Wendy's Co (WEN) 2005 Q2 法說會逐字稿

Good morning.

My name is Phyllis and I will be your conference facilitator.

At this time I would like to welcome everyone to the Wendy's International 2005 second quarter results conference call.

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

After the speakers' remarks there will be a question and answer period. [OPERATOR INSTRUCTIONS]

I would now like to turn the call over to Mr. John Barker, Senior VP of Wendy's.

Sir, you may begin your conference.

Thanks, and good morning everybody.

We announced our second quarter results yesterday at 4 o'clock and then we issued a strategic initiatives release this morning at 7 a.m.

We have slides that go along with our presentation today.

If you have not already done so, I encourage you to go to our Website, www.wendys-invest,com, and click on the webcast.

We do have a full agenda for today so let me take you through the agenda.

It's going to include a brief review of the second quarter by our CEO, Jack Schuessler, and our CFO, Kerrii Anderson and then we will have a discussion of our strategic plan and the initiatives that we announced this morning.

Jack, Kerrii and Paul House, Tim Hortons President, are here this morning and are going to review the comprehensive plan.

Following that presentation, we will take questions from those on the conference.

Now, before we get started with the presentations let me remind you of our Safe Harbor statement.

I would like you to refer to the statement that is attached to the Company's news release and in our most recent Form 10(Q).

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

It is possible that various factors could say 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 our earnings release and this morning's release.

I would also like to note that we are webcasting today's meeting in accordance with regulation FD.

Regulation FD encourages public companies to discuss potentially material information in a public forum.

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

Good morning everyone and welcome to our conference call.

Everybody here in Dublin is very excited about the strategic initiatives that we announced this morning through our press release.

But before we go through that discussion I would like to just touch upon the second quarter just for a few moments.

Second quarter revenues were up 4.6%, to 951 million.

Same store sales at Wendy's U.S. company restaurants, down 4.6, U.S. franchise, down 3.9.

We have made progress at Baja, down 1.7, then another strong quarter by Tim's Canada, up 5.6 and Tim's U.S., up 9.1.

All of this resulted in EPS of $0.61.

If you look at the second quarter in a little more detail for Wendy's, April Wendy's was down 5.8, and that was the brunt of the San Jose incident.

Then we made progress in May and June.

And the challenges were very strong going against tough comps, the San Jose incident and competitive convergence.

At the same time margins were pressured with beef costs up 24% to $1.52.

Looking at Tim's in Canada, strong same store sales in April, May and June, ranging from 6.5 to 3.7.

Then the U.S. had another very, very strong same store sales quarter, up 11.6 in April, 9 in May, and 6.2 in June.

As I mentioned earlier we continue to see progress at Baja through our initiatives.

April sales were down 2.3, and then May, 1.4 and June 1.3.

So if I were to summarize the second quarter was very challenging, we continue to focus on our core businesses.

The Wendy's North America has a strong marketing calendar for the back half and easier comps.

So we expect the second half to be stronger than the first.

But based on our first half results, we think it's prudent to take our guidance for the year to 7 to 10%.

As you know EPS was $2.06 before the goodwill impairment, so our new guidance is $2.20 to $2.26.

Now I would like to turn it over to Kerrii.

Just to touch on a couple of elements relative to the quarter, we talked about quite a few challenges that affected our overall results.

We had record high beef prices at $1.52, which were up 26% over a year ago.

That cost us about $0.035 per share in the quarter.

We have been expensing stock expense, it began last year in April, and now we are lapping over two years of awards, so our expense was up about $0.01compared to a year ago.

Lastly our average shares outstanding, as you know our policy as a company is to offset the dilution of stock options.

And because of the number of initiatives we announced hear this morning, we have not been in the market buying any of our stock back, and yet we have had in excess of about 2.8 million options be exercised during this year.

With that our average share count is up to 116.6 versus 115.7 a year ago and that costs us about $0.005 in earnings for the quarter.

While we had some challenges we did have some benefits in the quarter.

We had a benefit from Canadian currency.

The rate being $1.24 versus $1.36 a year ago in the same quarter, and that helped us by about $0.035 in the quarter.

We had a favorable tax rate decrease in the quarter from 36.50 a year ago to 33.7.

If you remember we had given an outlook expecting our average effective rate to be about 35.5 but because of favorable state legislation that was enacted at the end of, June 30, really, and some other settlements we actually had a benefit of about $0.025 per share as a result of that reduced tax rate.

We did if you remember compared to a year ago in second quarter of '04 had a market impairment issue at Baja in the second quarter and so when you are comparing our overall analysis you have to remember that we did take a 1.8 million hit, which was about $0.01 a share in the second quarter '04.

Margins overall at the enterprise were as you can see down about 1.3, both for the quarter and for the year, and it's pretty clear the results, we had a situation where Wendy's was significantly impacted by both the sales that Jack talked about, as well as the price of beef.

And that was certainly offset somewhat by the improvements that we saw at Tim Hortons during the quarter and for the year, along with improvement in developing brands compared to a year ago.

And in the end, our Wendy's segment income was 43% of the income for the quarter, versus 57% for Tim's, and that compared compares to 56% at Wendy's a year ago in the quarter, and 44% at Tim's.

I want to touch on G&A for just a couple minutes.

I think we have worked hard to control our costs.

We are focused on the fact that we have sales challenge at Wendy's, and as a result trying to make sure that we keep G&A spending in line.

It grew only 2% during the quarter in dollars and 6.8% year-to-date.

And as a percentage of revenue our G&A dropped from 7.9% a year ago to 7.7 for the second quarter.

A big factor which we have really talked about over the last couple of years, that we try to align our compensation plan with performance.

And we look to always improve our performance over the prior year.

And as a result of some of the challenges at Wendy's, we are certainly not accruing the level of bonuses that we were a year ago, and so as a result of that you are seeing G&A-- that be reflected in G&A.

The other line I would like to touch on just for a minute is other income and expense.

I know there's been quite a few questions, and I want to remind was goes in there are unusual items, the income we had from CDS.

And during the quarter other income and expense was down 2 points, was up actually, created other income of 2.4 million.

So when you think about that you have to remember that we had a $1.8 million impairment charge that was in that line in '04.

So that pretty much is your difference in the quarter.

And then year-to-date other income is actual up about 6 million.

And again if you would refresh back to the first quarter, we talked about the fact that when we were comparing to the first quarter of '04 we had a severance for the termination of the Baja President which is about 1.2 million in the first quarter of '04, and then were had some additional legal litigation costs that we accrued of about 1.4 million.

So that's 2.6 that was a big hit in the first quarter of '04.

So with all those things combined that helps explain the swing that you are seeing in other income expense.

It certainly makes income is up, but that's not what's driving this increase here.

With that the bottom line is we reported $0.61 as Jack already said, versus $0.62 a year ago.

A lot of pluses and minuses, but overall I think pleased with the performance in a challenging environment.

With that, Jack, I would like to turn it back over to you to talk about the enterprise objectives and initiatives.

When we set out to look at what our strategic options are, what they could be, we had to ask a number of questions to ourselves and we had to answer them.

