Wendy's Co (WEN) 2005 Q1 法說會逐字稿

Good afternoon.

My name is Monica 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 remarks, there will be a question and answer period. [Operator Instructions] Thank you.

Mr. Barker you may begin your conference.

Thanks, good afternoon everybody.

The purpose of our investor call webcast today is to discuss the first quarter business results for 2005 and some key initiatives for each one of our brands and management's outlook for the rest of the year.

We did issue our first quarter results early this morning.

As you know, we have a lot of information in there on the income statements, pro forma reconciliations and we can talk about that.

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

And then we will open up for question and answer after those comments.

Before we get started let me remind you that we will release our second quarter sales and that will be on July 7, and that will be for the months of April, May and June.

And this will be our first sales release under the new quarterly format.

The second quarter earnings will be released on July 28.

I like to refer you now to our 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, development is forward-looking in nature.

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 the factors are set forth in the Safe Harbor statement that is attached to the earnings release and in our most recent Form 10-Q.

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

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

Therefore, we do encourage you on the conference call today to ask your questions.

Finally, some of the comments today may reference non-GAAP financial measures.

In the event that we reference non-GAAP information or reconciliation to the most directly comparable GAAP financial measures that will appear on our website as mandated by regulation G. With that, let me turn it over to Jack.

Thank you John.

Earlier this morning we held our annual meeting of shareholders here in Dublin and I am happy to see all four of our Directors including myself and Kerrii were reelected and we are approved.

We also announced the first quarter financial results for the company.

Before I share the highlights, let me just state that we have decided to defer the adoption of stock option expensing until the first quarter of 2006 instead of 2005 as we had originally planned.

And Kerrii will discuss this a little bit further.

So keep in mind that the results we'll reference will not include any impact from stock option expense.

Some of the highlights for the quarter.

Revenues 894 million, up 7.1.

On same-store sales, Wendy's US company down 2.2.

Wendy's US franchise down 1%.

Tims in Canada positive 5.8, Tims US positive 7.7, and Baja Fresh down 6.1.

Net income is 51.3 million down 2.8%.

Our EPS was the same as the year ago at $0.45.

Overall, we had very strong sales again at Tims in Canada and the US.

Performance at our Wendy's was below expectations, but we are optimistic about the second half and we are seeing progress on the P&L at Baja Fresh.

Now let's move on to each brand.

Wendy's North America, no question it was challenging quarter.

We started with positive sales in January, reversing a four-month negative trend.

Sales were negative in February and March against the toughest comps we will face all years.

March was also negatively impacted by the shift of Easter into the first quarter.

There was also some weather challenges during March.

From a cost perspective, margins were impacted by higher beef costs, $1.42 for the quarter versus $1.34 the prior year, which is a 6% increase.

And you probably also saw the news about the arrest in San Jose.

The intense national media coverage did hurt our sales we believe.

We are estimating that the negative impact overall on our US sales were in the range of 2 to 3%.

We feel that Wendy's has been vindicated and we are eager to move on.

We're working to help our franchisees in the San Jose area and Bay area put in several initiatives to get the sales back.

Looking ahead, some of our key initiatives underway at Wendy's.

During the past four months, we rolled out several new products.

And we are testing several others.

In January, we rolled out Combo Choices that was highly successful, in February we introduced Fresh Fruit Bowl and currently we are testing our Fresh Goddess sandwiches in three markets, our Fix and Mix Frosty and our yogurt with granola.

We also advertise Mozzarella Chicken Supreme and Mozzarella Cheeseburger for April, and last night we started our Mediterranean Chicken Salad promotion.

Some of your have noted that we are testing different products and price points with our value choices menu in a few markets.

We are very encouraged at what we are seeing in this test and we will share more with you at the appropriate time.

Looking at marketing, we have been developing a comprehensive strategy for the Wendy's brand.

Ian Rounden (ph) and his team have the plans underway.

We are getting ready to launch our new advertising approach in late May.

At Tims, the sales momentum continues both in Canada and the US.

Combined revenues up 22.7% at $254.9 million.

And sales were driven by a strong first quarter promotional calendar.

In January, Tims advertised Lemon Cranberry Muffins and Twelve-Grain Bagels.

