your next question comes from the line of Andrew Barish with Banc of America Security.

Hi, Andy.

Hello.

Question on the Baja stuff.

Can you give us a little more flavor on the new menu boards that will be going up?

I imagine you are going to eliminate a significant number, kind of regroup, I guess, to sort of combat that Baja stare that people tend to get when they walk in and see that cumbersome menu?

You named it correctly, the Baja stare.

And Bill Moreton really coined that phrase after he made his first trip, he said, we got to get rid of that Baja stare.

You stole it from him.

But, it's really going to be more readable.

It's going to separate chicken and steak products.

It's going to have headings that are easy.

The two new salads are really distinctive tastes.

I mean, I'm real excited about these.

And, you know, we have a whole set of initiatives that we are going to put in place over the next 18 months.

This is just the first wave.

Then as I said, we have 4 kid meal offerings, really good products for the kids.

And all that comes with a side of rice and apple sauce and choice of drink.

Do you know the general price points on those kids meals, Jack?

In the $3 range.

Thank you.

Your next question comes from the line of Cun Foman with Omega Advisor.

Just a housekeeping question, do you think we might expect a write down of good well associated with Baja Fresh acquisition?

Every year for the past, I know since I've been CEO, we've reviewed impairment for all of our businesses and we usually do that in the fourth quarter.

We are very encouraged though by the improvements on the margins from Baja.

So, you know, we are still have to go through the review but we are feeling good about the progress we've made.

Thank you, Jack.

Your next question comes from the line of John Glass with CIBC.

Thanks.

Just a couple of quick followups if I could.

The 6% in October, again, how much of that was due to the lack of the Chicken Temptations promotions or is that not yet captured?

I think that's hard to say.

I mean, you know, we introduced Chicken Temptations in May and had good results.

When we put it on our calendar for October it would be our second emphasis and it was about the strongest thing we could come up with and it was our first choice.

That's not to say that Chicken Strips and Wild Mountain aren't good promotions.

They will be but Chicken Temptations was our first choice.

When was it supposed to start/started?

Two weeks ago.

Okay.

And then just to clarify, are you assuming that sales trends improve in the fourth quarter, stay where they are from current levels?

We would suspect that they would improve.

But remain negative?

They would improve -- I mean it's a moving target.

I mean, it's hard to really pin it down right now, John.

I think we can safely say they are going to be improving.

Okay, thank you.

Your next question comes from the line of Matt Difrisco with Harris Nesbitt.

Hi.

Jack, with regards to the promotional schedule, it looks like it's somewhat chicken skewed.

On a year-over-year basis how is that going to have an effect on your mix for your -- the cost of goods sold if you were to get a substitute and let's just presume flat traffic and someone went from chicken to a burger, is that emphasis going to actually have a lower gross margins or higher COGS, if you want to talk about it in those terms?

We really don't look at our business in those terms.

We are in the business of driving traffic and if you drive traffic you are going to get tremendous leverage on your sales.

So the products we put in are high quality and we really don't go marketing activity because of margins.

We do it what's going to drive traffic best.

And Chicken Temptations, it was a new product launch so you had -- we want to come back and advertise it and Chicken Strips are a great product.

And we advertise hamburger all year long.

And Matt, the Wild Mountain is both a cheeseburger or a chicken.

Okay.

Yeah.

But is it a correct presumption to make that your gross -- your COGS are higher on your -- the cost of goods sold for a chicken dish are higher?

I would have to get back with you.

I mean, you know, sometimes we get wrapped up in percentages that sometimes you like to take more dollars to the bank than percentages.

That's what usually happens to chicken.

Okay.

And then just on a followup -- .

You know what, the biggest index the franchisees really judge on, it's the CIP index.

Okay.

As a followup are you going to be featuring, I guess, show the food more within the advertising as you talked about tweaking with Mr. Wendys?

Should we expect to see that?

I think that's a good statement.