The first question is, what is the business reasons for keeping the two brands together.

Then the second, are the two brands moving apart or together?

And as we contemplated this we really believe that the two brands are moving apart.

I think Tim's is growing faster.

Wendy's is maturing.

Tim's has entered into the lunch space.

Wendy's is entering into the cold sandwich space.

At some point we believe Wendy's will have breakfast.

So it's not a big issue now but down the road, one could see that Wendy's and Tim's would become competitors as Tim's starts coming into the U.S.

So we said, we are moving apart and we believe that separating the two companies are the best actions for both.

And once you've answered that question then you find the proper vehicle to separate.

And that's the analysis that we've done.

But first we had to make that business decision because it drives everything else.

What we will cover today is our overview on history of our strategic initiatives, and then an operational review of all of our brands, Tim's, Tim's U.S., Windy's, our developing brands, and a summary of our initiatives and then Kerrii will go through the financial impact, and then a Q&A.

And I really believe this plan is holistic.

It's comprehensive.

It's just not answering one-off suggestions by investors, but encompasses a whole plan that we can move forward on.

If you look at a timeline of some of our initiatives going back to 2000, and I've mentioned this in the past, in 2000 we did an analysis of a possible Tim's spin-off.

We had three bankers look at it, JP Morgan, Goldman Sachs, and a Canadian firm, Nesbitt Burns.

And they all came to the same conclusion, that it wasn't time to separate.

A couple of reasons.

The U.S. investors really didn't recognize Tim's at that time.

And the Tim's U.S. business had started their turnaround but at that time was not profitable.

In 2001 we launched our enterprise strategic plan.

And then in 2002 Goldman Sachs did another review of Tim's spin-off, and although the recognition was better and the U.S. business was better, it wasn't where we really thought it should be.

At the same time we had just started investing in our joint venture with IAWS, to build our Branford bakery, and the investment was there but we had not gotten the returns yet, and we thought that was another factor of not doing it.

As we became bigger in 2003 we did an LEK study that really helped us understand capital allocation, and provided a uniform framework for cost of capital across all brands.

And then as you know we kicked off 2004 with our enterprise financial strategy that included our comments about our cash position, our dividends, our share repurchase, equity based compensation, stock ownership, and Goldman contributed heavily to our review of our dividend strategy.

And then in February of this year when Kerrii and I were at the analyst conference in New York, we fielded a number of questions about, have we looked recently about spinning Tim's.

And our answer was we did in 2000 and 2002 and at that time it didn't make sense.

But after we got the questions we did call Goldman right after the meeting and said, let's start analyzing this because maybe some things have changed.

We've done that.

We also had sessions with Royal Bank of Canada, and they helped us understand the capital markets in Canada, income trust, the traditional equity markets, REITs, royalty income trust, and you name it, all those type of areas that we are going to explore.

But as we went forward we always wanted to keep in mind, our strategic plan and how would it fit.

And at all times we wanted to have a balanced approach in meeting all the needs of our stakeholders and it's just not about a financial plan.

It's about how you run a business and preserving the business models that made both brands successful.

And as we looked across we wanted to meet the needs of our customers, our employees, our franchisees, of course our shareholders, and our suppliers.

Our strategic plan which has been in place since 2001 is really a long-term approach in building our business.

And job #1 is to focus on our core businesses of Wendy's North America and Tim's Canada.

At the same time, develop growth drivers in strengthening our development brands and investments.

Our integrated financial strategy also came into play in supporting our strategic plan in our review of our initiatives.

And again our long-term goal is to deliver 11 to 13% annual EPS growth rate.

Wendy's, founded in 1969, is really made up of three divisions, North America, International, and Bakery.

We merged with Tim's in 1995.

It was, Tim's was founded in 1964.

U.S. business really started developing '95, '96.

In 2001 we announced our joint venture with Cuisine de France, and then we bought a coffee roaster in Rochester, NY in 2002.

We bought Baja Fresh in 2002.

We have a 70% share in Cafe Express, and we have a minority interest in Pasta Pomodoro, which took place in 2002.

In looking at all of our business, we plot them against a pretty classic growth cycle and I do believe that Wendy's is starting to go into a more mature mode.

There is certainly lots of room to grow in the U.S., but I think were recognizing that it's going into a more mature mode.

Tim's in Canada, high growth, same with the U.S., and our other businesses are in the potential range.

When we analyzed our returns and our metrics over the last few years, we've seen decline.

You can give reasons whether it's higher cost or this or that but the fact is that they have declined.

In the core brands really led by Tim's have had stable ROA performance.

Wendy's U.S. growth in operating income in absolute dollars, have been lower than the growth of its assets.

So the growth drivers, developing brands and investments, have lowered the Company's overall return performance.

So that's another reason why we decided to really address this in a comprehensive way.

And it fits with Wendy's.

It's a long-term approach.

We wanted to preserve the key elements of the business models of both brands.

It's a more disciplined approach to capital occasion.

With a consequence of improving our returns in metrics, and enhancing the value for all of our shareholders, and all of our stakeholders.

So the elements, the first one is to sell 15 to 18% of Tim's in an IPO.

It would improve, we want to improve Wendy's profit and returns.

We plan to repay 100 million in debt.

We have been authorized by our Board for additional $1 billion in share repurchases.

We are increasing our dividend 25% to an annual rate of $0.68.

We had our long-term growth rate remains at 11 to 13%.

And we hope to complete the IPO by the end of the first quarter of next year.

So let's review operationally each brand, and I will start with Tim's.

Last year we ended up with 2,721 restaurants.

We began the new century with a little bit under 2,000, and if you remember when we merged with Tim's there was 1,000 units at the end of 1995.

So very good growth in new restaurants.

Revenue has almost doubled in a four-year period of time, going from 525 million, to just short of 1 billion, at 996 million.

Great track record in same store sales growth.

Tim's is the envy of the QSR segment in Canada and the U.S.

Just great growth in system-wide sales averaged C$1.730 million in Canadian dollars.

Total segment income has doubled in four years, growing from 114 million to 247 million.

And that's a CAGR of 21%.

Now there is benefit to that of the currency, so if you neutralize the currency the growth rate still would have been a healthy 17%.

So to sum up Tim's strategic plan, it's all about continued expansion in Canada.

Profitable growth in the U.S., continue our vertical integration, and growth through alliances in Europe.

Some of the rationale for the merger, and why Tim's and Wendy's were together, it really merged in '95 and Wendy's helped fund the expansion, going from 1,000 stores in 1995 to over 2,500 today.

This allowed Tim's management to focus solely on business growth.

At the time we had day parts that complemented each other.

Wendy's was not in a breakfast program.

Tim's had 60% of their business done before noon.

We already started doing business together in the early 90s with doing the combo units.

And there was geographic diversity.

When it was cold in the U.S. it was also cold in Canada, but that was their best time of sales.

So we really helped offset each other in geography and day parts.

So what's different?

Well, the big business decision is the businesses are moving apart, and we need to recognize that.

But also what's changed is I believe investors fully recognize Tim's success in Canada.

Tim's is self-funding.