In February we had a combo with Creamy Mushroom Soup and a Toasted Ham and Swiss sandwich.

And then in March our ever-popular annual Rollup to Win contest, which is always a winner.

Below the sales line, operating income increased nearly 19% sales over the prior year.

Maidstone Bakery continues to be a strong contributor to the other income line.

And Tims new distribution center is under construction.

Second quarter promotions will be, here in April, the toasted chicken club combo that we served our to oard of directors yesterday and everybody loved it.

Ice Cappuccino in May and in June a new product, yogurt and berries.

Taking a look at Baja, their P&L performance is improving.

Operating income improved by 275,000 versus the first quarter a year ago.

And this as the result of strategic action that we took last year, which include closing 20 under-performing stores and implementing theoretical food costs, labor matrix, and leveraging Wendy's supply chain.

As you know, a few weeks ago we announced a change in leadership.

Bill Moreton resigned and moved to Chicago and we send him the best.

I think he really got things moving at Baja Fresh.

And Brian Grube is our new CEO and President and he will continue to build upon the foundation that Bill and his leadership team have left.

So we feel very good with Brian going out there.

He is a 15-year veteran and he also turned around our Wendy's Canada Business and our international division.

We continue to update our menu.

Some of the new products that we put in place is a chipotle chicken salad, tortilla soup, Fajita burrito, kid's meals, and we are testing one of Kerrii's favorite the smoky chipotle chicken quesadillas.

Outstanding products and are bringing another protein, pork in the form of Cronitas (ph).

We have also been advertising in Phoenix and Las Vegas on radio.

And it's very encouraging by the advertising impact it has on sales.

So we have identified additional markets that we are going to put radio behind this year.

From a regulatory standpoint, we successfully filed our 10-K with an unqualified 404 opinion.

This is really a tribute to the hard work and long hours of all of our financial group both at Wendy's, the enterprise, and Tim Hortons.

And then, Wendy's was named to the Fortune 500 for the first time in company history at #498.

That is just a testimony to the dedication and hard work of our franchisees and employees.

Now let's talk about the rest of the year.

Our revised EPS goal is $2.29 cents to $2.35, which is an 11 to 14% increase over our 2000 earnings per share of $2.06.

We are not raising our guidance.

This is only an adjustment to account for deferring of our stock option expensing until the first quarter of 2006 instead of this year.

And John did a very good job, so please refer to the charts in the press release, which show the calculation for the pro forma numbers.

Looking ahead, we continue to expect improvement in the second half.

Comps begin to ease at Wendy's in the second quarter and we expect improvement in the second half.

Comps begin to ease at Wendy's in the second quarter, and we expect stronger sales to offset the first half challenges.

We have strong business plans in place at all of our brands and we are all confident that our business results will improve.

So let me now turn it over to Kerrii.

Thanks, Jack.

First I'd like to discuss the issue of stock option expensing and our decision to defer the adoption of FAS 123R until next year.

As you know, we had announced in February our intent to early adopt when 123R in the first quarter of this year.

And that would have been two quarters sooner than required at the time.

However, due to the SEC's April 14th announcement delaying the effective date of the implementation of 123R, we have decided to defer the expensing of stock options until the first quarter of next year, the required implementation date for us.

By that time we do expect to have received additional guidance and interpretation regarding the specific issues that are addressed by this regulation.

So as we look at the closing content of early adoption, delaying adoption 123 really is the right thing for us to do with this time.

So now let's focus on the first quarter.

Keeping in mind that these results do not reflect the expensing of options.

For the first quarter 2005, we produced record results and revenue and generated earnings per share results equivalent to the prior year.

As Jack has mentioned, revenues increased 7.1% to $894 million.

Jack has already summarize the same-store sales, so let me just touch on new store development.

We opened 77 new restaurants system-wide during the quarter and that consisted of 45 Wendy's, 23 Tim Hortons, and 9 Baja Fresh restaurants.

Net income was down slightly, 2.8% at $51.3 million, and that's compared to 52.8 million a year ago.

Diluted EPS was $0.45, the same as a year ago.

Factors impacting the quarter included, first of all, the fact we had a lower share count.

Our average shares were 114.6 million versus 116.6 million in 2004.

We did receive about a $0.02 per share benefit from the Canadian exchange rate.