I mean, you know, at Wendys it's always about the food and to the point where we can talk about it and make a good comparison we will.

Thanks.

Your next question comes from the line of Howard Penney with FBR.

Good morning, Howard.

Good morning.

Thanks for taking my question.

Is there any chance, and I know this is going to be a difficult question to answer, but is there any chance that you can make some very serious and difficult decisions regarding Baja Fresh and reallocate some capital from that business to the Tim Hortons U.S. business which is showing far better returns than the Baja business?

Right now, you know, we have a great balance sheet and lots of cash and as we've really said in the past few years, we are very fortunate that we have capital to build new restaurants at a run rate of 550 to 600, repurchase our stock, make investments and increase our dividends.

Right now Tim's is going -- by the end of the year we will have 260 restaurants.

If we build 80 a year to get to our 500 in 2007, that's a 33% growth rate.

And we certainly don't want to outstrip our people base in order to grow more restaurants.

So that's a delicate balance.

So, you know, really what you're talking about is capital allocation.

We have enough to do it all but we don't want to allocate so much capital to Tim's U.S. that we outstrip the people base.

I think in essence, though, Howard, we really already have reduced our capital allocation to Baja.

I think we've been pretty clear that this year we would only open about 40 restaurants and generally about 50% of the restaurants are Company.

If you look at that and say we are opening up 20 Bajas this year and we're opening up 80 Tim's and of the 80 Tim's 42 were Company right out of the gate, you know.

So from that perspective I think we already have reallocated our capital this year and as you know we -- one of our whole focuses on Baja was to slow development and when do you that it's really almost a 18 to 24 months getting it geared back up again.

So I don't think you are going to see us come out of the gate next year with big numbers on Baja just because we've had some margin improvement in the quarter.

You are going to see us get the business stabilized and then reinvest and you are going to see more of that occurring in 2006 and 2005.

Howard, if you look at quarter's store opening schedules for Tim's, it was just a few years ago U.S. was opening 25 to 30 units.

So, I think Kerrii put it well, we've done it.

I guess I was thinking more along the lines of maybe going the other way with Baja Fresh and instilling the shrink to grow phenomena where you are actually going to get this down to a core group of stores where -- .

Oh, okay, I'm sorry.

You know we have, you know, the past 2 quarters have had some store closures.

So, you know, we are revaluating every quarter.

Thank you.

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

Good morning.

Hi, Dean.

A question that we did not get into at the analyst meeting that you held in September, does the double sided grill -- excuse me, not the double sided grill but the new grill format, does that change your opinion or potential for breakfast?

Not really.

I mean --

So breakfast is still not something you are looking at on a go forward basis?

Let's say the new grill would not prohibit us from introducing breakfast.

But it's not an advantage in breakfast?

No, because -- no.

Okay.

I mean, I don't know how you cook an egg with a two-sided grill.

No, I was more referring to your parallel cooking process next to the grill.

Oh, no, it's not -- it's not -- it won't inhibit it.

It won't inhibit it?

Thank you.

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

Thanks.

With your -- with your stock down in the low 30s does share repurchase move up the list in terms of capital investment priorities?

In other words, what would keep you from dramatically stepping up your share repurchase from relatively low levels we saw in the recent quarter?

I guess that's for Kerri.

Yeah, David, I guess a couple things.

One is I think we've been pretty clear that our intent is to help offset dilution.

And as Jack's already said we are fortunate that, you know, we have an extremely strong cash position.

I mean, I would say we think the stock is a very, very good value and we look as we focus on next year and know that we need to offset dilution.

It's certainly an opportunity and with our cash position we will continue to look.

But, that's -- you know, offset dilution is our focus.

And we've already passed that this year so anything we are repurchasing is over and above.

Okay, thanks.

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

Hi, good morning.

The question with respect to your store base at Tim Hortons, your store count seems to suggest that you've had more store closings than you've had in the past.