Maidstone Bakery is a strong profit contributor.

The franchisees in the Tim's business have successfully converted to always fresh.

Maidstone Coffee is a profit contributor.

The completed turnaround of Tim's U.S. has taken place.

One important change this past July 1 and that's the change in Canadian pension fund rules.

Tim's is a domiciled U.S. company.

And before the pension change, the pension funds could only invest up to 30% of their proceeds into a U.S. or a foreign-domicile company.

When this changed, I think it was something that made the IPO more attractive.

Some of the rationale behind the 15 to 18%, while the strong same store sales averaged 7% in Canada since 2000 is certainly a factor, it's gone to almost over 2,700 restaurants, revenues have nearly doubled to 1 billion.

And segment income has more than doubled, growing at 21%.

And there is a great, great strong customer bond with Tim's in Canada.

So what are the goals here?

It's again, the IPO of 15, 18% would be tax efficient.

And then based on business conditions down the road, it preserves the ability then to do a tax respin-off to Wendy's shareholders.

The Company intends to complete the initial public offering by the end of the first quarter.

We would list on both the New York and the Toronto Stock Exchange, and the Company will retain 82 to 85% ownership of Tim's.

We are really excited about the IPO for Tim's, and are also focused on positioning Tim's U.S. for growth.

Now let me take a moment and talk about Tim's U.S.

In 2000, we had 121 restaurants by the end of 2004, 251 restaurants.

Great same store sales average.

Over a five-year period of time, 9%, and it's because of those kinds of numbers that we are now profitable.

Business has been breakeven or a little profitable with over the past three years.

We continue to grow and improve in Buffalo, Michigan and Ohio, but sales and profits from the stores acquired in New England have been a little bit lower than expected.

So the way we are going to position U.S. for growth, is to accelerate the franchising of company stores, review our under-performing restaurants, review and modify our real estate strategy in the U.S., and continue penetration of our bigger markets.

So with that I would like to turn it over to Paul House, President of Tim Hortons, for some comments.

Thanks, Jack, and good morning everyone.

Well, it's an exciting day for myself and the management team of Tim Hortons, but at the same time it is a day that we reflect on the past ten years that we have been in the Wendy's family.

In fact it was ten years ago at this time that we were putting the final details on the deal that we would announce the following week.

And I would just like to go back and tell you from our side what happened during that time.

We had looked at taking an IPO of Tim Hortons, it was owned by Ron Joyce.

Ron did not have anyone in his family that was in-line for succession.

Ron was turning 65.

We as a management team were concerned about the future of the company and where we were going.

We looked at various alternatives as to what to do with the brand.

We had some opportunities in Canada to align with some other companies.

And we had a relationship with Wendy's.

So with discussions with the management team, Ron decided that, let's go talk to Wendy's, in particular to Dave Thomas, Gordon Teeter, and Jim Neer at the time.

And we had a good relationship with these people and we knew them.

And the reason that we put the brand with Wendy's was because we knew the people.

We had a culture and a relationship that was similar.

Our companies are very similar in culture, and remain so today.

We also knew that with Wendy's we would if we were going to grow the brand in the United States, they would offer a tremendous opportunity for us to penetrate the U.S. market.

And our combo stores had worked very well for both of us, and we saw a great future in that.

So on the basis of those relationships we did the merger ten years ago.

I can say for myself and the team it's been a great ten years.

The management team that I led into this merger with Wendy's ten years ago is intact, and I think that speaks for itself.

We have had the independence to run the brand and drive the brand with great support from first Gordon and, of course, Jack and Kerrii, and we are very thankful for that.

We have a strong franchise system that's committed and healthy.

We have a good base of business in the United States.

And I have a management team, that is excited about the IPO opportunity.

And we are very confident about the future as we look forward, and we are very thankful that we had the great opportunity to spend ten years in the Wendy's brand, to be able to drive our business to take us to where we are at this point in time.

Jack?

Thanks, Paul.

Just a side note here, when we had our Board meeting the last two days, and it came down to a decision and a vote, it was unanimous.

But it was very emotional.

I think we all felt that we've been together, as a kid, and now we are sending them out on their own.

Well, Paul to out that night and he did have a few pops.

Okay.

Let's look at Wendy's now.

Total restaurants, we've been growing new units about 6% a year.

And we finished last year at the end of '04 with 6,671 restaurants.

Good revenue growth over four years, going from 1.7 billion, to $2.433 billion.

Then same store sales growth, pretty consistent over the last four, five years.

We had a low of 0.9, and a high of 4.7 during that time period.

Our segment income topped out last year, 272 million.

But you could see that from 2003, 2004, we flatten out. 2003 the front half of the year we had sales challenges, the back half was good.

We started also experiencing margin challenges with beef costs in 2003 and 2004.

And that produced a CAGR of 7% during the four-year period of time.

So the story here is we continued same store sales but we are really challenged by margins especially with beef.

So how do we improve returns?

We looked at the businesses from inside and out and five initiatives, and I will cover each one beginning with rebalance of our U.S. store mix.

If you look at this chart, in 1999, our mix of franchise and company store was 20% to 80%.

And in the 2004, as a percentage it's still close, 22% to 78%, but in absolute number of company stores, it rose 35% going from 982 to 1,328.

The question of how many company stores is right has been in this system for a number of years.

It goes way back to when I began my career, always the question of, what's the right mix of company stores.

And the answer is it really depends upon the times and what you are trying to achieve.

If you look at the next chart, we are at 22% against our main competitors, Burger King at 8 is probably the lowest, but then you look at McDonald's and Sonic and KFC and Taco Bell and Pizza Hut, they are all in that 20, 22%, McDonald's at 15, but an absolute amount of restaurants, 2,028 company restaurants.

In our minds there's no pattern here.

I think it's really based upon what your business needs , what your business model is, and what you feel comfortable with.

So the action we are talking is over the next couple of years we are going to lower the mix of company stores from our current of 22% to around 15 to 18%.

And we will maintain a base to provide leadership to the system, innovate in operations, new products, buildings, and at the same time we may strategically buy certain franchisees for business reasons.

The impact here is going to generate cash.

It's going to have a positive impact on our enterprise ROA.

I think it's always healthy to look at underperforming restaurants.

We did this in 1998 where we closed around 68 under performing restaurants, and this is the same analysis we did this time around.

We reviewed each site to determine whether to close, or continue to operate, or is it worth franchising.

And the goal, quite simple, it eliminated underperforming store assets to drive future operating income, cash flow, and return on assets.

So what we've looked at is to close anywhere from 40 to 60 company operated restaurants, and the impact would be an ongoing increase of pretax income and cash flow, and improvement in our enterprise ROA.

We also owned about 217 real estate sites that we leased to the franchisees.

Of our company restaurants we owned and fee 660, so about half.

But we do look at the franchise real estate, and we intend to pursue the sale of as many as possible of the 217 fee stores leased to franchisees.

And it will, we will also investigate the potential sale of the remaining stores to a third-party real estate company.

I know from the franchisee perspective, they do like to own their real estate at Wendy's.

So these sales are likely to take place over about the next year.