The rate during the quarter averaged $1.23 versus $1.32 the first quarter of last year.

Of course this was less than the $0.035 benefit that we were able to get first quarter a year ago.

Offsetting these benefits were higher beef costs. $1.42 this year versus $1.34 last year impacted us about $0.01per share.

And restricted stock expense this quarter was about $0.01.

That was compared to no expense in 2004 as this period was before we aborted restricted stock.

Now let's talk about the operating margin.

The Enterprise operating margin was 10%.

That is below the prior year's margin of 11.2.

The majority of the 1.2% decline came from Wendy's.

Wendy's operating income was $43.9 million, and that's down 15.2 million from a year ago.

And operating margins were actually down for the segment of Wendy's 270 basis points.

The negative same-store sales and the 6% increase in beef costs had a significant impact.

Operating income at Tim Hortons was 62.5 million, up 9.9 million from a year ago.

And the operating margins were 24.5% compared to 25.4 in the prior year.

The 90 basis-point margin decrease resulted primarily from the stores we acquired from that season last year AUVs are still below the rest of the chain stores in the chain.

Now let's take a look at some of the key items on the first quarter income statement.

Cost of sales was $483 million, and that's 66.6% of retail sales.

As a percentage of sales, that is about 130 basis points higher than a year ago.

Wendy's food cost is really driving that and with the greatest impact coming from higher beef prices.

Company restaurant operating costs were 164.8 million or 22.7% of retail sales.

As a percentage of sales that is about 30 basis points higher than a year ago.

The dollar increase over the prior-year is somewhat due to currency, and the impact of the 80 Tim Hortons Canadian franchisees that we are required to consolidate under 1046.

I might add that this is the fourth quarter in which we have now been doing that.

It would not have been affect a year ago in the first quarter.

Operating costs are $36.2 million, ant that's the $608,000 increase.

The reason the dollar increase is really feel moderate is that primarily due to the decrease cost related to franchise equipment sales to our Tim Hortons franchisees.

And that 's a result of lower store openings to Tim during the quarter.

Depreciation was up $3.9 million versus a year ago to $48.7 million.

That is mostly due to the addition of new restaurants, but was flat as a percentage of revenue.

G&A expenses were 75.8 million, that's 40 basis points higher than a year ago as the percentage of total revenue.

The dollar increase reflects the restricted stock expenses I talked about earlier and certainly the stronger Canadian dollar.

As a percentage, the increase reflected the slower revenue growth and restricted stock.

On the other income line, we produced 4 million in income compared to about 200,000 roughly a year ago.

The other income expense line typically includes items such as the income from the Tim Hortons joint venture, parbaking plant with Cuisine de France, currency adjustments, and other non-operating items not related to our primary business.

This year's income improvement really reflects reduced expenses related to severance costs and legal reserves we incurred the first quarter a year ago.

From a balance sheet perspective we ended the quarter with about $139 million of cash on our balance sheet.

This is a little bit lower than the balance at year-end of 177 million, and really reflects the working capital changes taxes and the payment of accrued bonuses at year-end.

From a dividend perspective, the board approved our 109th consecutive quarterly dividend, which will be paid on May 23.

The quarterly payment will be $0.135 per share.

This is our second dividend paid since our February announcement of a 12.5% increase in our annual dividend rate from $0.48 to $0.54 a share, which of course it followed a 100% increase in 2004.

As Jack has mentioned, we have adjusted our 2005 annual EPS estimate to a range of 2.29 to 2.35, which is higher than our previous estimate, but merely reflects the change in our decisions regarding stock option expensing.

As you know we are facing further challenges in the second quarter mainly beef prices expected to be $1.52 1lb versus $1.23 a year ago.

That is an approximate 24% increase.

We now expect beef prices to increase in the range of 6 to 9% for the full-year compared to 2004.

Even though we are facing these first-half challenges, we have continued to control costs effectively throughout the organization and will continue to do so the rest of the year.

The strong sales momentum at Tims continues both in Canada and the US, and we expect a stronger second-half to offset a tough first half.

So let me turn it back over to John for just a moment.

Before we open the call for Q&A, let me discuss the subject of our heavy stock trading volume and activity over the past several days.