Number one, can you, I guess, just confirm it and, number two, can you just speak to as to whether it's really a one-year thing or are we looking at something where we should be modeling more store closures is the future, maybe replacing more mature stores, et cetera?

I guess, Dennis, what I would say is I don't think they've had any more -- a lot of times it's leases that, you know, run out and you don't want to renew or different things.

We didn't have anything unusual.

I would tell you they are a little slower in growth this year.

They are going to have a lot going on in the fourth quarter compared to last year and it was just a, you know, just different real estate opportunities at different times but no, you know, no systemic concern from our perspective.

If you look back historically, Dennis, and I can send you the schedule, they have had, you know, regular closings year over year, I mean, it's part of the system turnover.

It just appears like -- I mean, I'm getting 63 from your numbers which is double what it was for 12 months last year.

Well, for the quarter, I'll send you the schedule, but for the quarter it was 35.

Okay, thanks.

Okay.

Your next question comes from the line of Janice Meyer with CSFB.

Hi, thanks.

Question on the E-Pay now that you've had it for a while, you did note in your release that the average check is much higher than the cash.

In your experience is that just the higher check customer moving from cash to credit card or do you think you are seeing incrementally a higher average check in your business?

And could you just contrast maybe roughly the components of the comp, the 2% comp you saw in the third quarter versus the 6% comp you are seeing in October between, you know, transactions and check?

I'm not sure of the second part of the question.

Oh, just could you breakdown how the 2% for the quarter versus the negative 6 from October?

We can give you the third quarter.

The third quarter -- .

That's what I meant, yeah, I'm sorry.

Transactions negative 1.3 and, of course, the hurricanes impacting that, as you would know, average check was up 3.3 and price was about 80 basis points.

Okay.

And any sense for October, was it all traffic, you think, or are you losing a little check given the promotions?

Well, we don't have the final figures but I mean, you know, it is traffic.

The check is not going to affect it that much.

Okay.

And on the E-Pay?

The E-Pay, it's about 9.5% of our total sales now, Janice, and it's hard to say what's incremental.

We know that the check average, you know, is higher.

We think that -- there's some incrementals at that.

It's hard to break out.

I don't know if we can.

I think it's certainly both.

I think that we proved that, yes, some people do substitute between -- from one to the other, but I think most of our studies have proven that people do actually spend more money when they have a credit card than they do versus cash.

Okay.

But is there no, I guess, really precise way once that's in your system of sort of measuring that?

No, it's very difficult to measure that because you really have to do, you know, a study to do that and it's just -- it's a very difficult thing to measure.

That was Jim Connor.

He heads -- he is the CFO for North America, Wendy's..

Great, thanks so much.

Operator, we would be happy to take one last question.

That you.

Your next question comes from the line of Paul Westra with SG Cowen.

Great, that you.

I was wondering if you can comment is there anything you kind of regret, I guess, in the last maybe 6 or 9 months maybe on the promotional side?

It seems as though your big competitors are playing in your historical playground here on premium sandwiches focused a lot more on value, would you change that, if you could, going back and therefore looking on '05 maybe -- what have you learned and what -- ?

I don't regret building our business.

I don't regret anything about that.

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

Is there anything -- it seems that your -- it seems like your strength is premium sandwiches, that seems where we are seeing the growth in the category.

I can't prevent them from doing that.

But at the same time you seemed to go away from that this year.

Chicken Temptations was a major focus.

That's premium sandwiches.

That's true.

So you're happy with the mix of promotional historically initiatives, that roughly the same in '05?

Yeah.

Okay.

Thank you.

You know, guys, remember we are up 5.6%, you know, same store sales to the third quarter.

I think that's a point to remember.

With that we would like to close out the conference call for today.

Thank you for calling in and listening.

If you have follow up questions please contact myself or Dave Poplar the rest of the day.

Have a good one.

Take care.

That you.

That concludes today's Wendy's International quarter three results conference call.

You may now disconnect.