Again it will impact, generate cash.

It will have a potential for a pretax gain.

We will lose some annual rent, but the impact on the ROA will be neutral to slightly negative.

On the company fee sites, the company does not intend to sell the fee sites, for a couple of reasons.

The sale/lease-back as a vehicle for financing is likely to compare unfavorably with public debt.

And the gains from the sale/lease-back cannot be recognized at the time of a transaction as a gain, unlike a straight sale.

With that I would like to turn it over to Kerrii.

I would like to spend a minute talking about the fourth and fifth initiatives with respect to Wendy's.

The first one is the initiative to slow new store development.

From our perspective we have taken a long hard look at the stores that we've opened over the last few years, and without a doubt the cost to build new units continues to rise, and today we are above an average of $1.5 million opening new stores.

As a result the new stores are hurting our overall returns and the returns in the Wendy's segment.

From our perspective we believe we need to be as a Company extremely selective with new store development.

Our action is to reduce company store development , from approximately what's been an average over the last four years of 71 units per year, to 30 to 40 new units in a years time.

We want to limit the future new company store development to stores that clearly meet our growth and our return requirement.

The impact of that reduction in development is to actually generate additional cash that will not be reinvested back in the business in the range of 50 to $60 million.

And we believe it will have a positive impact on the enterprise return on assets.

The fifth initiative is to really rebalance the Wendy's store mix in Canada.

The next chart really gives you a little perspective on the growth that we've seen at Wendy's restaurants of Canada.

We've grown from 324 units to 384.

The interesting number I think on this page, is the fact that our company franchise mix, we are at 40% company stores, 60% franchise, which is significantly higher than the franchisee mix that Jack discussed with respect to the U.S. stores.

So as we look forward we continue to really look at what is the right mix there.

Our actual average unit volumes have grown from 1.1 million to 1.3.

And our same store sales you get a sense, have actually trended up very nicely over the last few years.

While we have had good growth in sales, our challenge has been in the income line and we are sharing with you the fact that over the last five years in U.S. dollars we have basically stayed level.

We are at $11 million of profit related to the Wendy's restaurants of Canada business.

And in constant currency we've actually declined about 4%.

So that really again in analyzing our overall business felt we needed to then look specifically also at Wendy's restaurants of Canada.

Our actions with respect to that area is to really look hard and close under-performing stores.

We will consider refranchising certain stores that we think can be operated more profitably by our franchisees, much as we are doing in the U.S., and we will continue company development, but only in the profitable and high growth markets.

The impact again much like the U.S. is that we would generate cash from the sale of restaurants as well as underperforming stores.

We do anticipate perhaps a pretax gain from the refranchising.

And a potential charge from store closures, and overall having an impact to improving return on assets for the enterprise.

With that I will turn it back over to Jack.

Just touch on the developing brands just for a second here.

Baja Fresh we believe our initiatives are starting to pay off.

The key metrics are improving.

Sales are strengthening.

It is contributing cash and will continue the turnaround, and monitor as we go forward.

Cafe Express is stable, again, the metrics are improving, sales are strengthening and we are going to continue the positive trend, and we will keep an eye on it.

Basically the same thing with Pasta Pomodoro.

Just a summary of our initiatives.

With respect to Tim's, 15 to 18% initial public offering, positions U.S. for profitable growth.

Rebalance U.S. store mix, close underperforming U.S. company restaurants, sell the franchise real estate, slow new store development, rebalance our Canadian market, and continue to work with our developing brands.

With that I will turn it over to Kerrii to look at the financial implications.

Our time this morning has been spent on the operational perspectives and that's really what has to drive our business what Jack started out with this morning, but what I want to share with you is the financial impact of those operational initiatives.

With that in mind, we do it in the context of understanding what areas of our financial strategy will be touched by these operational decisions.

And primarily they are the areas of cash, dividend, share repurchase and, of course, the long-term growth rate.

The strategic initiative that we've discussed would generate cash from the following areas.

The Tim Hortons IPO, the potential debt of a transaction would generate cash, the refranchising of the company stores, the selling of real estate to franchisees, and the slowing of new store development.

So the question we certainly wrestle with is, what's the most appropriate use of that cash from these strategic initiatives.

And the two areas we have focused on is, one, we think we should return debt and secondly, we should return back to the shareholders some of that cash in the form of both dividend and share repurchases.

So the strategic initiatives we as Jack has already talked to in summary, is that we have $100 million of debt that is due December 15 of this year.

Our current cash balance even today exceeds $200 million.

And we would save about 6.35 million as a result of paying off that debt and reducing our interest expense.

And that would help EPS certainly as we go forward, and it reduces our overall public debt outstanding by 15 to 17%.

Our second action for using cash is to increase our dividend by 25% beginning with the November, 2005, scheduled payment date in the November 21.

Our annual rate of dividend would then go to $0.68 per share, versus $0.54 per share previously.

Our target yield would be in the 1.4 to 1.6 and, of course, that depends on the price of the stock.

More importantly our pay-out ratio would be in the 23 to 27% range.

And then thirdly the use of our cash, our Board has authorized us to increase share repurchase authorization, $1 billion.

We current have authorized today about 222 million remaining.

That addition authorization will take our total authorization outstanding to $1.22 billion.

And when you look over the last few years from really the time they originally authorized the share repurchase in '98, we have purchased $1 billion worth of our own stock at an average cost of $25.28.

And then lastly as we look at all these initiatives in context we are here today to reconfirm our growth rate of 11 to 13%, based off all the initiatives that we have set forth.

And we look forward to having a strong future.

We believe it is a comprehensive plan.

We are absolutely focused on the long-term strategy of this Company.

On our capital occasion and on improving returns.

And with that the summary of the initiatives really are to sell the 15 to 18% of Tim's and an IPO, to improve Wendy's profits and their return, to repay the $100 million in debt.

And through an authorization, $1 billion more in share repurchases, as well as the increase in dividend.

With that I would like to turn it back over to Jack, and for Q&A.

I would like to give you my feelings and thoughts on, I've been a firm believer that one looks at their life or their business in chapters.

You have to realize when one chapter is over you close it, but the exciting thing is you have the opportunity to write a new chapter.

I think that pretty much sums up how Paul and I feel.

It's been a great relationship, it will continue.

Not only as business partners, but as friends.

But the exciting thing is we get to write a new chapter.

With that I will turn it over to John.

Okay.

Operator, this is John Barker.

In just a second, I would like you to open it up for questions.

Just first ground rules for today.

We would like questions from the audience coming over the phone line, to be limited to one question at a time.

We realize we will have a lot of questions today, we will take our time and we will go through them.

But if each caller can have one question at a time, it will make the process go smoother.

So now, if you can go ahead and open up the line for Q&A, we would appreciate it.

[OPERATOR INSTRUCTIONS].

First question comes from the line of David Palmer with UBS.

Hi, guys.

Hi, David.

Hi, Jack, Kerrii, congratulations to you and to Wendy's shareholders.

Boy, this is certainly a home run scenario for returns, and shows that you are indeed very open-minded, and just congratulations.