We addressed the subject with the press release on Tuesday 26 so that company is not aware of any corporate development that would account for the trading volume or rumors.

The release also referenced a recent 13D filing from a large investor that stated the reporting persons have no current intention of acquiring control of the issuer.

We would not be surprised if there is another filing in the near future.

Management does not typically comment on market rumors or speculation, and we do not intend to discuss this matter further on the conference call today.

We do invite questions today about our first quarter results, our 2005 outlook, and operations and marketing trends of the brands.

So please focus your questions on those subjects.

Operator please let's begins the questions.

[Operator Instructions] Your first question comes from the line of John Glass of CIBC.

Thanks, good morning and good afternoon.

I would like to address directly I guess the question of spinning off Tim Hortons and what criteria you use generally and determining maximizing shareholder value.

In answering the question if you could also touch on the business reasons maybe at the profit reasons but the businesses reason you think the business is a better combined.

The first answer is no comment, on the second question, no comment.

And I think John Barker just said that we are not going to comment this and we are going to stick to the results of the first quarter.

I thought I was just in relation to the 13 D filing that business strategy.

No comment for the conference call.

But because you keyed up you can ask another question.

Thank you so much I guess may be just Kerrii, any more particular insights on specific guidance on the second quarter.

I understand you talked about in terms of the pieces being up year over year.

Any other than sales trends and be, any other specific cost issues to be aware of in the coming quater?

No, I think that those issues that you have identified, sales and we are very focused and on beef, and of course as you recognize that a little bit of benefit from currency in the quarter.

But the currency, we may have a little bit of benefit that may help us offset some of the challenges.

Great okay, thank you.

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

Hi guys I am just hoping to get a sense of your sense of what the competitive environment is like out there.

Depressants that pricing that the pricing environment may break down if the consumer is not healthy going into the peak fast food and driving season?

Do you think any of your competitors will push the discount button?

Our competitors seem to push the discount button whether it is needed or not.

Nothing out there right now says it is going to be meaningful.

That does not mean it cannot change.

McDonald's did do the $0.50 hamburger for a short period of time.

That was an honor of their 50th anniversary.

Okay great.

Thank you very much.

Your next question comes from the line of Larry Miller of Prudential.

just two question Could you give us some frame of reference, I don't current past maybe with you guys or other people QSR that you kind of monitor did, when you have an incident like the thing the incident, how long does that tend to last?

Second, I had a question on Baja Fresh.

It looked like results have improved from the quarter.

Any plans to break even for the year?

I cant really I mean the only reference point I have on the QSR is the number of years ago in the Northwest, is probably 13 years ago on another change equally but I think there is different that lasted a long, long time.

As far as the San Jose incident, it was 30 days and the news.

We had to 2 or 3 days of news around the rest.

It does help, but I do not think it fully makes up.

My suspicion is that we will start to make it up.

I think will be a little bit slower in the Bay area and some of the West Coast markets.

There is not a true reference point on this one.

As far as Baja assets, I think it is too early to change guidance.

We did have the lease issue there that is going to cost us about a $1 to $6 million or about 400,00 or so.

I think we said that we will break even, but if you include that issue, you're looking at anywhere from 1.5 million to break even.

To have clarification on the point that check is making, when everyone had to address the lease issues, one of the items that impacted was depreciation of assets.

What is happening is we have shortened the life for Baja Assets for 15 years to 10.

As a result of that we have increased depreciation and it will impact their results this year about a 6 million.

I will tell you that, I know developing brands and this might be a question someone else had developing brand we were reporting about$3.4 million loss against roughly about $3.1 million last year.

You would get the indication that it's worst I would tell you Baja loan is about 3 to 400,000 better before the 400,000 lease adjustment.

So in theory there about 7-to800 better there were a year ago in the first quarter.

The other different that is impacting the negative activity of developing brand is to purchase price adjustment, which we made relative to Café which increased depreciation there and that's usually 12 months to make your final adjustment.

We made that during the quarter just to clarify what is going on in developing brands.

We do not normally break the pieces out, but we think it is important because it shows improvement in Baja.

Thank you very much.

Your next question comes from the lines of Jeffrey Princeton of Lehman Brothers.

Just a question on the beef.

With the company on your side, would presume that to be able to lock in for a longer period of time than your current quarter allow you to that of Bill got your calendar and forecast earnings.

I know you guys use fresh beef.

Any idea of how you can be protected or perhaps lower.

We do lock in the cost for quarter at a time.

We have looked into can you possibly create a hedge against and have less volatility.

We have not been able to get there with the most expert Advisors on this matter.

There's no sort of floor ceiling structure.

EPS is not driven at course of your control?

No.

I assure you it we could get there we would.

Thank you.

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

Just, one more quick question, one on the beef and then the pricing question.

The current beef costs as it pertains to setting up for the third quarter, I imagine you are still expecting an increase for that.

And then on menu prices, did you guys take your typical half a point on the menu board increase at the beginning of the year?

We did.

I think it was in November of last year.

From a price increase perspective, as we look at our guidance we gave today it is six to eight percent.

We would expect the quarter is up, certainly lesser

Up from a year ago, but down from second quarter.

Right, and just I mean we've probably just information before we did pay in the third quarter of 2004 for $1.31.

Thank you.

Your next question comes from the line John Avago (ph) JP Morgan.

Two questions if I may.

The first one is all combo Choices.

Could you give us some sense in terms of how you think that many will a ball from the current $0.99 Super Value Menu?

Do you think it is right to substitute better margin items and $0.99 or breaking the $0.99 price point altogether will be more likely?

I needed clarifying question?

You are comparing combo Choices to volume in use?

I am sorry, Value Choices, exactly I misspoke Value choices.

That is what you're calling it, correct?

Yes.

Okay, so compare vary choices is to the $0.99 per value menu.

It is still a test.

Initially, it looks good.

The idea behind the test is not lose transactions.

Are very minimal transactions offset by a little bit higher price?

We do have five items and $0.99 that represent some of the more important prices to the consumer.

Really, the whole idea is to be able to give consumers more.

Like I said, the test looks good.

We just ended it.

Now we have to analyze it.

Just for example, one of the lower margin items as a junior bacon cheeseburger.

Do you think that stays on and $0.99?

No value choice is junior bacon goes to $29.

Okay.

That is great.

Secondly, could you comment on what you think the advertising changes going to represent relative to larger advertising has looked in the past and what you think the current positioning at Wendy's would be in relation to what some of your competitors are doing?

We are getting close to the launch, so I don't want to give away the work that our marketing department has done.

I can tell you that it does want to be a different feel.

It is going to play two different segments of the consumer.

It is on to be a little bit edgy at times.

I think we have some great stuff.

For example, for the MTV networks, it will energize the teenagers and early 20market.

We will to set to win seats.

Okay, thank you very much.

Your next question comes from the line of Janice Meyer with CS First Boston.

Two follow-ups, actually.

One on the beef.

I don't have the your numbers right in front of me but your guidance for still I guess up year-over-year in the third quarter would suggest them up pretty big price decline in the fourth quarter to get to the full year guidance that you just talked about.

That is the latest right now.

Right now we're at $1.52 compared to $1.23 last year.

We are expecting it to start declining in the third quarter.

This has been a moving target as you know.

And I might add, that as you know Janice we are on a quarterly lag.

Prices today are higher than $1.52.

So with a lag, you will see some impact of it coming down and the third as Jack pointed out this is versus the second quarter of this year.

But hopefully as things continue to move forward, more in the fourth quarter.

Just on the Super Value menu, Jack you mentioned that you do not want to lose transaction.

If franchisees' were able to improve profitability substantially on the menu and it did require losing transactions, would you not be open to entertaining that idea?

I think maybe I explained wrong or you miss understood.

The idea is not to lose transactions.

The slight amount that is offset by the profitability.

You can lose a certain amount of transaction and still be profitable.

That is our game plan.

Want to be at least that.

Okay, great.

Thank you.

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

Could you give us a little update on the Tims U.S. rollout.

How much of the mix of franchising are you expecting?

Right now we are expecting mainly franchising except in our Rhode Island markets, where we will have a little bit more company.

But we are starting to bring in franchisees' to our Rhode Island market, and we are going to start penetrating and a bit away the state of Maine where we brought in some new franchisees.

Any comment on how many have rolled out and progress there?

I forget what we said.