I guess my question is I assume from the tone of your comments, that you are committed to do a full spin of the Tim's business.

What would be the timetable for that and one more, what is the timetable for this $1 billion in share repurchase?

Let me do the first one first, okay?

We expect to complete the IPO in March.

So it's six to nine months.

Then I think you have to look at business conditions, performance of Tim's, of Wendy's, are both brands ready to go it alone?

And I think and you can't hold me to this, because business conditions can change, but I think 18 months, 24 months from now you could do the eventual spin.

But again the Board has to authorize it, you have to have good business conditions and the brands have to be performing.

The second on the repurchase I would say as the money come in, show me the money, Kerrii likes to spend money on these type of things, as the money comes in, we will start buying it back.

Right.

The share repurchase authorization, as it has been strategically as over the next several years, and as the proceeds come in, you would anticipate that we would repurchase shares accordingly.

David, just to be clear, though, we have never given specific guidance on forward purchasing of stock.

Okay.

Thank you.

Your next question comes from the line of Tom O'Neill with Barclays.

Thank you.

My question relates to your bonds.

Did you speak to the rating agencies about this and how important is your investment grade rating as you go through this transaction?

Thank you.

Yes, absolutely.

We operate under the 'No surprise' theory, and so as a result we did have conversations with both of our rating agencies, prior to this announcement.

At this point, we would like to this that we are slowing development and increasing our available cash.

We are paying off $100 million in debt in December.

So from that perspective it actually strengthens our overall position at Wendy's.

Certainly a potential transaction is at this point unknown as to what the impact would be.

I cannot speak for the rating agencies, as to what their opinion may be.

I think it is likely they generally watch and develop, watch developing circumstances.

But investment grade rating is important to us, but ultimately it's one of the factors that we look on an overall balance of our constituency.

Thank you.

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

Is there a way to get a sense historically the Tim's numbers, either as you would be showing them going forward, on an earnings basis at this point?

Well, I mean you have the segment income, but you can't really do an earnings per share, because we haven't sized anything yet.

As you know we don't generally give forward-looking projections.

On a historical basis.

We don't even know how it's going to be sized.

I think technically, that's what your S1 is for.

We'll wait for that.

One other quick question on the reported earnings going forward do you, I guess your 11 to 13% growth rate, sounds like that's going to include a lot of the moving pieces kind of coming through the numbers with the refranchising of stores, and real estate sales, and all that kind of stuff?

I think how we are seeing it is the 11 to 13 is still good even with the reduction of 15 to 18% of Tim's earnings on the enterprise.

And then somewhat offset by the actions.

But we see the actions overall the next two or three years whether it's gains or losses on some sales that it would be neutral.

Thank you.

Congratulations.

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

Thanks.

I thought one of the arguments against spinning Tim's initially, was that there was a large tax implication.

Could you address that issue?

Yes, there is.

How do we think about it, is it net of the proceeds?

We looked at a number of vehicles, okay.

We looked at income trust.

We looked at having Tim's becoming a domiciled Canadian corporation to do some things.

And all those moves were tax inefficient.

The best mode was to do the IPO at 15 to 18% which is under our basis.

And that would be tax-free.

And then if business conditions are right and the Board authorizes it, when we do a spin-off to the Wendy's shareholders, that would be tax-free, too.

And because it's a U.S. domiciled company, a big factor here was that the Canadian pension law changed and how much they can invest.

Before July 1 they can only invest 30% of their funds into a foreign domiciled company.

That's changed.

So there's a lot of things that lined up properly.

I want to make sure I'm understanding it.

This IPO, plus maybe a future spin-off would both be essentially tax-free?

Correct.

Because we are linked today, Tim's is owned by a U.S.-domiciled company.

We are not changing that nature of that.

Thank you.

Your next question comes from the line of Steven Kron with Goldman Sachs.

Good morning and congratulations to all of you on this announcement.

I have a question on capitalization, capital structure, and how you plan to capitalize Tim's going forward.

Is there an opportunity perhaps to kind of lever that up?

And is there a different optimal capital structure for the Tim's business versus the Wendy's business?

Thanks.

Steve, it's a great question it's one that we have certainly reviewed and looked at, but are not ready to commit to.

We have looked at placing some leverage on Tim's, and what the impact of that would be, but that will all be disclosed as part of the S1 filing, as to what the debt would be.

It's too early to the get into that detail yet.

Thanks for asking, and it will be shared.

Next question comes from the line of Mark Kalinowski with Buckingham Research.

Just curious about the long-term EPS growth rate you are targeting.

It would seem to me with some of what's announced today the share repurchases, which would lead to lower sharecount, the debt pay down that , that perhaps 2006 might be a better year than 11 to 13%.

I know you don't normally comment on that type of forward-looking thing, but given today's fairly extraordinary announcement, it wouldn't hurt to ask.

And it won't hurt not to answer either. [laughter]

I guess I would just add, as we said this is the long-term growth rate.

We are not giving projections over '06.

We are happening what's happening over the long-term, three to five years.

As you know it can go up or down based on any business conditions for a year at a time.

I might ask quickly on the tax rate expectations going forward.

We still believe 35.5 is the tax rate kind of going forward here, no change.

It was an unusual situation with the current quarter.

Mark, welcome back.

Thanks.

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

Hi, guys, congratulations, also.

One clarification and one question, I heard you talk about the company-ownership of the 660 stores.

That's not in the current plan.

Is that correct?

No.

What's in the -- we own, out of the 1400 company stores, fee based sites, 660.

The rest are leased.

And we do not plan on selling or doing a sales/leaseback of those 660 sites.

And I guess I would make the statement, Larry, it's not mutually exclusive.

To the extent you make a decision to sell a market and refranchise your company stores, it may have some fee sites in it.

What we are saying is, we are not going to take the approach of basically getting all 660 off of our books if we so chose to keep those as company stores, we are not going to do a sale and lease back-to-back.

To the extent you're selling markets that have fee sites, you would sell those.

I get it.

My question was, you outlined all the uses of cash.

Have you totaled up what you think the approximate gains are, net of any total charges you might make, particularly cash charges?

I think in the press release it said that you were going to take some impairment charges.

Are we to assume that that billion dollars in share repurchase is kind of a rough estimate of what you think you were going to generate cash flow?

Yes, I think that's fair.

And also then on the sale and, of assets we figure that during the course of these actions, it will be net out to neutral.

Thank you.

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

Thank you.

Are there any other IPO nuances with Tim's that we should be aware of?

You mentioned the gaining pension funds investment options expanding.

Are there any other nuances related to Tim's?

I know it's domiciled in the U.S., but being a Canadian company.

I can't think of anything, Joe.

We do know that Canadian appetite would probably be pretty good for this.

And Kerrii, in one of your slides you did Tims IPO and debt, and I know you didn't want to answer the capital structure question yet but the implication of that is that there will be some debt ascribed to Tim's in this breakup?

I think what we would say is that we certainly would consider having some leverage at Tims.

That reduces your overall cap to capital, along with everything else.

Whether it would be new debt is what would be more likely if it were there.

It wouldn't be us transferring current debt from Wendy's there.