I think we opened it nine in the US.

Okay, thank you.

Your next question comes from the line of Rachel Rowtman (ph) of Merrill Lynch.

Just a quick follow-up on your guidance I'm sorry if I miss this in the press release.

Can you just -- I know at your analysts' meeting you put out a top line target at Wendy's of 3 to 4%.

In light of everything that has gone on with the San Jose incident, is that still your target?

One thing, you are new.

We don't update guidance anything but EPS.

Sorry about that.

No problem.

So will that be the same for currency?

I know you guys said constant currency for the full year.

If something changes drastically we may.

Usually we give our guidance online items and then the only thing we update is really our EPS.

Perfect.

Thank you so much.

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

Couple of questions.

First with the San Jose incident, has the sales decline persisted to the point where you think you should take remedial actions to counter the negative publicity that was generated?

We have, for San Jose and the Bay area, a whole marketing plan already put in place.

It started last weekend.

The stores offer free junior frosty for everyone who came in.

I will tell you one story.

Usually I do not tell sales.

The store where the incident happened, going into the weekend there were running down 35%.

Coming out of the weekend, there were up 15%.

We are starting to climb back.

We are on to be aggressive.

It is our franchisees' and small-business people that were the victims here.

Okay.

Jack, I was listening to the web cast of the annual meeting this morning and talked-about the chicken sandwiches.

I think you mentioned 8 percent mix in the test market.

I guess I was tried to put that in perspective result.

Are you encouraged by that?

Does that signal that the product is a go at some point?

Could you put that in perspective for us?

It is good.

Let me tell you that.

We have to make a decision on a go or no go coming up because we do have to get the production of the bread online pretty quick.

We are going to be reading this very soon.

Could it possibly be in 2005 or issue planned--

It could be 2005 or 2006.

Kerrii, could you just go back to the operating costs income statement?

I was looking at the Tim Hortons openings first quarter last year versus this year.

At the to open one fewer this year.

I guess I still do not understand why the number would be up so little, and I am assuming there is currency influence and that's the one real basis probably down.

That is exactly correct.

I may have skipped over the most important word in explaining the difference.

We had fewer traditional Tim Hortons franchise store openings in Canada.

They have in line and kiosk and then traditional stores.

Because we opened-- opening a traditional store yields more expense and income than some of the other models.

Okay, thank you.

Jack, one more.

In the past, before the incidents with the stock, you're of knowledge looking at the Tim Hortons at different points of time and decided not to go forward with it.

Would you be willing to walk through what motivated you to look at what the restraining factors work?

That was a while back, so I have to say no comment.

Okay, thank you.

Your next question is from Peter Oakes of Piper Jaffray.

A couple questions.

On the first quarter performance, the other expense line.

Kerrii, you mentioned the swing was primarily due to reduced expenses, but the line actually had 4 million of income, is that a reserve reversal that was the predominant shift there?

Peter, it is actually-- think about it like this.

The components are we have the in companies that comes from our joint venture because it is a minority-owned investment, that is income, to the extent that we have unusual expenses, it may ultimately reduce the amount of income reported.

But you have is that a year ago, you will see that we had a reserve set up for a legal issue that reversed in the first quarter of 2004.

That was roughly a couple million dollars.

We also had a severance termination with Greg-where other things were severed.

What you have is income that didn't have those kinds of large hits going against that number this year.

So the run rate on that line item, we should look to first quarters to be more indicative?

That is right.

The second question is a factual question about the stock.

I am trying to understand what has transpired here.

It really centers around the Dave Thomas estate and Ron choice.

Are they still both as significant shareholders as there were two years ago when there were last filed?

No, they're not.

In fact, it stays the state, I do not think there is anything but a minor amount.

Okay.

And I am just try to understand who was on the other side.

Your next question comes from Paul Westra of SG Cowen.

Following up to the operating income line, could you give us an update on the bakeries and what is going on there?

Still doing very well.

We still have excess capacity.

We are looking to put end-- we have capacity for one more line.

We will probably put in a moderate line and can do a number of things.

We are quite excited about what has transpired.

We keep on driving this income by new stores it growth and same store sales growth.

Just a follow-up on the, bread has not changed since you originally showcased, it to us a year ago?

We have done some reformulations.