The 11 to 13% long-term rate is intact, what do you think Wendy's grows at on a standalone basis?

I think that's a question that would probably serve its purpose a little bit later, because we are going to be taking a number of actions, and I think that with the share repurchase, and how it all comes together, I think I would like a little bit more time on that one.

Sure.

Thank you.

Your next question comes from the line of [Satchin Shaw] with Cathay Financial.

Congratulations.

Just wanted to based on today's announcement wanted to find out when can we expect Tim's to start accelerating their plans for growing U.S. units?

Well, you know, one has to be careful.

This is a business.

And it's just not about growing stores and taking in money.

One has to be careful in entering new markets.

One has to be careful that you don't outstrip your franchise capability and your people base.

And we said that a year ago that our goal is to get to 500 restaurants by the end of '07.

And I think based upon conditions and how Paul feels, he will announce at that time what the next plan would be in going forward.

But right now it's getting to 500 restaurants by the end of '07, and that's a magical number in the restaurant business, because you have infrastructure established and sometimes it's harder to grow from 250 to 500, than it is from 500 to 1,000.

So we have good plans in place and I think we need to play that out.

So you stand by your 500 by '07 number?

Yes.

Okay.

Is there going to be a reevaluation of that number going forward, post-IPO?

You always evaluate.

You do that ongoing, but that's our plan right now.

Okay.

Fair enough.

Thank you.

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

It's Paul Westra.

Congratulations.

Just really a question on the underlying Wendy's capitalization in both the underlying debt to capital ratio, just trying to do the math at first blush here.

Do you have a target debt to capital ratio there?

Can you share what that would be?

It's just and then answer the question, is it safe to say that if the underlying company keeps it's 500 million or so remaining debt, buys back $1 billion of stock, would you exceed that ratio or would you just approach it?

I think we, there's a number of factors, you are still owning 85% of a company that has issued new shares, new common shares.

So I mean there's a lot of things going on in the equity section of the balance sheet from that perspective, Paul.

I mean for us, that's going to be part of the whole pro forma as thing go forward, but it certainly changes the landscape a little bit there, but I think we continue to be focused on the pay down of the debt of 100 million, that certainly helps us from a leverage perspective, and we have a very, very strong cash position.

Even today without any of this occurring.

Do you have a general debt to capital ratio?

As we have continued to say we would like to maintain investment grade rating.

That has been our focus.

Does that mean you are a notch level below where you are today?

It might be the case.

But we continue to focus on investment grade rating at this point.

If I can follow up quickly on a cash tax implications, you mentioned gains and losses I think on a GAAP basis was kind of breakeven.

Was there a, do you suspect any net cash tax implications one way or the other?

I would say no, no real impact there.

I mean we think in general, anything that we would have from a loss perspective would be tax deductible along with any gains would be tax taxed, so no unusual offset there.

Great.

Thank you.

Your next question come from the line of Ricky Sandler, Eminence.

You guys talked about the GAAP impact of gains and losses from both the write-offs and selling units, but you didn't talk about the net cash flow impact.

It sounds like a lot of the losses are write-offs of assets and the refranchising would be gains in the cash form.

Can you talk about how much net cash the company thinks it would take in by lowering its company-ownership percentage?

Well, just cutting back on, let's say, company restaurants and building them, it's about 50 million, cutting it in half.

So you would have a net impact of 50 million in additional cash.

I'm speaking of cutting its ownership from 22%, to 15 to 18 and selling it, it's own real estate.

About 300 to 500 million.

300 to 500 million.

Again those are initiatives that would take place over the next several years.

They aren't going to happen next month.

I understand.

Great.

And as far as Wendy's breakfast concept, has the company considered using the Tim's brand inside of the Wendy's unit, to use that as a breakfast concept?

Yes, we have.

And there's been some testing.

But in building a brand going into new markets it's not a good way of doing it to build brands awareness, and we pretty much made the decision, Paul and I really three or four years ago, that you would want to build -- you don't want to build the brand in the U.S. that way.

If you could have some filler sites maybe, but the way to build it, is the old-fashioned way.

Okay.

Thank you.

The next question come from the line of Fred Wadler with UVT

Just want to ask you to over the Canadian income trust conversation you had with Royal Bank, and just if you go into a little more depth where you came out, in terms of whether it's a possibility to do anything.

We already said we are not so.

Right.

The possibility is not there but some of the reasons we looked at was evaluation, tax and structural implications of the income trust.

Tim's needs capital, and we felt that if we would do the income trust route, and paying out the dividends we would have to borrow money to pay out the dividends, and that didn't make a lot of sense to us because Tim's is a growth company.

Thanks.

Your next question comes from the line of Rachael Rothman with Merrill Lynch.

Hi, guys, good morning.

Just a quick question, when you say 217 sites, for the site do you mean you own the land and the building, or just the land, or neither?

It's a combination.

Most of it is just the real estate, the land.

Just the lands for the 217.

Sometimes building but there's mixes.

Do we have a rough approximation?

No.

50/50?

No.

We are just not going to disclose that, Rachael.

Perfect.

Thanks, guys.

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

Thanks.

My question has to do with selling refranchising company restaurants to franchisees.

I mean if you could talk about philosophically about your selling restaurants to franchisees, maybe at your operating income trough historically, and whether you do in fact wait for that to, for you to perhaps improve, before you are particularly aggressive on the selling program and secondly, is it true that a franchisee preroyalty restaurant operating income is meaningfully more than company stores, I mean can they operating meaningfully more efficient than you can on a similar sales volume?

Thanks.

Usually not because of the royalty at 4%.

So.

On a preroyalty basis, I'm sorry.

It's about the same.

There is not much difference.

Do you wait to have operating income go up at the store level before you go through this aggressive franchising program?

What's in your thoughts?

I mean do you sell it--?

It's going to be over the next two to three years.

Business conditions will change.

We will be able to do some markets now, some markets later.

And we are not going to be tied down here.

We are not, we are going to do it on our timetable.

Historically when will there have been transactions between you and the franchisee, where have those transactions typically gotten done on an EBITDA basis or multiple EBITDA basis?

Are they getting done at 5 times, 6 times, 7 times?

6 to 7 I think that would be fair.

Every case is different.

Orlando, that was, when we bought that back it was about 7%.

7 times.

7 times.

And that was about 50 some odd stores.

And from our perspective, this is not a fire sale.

We think we understand our business better than anyone, and we certainly are aware that margins have been down, and that certainly is part of our overall strategy as we set prices.

And we think interest rates are low, and that's very positive for franchisees today.

In terms of overall concentration, should we think about the company being just a primary operator in just fewer markets, are you going to sell entire markets or are you going to sell the one-off company stores, that you may own within markets?

How should we think about your dis-investment, I guess, in the business?

When we announce it you'll fine out.

We can't, I'm not going to divulge that.

You can't do that.

We are going to think about it and then do something and then we will tell you.

The most important thing here is that we work with our franchisees and our company to get it right before we announce anything.

And to your knowledge, is there plenty of financing for the franchisees to buy units or would you consider helping?

I know you've done this before with different properties, would you actually help them finance some of the units off your own balance sheet?

I think the intent would be for them to do their own financing, and we certainly have relationships with a number of firms that lend and finance for our franchisees.

Thanks.

John, that was four questions.

Your next question comes from the line of Filippe Goossens with CSFB.

Good morning and thanks for taking my call.

You had indicated on various locations this morning your strong desire to stay investment grade.

If you look at the stock this morning in the preopening it has reacted very favorably and hopefully some particular investors will be very pleased with it, and hopefully will put somewhat less pressure on you.

Now if you were to fully spin-off the Tim Hortons business let's say 18, 24 months from now, obviously you will lose about 50% of your cash flow, which will be negative from a credit metrics perspective.

What I'm trying to ask is from a conceptual perspective if you look at the entire QSR restaurant business, only about five or six companies that are currently investment grade.

What are the benefits for you as a company to stay investment grade?

Can you just share that thinking with us?

I think it's a great point.

We do recognize there are only a few of us that are investment grade.

And to that point we understand that there can be a fine line there.

It certainly helps in lowering your overall cost of borrowing.

That's an obvious one, although we may not have needs to the near term to go to the market for anything.

We just think it's a good position to be in.

It's a cyclical business.

It goes up and down.

And so that's sensitivity but we also understand that we have to do the right long-term things for all holders.

I think also at times for our franchisees when we lineup lenders, having investment grade rating tends to benefit the franchisee, too.

So one has to look at that.

Would it be fair to say if you decide to spin-off the remainder of Tim Hortons 18, 24 months from now, and there were to be some concern from the agencies because of that loss of cash flow, that you might kind of spread out a little bit your share repurchase in order to, maintain that investment grade rating?

I think we are always -- we've got to react and be flexible.

And so share repurchases are an opportunity to make a decision to buy or not buy.

You are not absolutely committed.

Over time because we've gotten away from the options, we won't, we will not have to buy the level of stock that we have bought historically to offset dilution from stock options.

So as we look out several years from now, our options are going to be gone.

We went to restricted stock.

We are awarding significant less than the number of shares today.

Our overhang is coming down.

So I think all of those bode very well for us not to have to be in the position to buy the kind of stock back we had to up to this point and for the next year or so to offset delusions.

And a big chunk of it's going to come after we do the IPO.

And the proceeds we receive there, it's going to be the majority of that billion dollars.

Thank you very much.

Your next question comes from the line of Jeffrey Bernstein with Lehman Brothers.

Thank you very much and congratulations.

Just a question more broadly on the QSR category.

I know you mentioned it in your commentary about the competitive convergence continuing.

I'm wondering from an operational standpoint, some initiatives or plans to drive and improve perform at the core Wendy's burger business going forward?

I think we have a good calendar for the back half.

We have easier comps.

So I look forward to that.

Then on the margin lines, we've done a number of things from our 'Value Choices' menu, we are going to be picking up margin on that.

As we roll-out our two-sided grill we will pick up 20 hours of labor savings.

We expect these costs to moderate.

In fact we are seeing it now.

For the past five or six weeks the average price is about a dime under what we are paying now, $1.54.

We hope that continues.

The Canadian border is open.

That helps drive this.

We are looking at being a lot more optimistic about the second half.

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

Hi, good morning.

Just I guess a longer-term strategic question on growth at core Wendy's.

In the past you really emphasized Tim's U.S. as one of the growth stories you've really been placing a bet on.

If do you the full spin of Tim's you are left with Baja, Pasta Pomodoro, and Cafe Express, none of those have proven themselves as a growth story, will you be looking for other vehicles for cash flow?

The way I've put it we've done two mergers or acquisitions that were of significance over the last ten years, one was Baja, and one was Tim's.

Clearly Tim's was a home run.

And Baja we still believe it has a good future.

But as of now it wasn't a home run.

So we are batting 500.

And 500 gets you into the Hall of Fame.

When and if Tim's spins out completely one has to look at your own company.

Maybe we are not a growth company at that point.

Maybe we are going to be a performance-driven company and a cash-driven company and a returning money to our shareholders through dividends, and things like that, and still keep an eye on, out for another growth story.

If it's Baja, fine, but there could be other things out there.

But one has to look at Wendy's maturing.

And you have to adjust your company along those lines and there is great companies out there, and we've always been about being the best, not the biggest.

That's what we are focused on.

Okay.

Kerrii, there's about $70 million of corporate overhead that would need to be divided up here between the two.

Can you talk about how that split would go, and are there any synergies on food sourcing that we need to think about that may go away if do you spin-out Tim's completely?

Well, as you know part of preparing the S1, is to go through the carve-out analysis.

So we are beginning that process as we leave here today.

So from that perspective we can't tell you of how much is a benefit to Wendy's or Tim's, how it would exactly be split.

Is it exactly revenues, is it, you know, income?

There are certainly things that happen at corporate that benefit Tims.

I would tell you, though, from a purchasing perspective there are not many synergies that exist today between the two brands, so this should not abnegative impact by anything from that perspective.

Thank you.

Your next question come from the line of Marcia Shelton with FBR.

Yes, this is Marcia Shelton on behalf of Howard Penney with Friedman Billings Ramsey.

How is Howard doing?

Fair to partly cloudy with blue skies on the horizon, he was in a pretty serious car accident, and is actually in surgery right now.

Give him my best.

We certainly will.

Thank you.

I had a quick question regarding the level of debt.

I think I must apologize, I must have missed this, but wanted to get an idea of the amount of debt that you would expect to repay in 2006 pending all these strategic initiatives.

We are actually going to repay $100 million of debt in December of this year, it becomes due and payable on December 15.

And that would occur this year.

Okay, I think I missed that part of the call.

That's all right.

Thank you.

Your next question comes from the line of Rob Schwartz with JL Advisors.

I had a quick question on the buy back.

I think earlier you mentioned that as soon as you got the cash you planned on spending it.

And I guess the refranchising will occur over two to three years.

But the IPO will be completed by March.

I mean depending on estimates you could have anywhere from 600 to 800 million from that, maybe more.

Do you plan on using that shortly thereafter?

I guess based on your early comments?

Yes, I mean from our perspective it is most advantageous for to us quickly put that cash to use, whether it's through share repurchases, certainly you have a couple of different options in the future.

Dutch auction or buying in the open market or whatever, those would be the kind of techniques that may be utilized.

But you expect to utilize that shortly thereafter.

Yes.

Okay.

Great.

Congratulations, guys.

Thank you.

A follow-up question from the line of David Palmer with UBS.

Hi, guys.

With regard to the remaining Wendy's business obviously you are refranchising roughly a third of your company-owned stores there, and that will obviously have some ramifications for profitability.

But obviously the spin shines a bright light on that business overall profitability, is there anything else as you kind of look at that as a standalone business with fresh eyes and you think about margins and other things that you can do to drive the profitability a way from the beef costs abating, and sales getting better?

Exactly and that's why we are doing these initiatives.

And that is to really start looking at the returns and the performance and what can we do to enhance that, not only now but or when the future comes and Wendy's is a standalone.