We have done some tweaking of it.

We just want to make it a better product.

The basic size is the same period

It is still not being made at the bakery, right?

It is made at the Brea Bakery.

Brea Bakery is owned by the joint venture partner at made stone IWS.

Okay and lastly just one final follow up on a San Jose incident.

Is it safe to say that the worst is over from a national impact?

I assume the worst is up front?

I would hope so.

Okay, thanks guys.

Your next question comes from the line of Andy Lester (ph) of Lester Brothers (ph).

Hi how are you?

Hi.

Earlier in your introductory comment you have stated that there may be another file in coming.

Could you give any further elaboration about that?

No we cant at this time.

Okay, thank you.

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

Hi my question has been answered thanks very much.

[Operator Instructions] Your next question is from Richard Heriso (ph) of Heat Bridge Capital.

Hi I am calling from log only fund manager in Canada.

You're a great ship Tim Hortons Canada continues to march on.

I was wondering if you are aware of a potential iceberg on the scene.

The Royal Canadian Mint had an exclusive promotion back in the fall for remembrance Day, which is like that Veterans Day and a special colored coin the first one in the world, exclusively available at Tim Hortons, and there has been some political question on that.

And we had where Canadian Mint is going to testify before a committee because of the nature of this exclusive reading given in the critical climate here where we got a still government that is a victim of corruption and about to fall.

Are you aware of this and there is anything that you need to in terms of protecting the frame?

We are aware of this past fall in October.

We do not historical comment on political issues.

For that you are taking any steps to protect the franchise?

No comment.

Your next question comes from the line of Stephen Crown (ph) of Goldman Sachs.

Thank you just a couple of quick follow-ups on Baja Fresh.

You actually mention that in some of the markets where you are advertising radio are you saw some benefits.

Can you be just be little bit more specific as to what kind of benefits you may have seen?

Where are your expanding this radio advertising?

And which where you expanding to and then lastly, could you discuss where the nine new units of Baja Fresh to open and if they are established markets or new markets?

They would e all been established markets.

Okay, right now we do not have any plans in new markets until the thing is righted, and it will go in with the new market entry strategy much like we did with Tims US.

As far as the radio, we did that in Phoenix in Las Vegas we have been on the air in Phoenix since last August and we are very happy with the results.

I do not want to quantify them.

We are also looking at additional markets to have in place by June July of this year.

And again, I do not want to comment on those to give away what we are going to be doing next.

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

Back to the Wendy's brand, there has been some talk about you being right around the corner with a breakfast offering.

But I don't expect to necessarily confirm it-

We have not commented for year.

So you are right there it will not happen this year.

We are not coming (ph) you are saying, one more time you are seeing that it is going to be launched this year?

No, it will not be.

Okay.

Just wanted to make sure we got that out in the open.

Thank you.

Your next question comes from the line of Lesley Ruface (ph) of Ontario Key (ph).

Hi I think Kerrii earlier in the call you mentioned that other income for the quarter was $4 million and then subsequent to that this should represent a reasonable run rate on a quarter basis, but my recall and quickness on (indiscernible) is that your guidance for full-year other income is zero.

I was just wondering if you could clear that up for me?

It's kind of Jack alluded to once we gave guidance I think, we tried to always be conservative you know, gave more of a lower.

It could be positive or it could be negative depending on situations that occur on that line items.

But what we have expense this quarter we didn't have the kinds of items we had last year.

Was there a sort of a deficit of any normal expenses that you would expect in the quarter?

There is no doubt that we worked hard to keep any expenses that we have throughout the P&L very low to manage expenses considering the challenges that we faced with sales.

So from a G&A perspective, we have always said that the first half of the year expenses generally run lower than they would in back half of the year just because you started seeing things more reflective of high-end activity hopefully.

Okay, thank you.

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

I just want to ask a follow-up on the practice question.

Jack I think it's all about the practices has possibly testing in '06 has that been accelerated?

Are you running test markets now?

No, we and are running test markets now Joe.

At this time, there are no further questions in the queue.

Mr. Barker, are there any closing remarks?

No closing remarks.

Thank you for joining the call.

We will talk to you all later.

Thanks.

Thank you.

This concludes today's conference call.

You may now disconnect.