Okay.

I think we said it already but certainly a big opportunity for Wendy's is the morning day part, so.

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

Good morning everyone.

How you doing, Jack?

Good.

Three questions.

The first question, have you considered a sale of Baja?

I think that's always, I mean, you always, if someone came and offered us 200 million I would consider it for about one minute.

And the psychiatry bill would be later forthcoming?

Yes. [laughter] But right now right now we are happy with the metrics, no one is beating down our door and we are seeing things that we like, you never know, it could be a good story for us in the future.

Number two being a restaurant operator, I'm not always clear on arcane accounting rules, if you own 80% don't you still have to consolidate the financials.

You are remembering your Accounting 101, we will continue to show consolidated financials as we do today, consolidating all the elements of financial statements within ours.

We will then of course eliminate whatever minority interest, we do not not-- no longer own, whether it's 15 or 18%.

And eliminating the one-line item.

Okay.

So basically everything stays the same except for a minority interest line, which is now new.

That is correct.

And would have to set up the corporate governance, it's going to have its own Board and reporting procedures.

So that will change.

And they will have to file themselves will they not?

That is correct.

So we will be able to break the numbers out separately.

They will have their own separate financials.

Last question on the Hortons financials, have you anticipated transferring any debt over with the transaction?

Our thought at this point is that we would not technically transfer any of Wendy's debt, whether or not there is new debt, that's yet to be determined.

So the IPO would by basically be of a debt-free company?

No, I'm not saying that yet.

Okay.

Okay.

There's your three.

Dean, we know you can't do accounting, we said one, you asked three.

By the way, I'm the only one out there with a buy rating on your name.

That's because Jack trained you in the stores.

That's right.

For everybody Dean Haskell when I was much younger than I am now, Dean was probably 16, I had portions of the Atlanta market, and Dean was a crew member.

Next.

You have a follow-up question from the line of Larry Miller with Prudential.

Thank you very much.

Just a couple of questions, I promise not to ask as many as Dean, though.

The appetite, have you spoken to some of the franchisees about buying back some of these company stores?

I imagine they are probably highly in demand but what's the appetite.

Remember, we are under FD, so we couldn't talk to them before we talked to you and announced this so I would imagine the appetite would be good.

We are going to have a conference call with our franchisees on Monday and Paul is going to have one this afternoon with his.

And the second question is, the combo units thank you currently run that are both Tim Hortons and Wendy's, how will that be operated, will there be changes there?

I don't know that, we haven't really gotten into it.

It is set up as a separate entity, Tim/Wen or Wen/Tim, and we had that set up before we merged.

So we are going to have to look at it, but it would probably be the same.

My math is not quite as good either.

I think I have another question.

I think one of the reasons that maybe you didn't spin it out in the past, was the market was adequately valuing Tim Hortons.

According to your own DCF models internally.

Can you speak to the current valuation of Tim Hortons internally in your model?

We can't really do that.

We leave you guys to do that.

I know.

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

Hi, good morning.

Good morning.

I do want to extend congratulations to Paul House and his team, a wonderful job they've done the past decade.

I think we all share that.

Thank you.

I wanted to get some clarification on the Wendy's brand.

The units that are being earmarked for closing, it sounded like those are cash flow losers, how many other cash flow losers are in the company portfolio?

We see 40 to 60.

The interesting thing is, its mainly older stores that maybe the market or the demographics have moved away.

And it's something that you look at from time to time.

So these are new cash flow losers.

I wouldn't say that but the last time we took a very hard look was a number of years ago.

Okay.

And the units that you are thinking about refranchising, if we downshift that ownership number it's somewhere in the, call it 300, 350 units, if I did the math right.

Yes.

How much does the operating performance of those units need to improve in order to make the math appropriate for franchisees given the incremental cost from the royalties.

The math would not have to improve.

It's underperforming from averages, and maybe by looking at some of your underperforming, you have a tendency then to raise the overall.

But it would still a good deal for a franchisee.

If we take the company operating margins where they have today, and then obviously layering on some debt service costs, it's a pretty interesting exercise to figure out how these 300, 350 are going out the door with current performance.

Okay.

We've analyzed it so.

Okay.

Okay.

That's why we have Jonathan.

Yes, and actually when you prereleased the sales three weeks ago, you made mention that the finger incident restrained second quarter comps in the area of 2 to 2.5%.

That's correct.

Does is that restraint still part of the equation for the Wendy's-based business?

I'm not sure it's up to that level any more.

Okay?

Okay.

And then lastly on the capital side as you are kind of reassessing how the capital spend is being partitioned for the Wendy's brand, is there any change to the fresh simple remodel program or the double-sided grill, and that's it, thanks.

No, the double sided grill is an investment that you know you are going to get a return on.

The fresh and simple, it's still there.

And remember the remodel program is over 5 to 6 years, 7 years, it's all doesn't have to take place right now.

All right.

Thanks, Jack.

Okay, Peter.

You have a follow-up question from the line of Paul Westra with SG Cowen.

Great.

A question about the Maidstone Bakery, Jack, and relationship going forward with Wendy's, can you highlight that and whether they will play a role in any pending breakfast roll-out down the road?

No, because it's really supplying all of Tim's in Canada and the U.S.

And we are at good capacity.

I don't think there's a lot of overflow to handle anybody else but Tim's, and it's been a very good investment for us, and we will go from there.

If any prospective Wendy's breakfast offerings, therefore, wouldn't they resemble what they are already producing for Tim's?

No, it would not.

Lastly I guess a question on the Tim's GAAP tax and cash tax as a standalone company.

You mentioned your tax rate 35.5 seems would stay as Wendy's standalone.

Does that imply that Tim's would be pretty comparable to that on a GAAP basis?

We are not ready to give those projections yet, Paul, but again that's part of laying out the individual financials, as part of the S1, on a historic basis.

How about a general direction on cash taxes, maybe Paul knows, is there anything we should know, is there some tax savings or hurting.

No, not really, Paul.

No.

Great.

Nothing that unusual.

Great.

Thank you.

Thanks.

Your next question come from the line of Bill [Ackman, Pershing]

Good morning.

I wanted to say that I think management did an excellent job with your very comprehensive structuring, and I wish you the best and I guess at the end of the day it's in the execution, and we are excited to be shareholders.

Thank you.

Thanks very much.

Operator, any more calls in the queue?

Yes, sir, you have one further question.

Let's call it then.

Your next question comes from Jeff Omohundro with Wachovia.

Congratulations.

It's an easy one.

That's easy for you to say. [laughter]

Hopefully an easy one.

What do you think the timing is, around the filing of the S1?

Well, I think we would hope by year-end, we could file on a sub-period, but that gets you into the SEC and it's up to the SEC with their review, as well as Canadian authorities.

So the timing sometimes is not in our control, but that would be what we would hope.

Again, the offering would not really be in place until next year, off of year-end numbers.

Great.

Thanks.

Okay.

We want to thank everybody for participating in today's call as usual.

Please follow up with me or Dave Poplar later today, and have a great day.

This concludes today's conference.

You may now disconnect.