Wendy's Co (WEN) 2005 Q3 法說會逐字稿

Good afternoon, and welcome to the Wendy's International third quarter 2005 results conference call.

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

After the speakers' remarks, there will be a question and answer period.

If you would like to ask a question during this time, simply press star, then the number 1 on your telephone key pad.

If you would like to withdraw your question, press star, then the number 2.

Thank you.

At this time, I would like to turn the call over to Mr. John Barker.

Please go ahead, sir.

Okay.

Thanks a lot.

And good afternoon, everyone.

The purpose of our call -- and our webcast today is to discuss our third quarter results for 2005.

We're going to update you on some key initiatives on each one of our brands and then give you management's outlook for the rest of the year.

We did publish our third quarter results earlier today.

It was our corporate news release and the accompanying financial statements.

All that information is available on our website at www.wendys-investment.com.

Please want to note to you that our earnings release include several things, including our income statement, pro forma reconciliations, a balance sheet, our revenue and operating income by segment, as well as our system-wide restaurant unit summary.

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

Following those remarks, we'll open up the call for questions.

Now before we get started, I would just like to update you on a few things regarding upcoming events on our IR calendar.

November the 9th, we're going to be hosting an Analyst Day here in Dublin, and that is being sponsored by Pure Oaks and Piper Jaffray.

We plan to release our fourth quarter sales results -- and that will be for the month of October, November, and December.

And the date for that is Friday, January the 6th.

We plan to release our year-end earnings on the morning of Friday, February the 3rd, and that will be followed by our 2006 outlook release, as well as our investor meeting which we typically hold in New York and we will again this year, and that is scheduled for Monday, February the 6th.

We will send out more details about that event and RSVP information in the near future.

For future reference, please note that we do post all of our disclosure dates on our corporate and investor relations website.

You may have noticed in our release today that we did publish our first ever corporate responsibility report during this quarter.

This is an online report that is accessible from the investor relations home page.

The report has information about our corporate ethics, governance, community relations, nutrition and animal welfare, and also has information regarding other initiatives for our stakeholders.

I urge you to take a look at that when you get a chance.

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

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

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

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

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

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

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

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

In the event that we reference a non-GAAP information, a reconciliation that is most directly comparable to the GAAP financial measure will appear on our website, which is mandated by Reg-G.

Now let me turn it over to Jack.

Thanks, John.

First, I'd like to summarize our results for the third quarter.

Revenues were up 5.1% for a total of 961 million.

Same store sales, Tim's in Canada, positive 3.6.

Here in the U.S., Tim's positive 4.7.

Wendy's brand, U.S. company restaurants down 5%;

U.S. franchisee down 5.5, and Baja Fresh down 4.1.

Our net income was up 4.3% to 72 billion, and our EPS was 61 -- [LOST AUDIO].

Sir, you may resume your conference.

Sorry about that, everybody.

I think I left off, EPS for the quarter was $0.61; that's positive by a penny.

We had strong sales at Tim's, both in Canada and the U.S.; but I got to tell you, we've been disappointed in sales performance in Wendy's and in Baja, and I can tell you we're very focused on improving the top line.

At Wendy's North America, it was a challenging third quarter.

Sales were below our expectations, impacted by hurricanes and competitive activities.

Margins were impacted by higher beef costs, an all-time high of $1.55 per pound versus $1.31 the prior year; that was an 18% increase, which had a $0.02.5 share negative impact on earnings.

The good news is, here in the fourth quarter, beef costs are down to about $1.39.

We're really concentrating on our restaurant operations, marketing, research and development, and we're really going after our sales and reinvigorating the system.

From an operation view, we ranked number one in -- again in QSR Magazine's Annual Drive-Thru study at 135.7 seconds.

But we're not pleased with our performance, because our average time slowed down 11 seconds.

And our goal is very simple.

We're going to improve, we're going to stress speed, accuracy, quality; and we are recommitting, and all our operators in the field are going after the service excellence across the entire system.

As you saw in today's release, I plan to continue at the Wendy's brand to provide leadership as a goal, and we're doing it, is to reenergize the system by focusing on continuous improvement in operations in everything we do.

I've spent a lot of time over the past month with our franchisees listening, learning, taking action; and our whole goal is to add value to our franchisees in everything we do.

Two weeks ago, we had excellence meeting -- excellent meetings with our two franchise leadership groups, our Wendy's National Advertising Committee and also our Franchise Advisory Counsel; and again, we had excellent meetings.

And starting this Sunday in Las Vegas, we're holding our biannual convention with our suppliers, operators and franchisees, and we expect about 3500 people there.

So I really look forward to this meeting.

In the quarter, we had a number of test products -- one was Frescata sandwiches that I'll talk about.

We had a 10-piece Chicken Nugget Combo that proved out pretty well, and two new salads, the Chicken Caesar Salad and the Southwest Taco.

Our pipeline is getting full again.

In February, we're going to have a number of test products.

We're going to test the extension of our Frescata line with hot beef and hot chicken products.

We also have a great [LOST AUDIO].

Ladies and gentlemen, this the the operator.

I apologize, but there will be a slight delay in today's conference.

Please hold and the conference will resume momentarily.

Thank you for your patience. [PAUSE IN CONFERENCE]

Sorry about that, everybody.

But in February, we'll have our local pillar with a number of tests, including our Frescata extension with hamburger and chicken.

We have a great new product we're going to test called the Stuffed Double with jalapeno and cheese; and I can tell you, it's outstanding.

We're also going to be testing a high quality 99-cent chicken sandwich, and regionally, we have some favorites from a while back.

One is the Carolina classic that goes over very well in the Carolinas and Virginia.

The Frescata deli sandwich test results were strong, and we plan to roll out this product to the entire system next year.

We're also considering the Chicken Caesar Salad and the Southwest Taco Salad for sometime next year.

Ian Brown, our new Marketing Chief, and his team continue to integrate our platform with pillar advertising.

This involves using the internet, along with television, cable, radio, print, and in-store marketing.

Our fourth quarter promotions include the Bacon Mushroom Melt, which was done in the past.

It's proven sales -- [LOST AUDIO].

Ladies and gentlemen, this is operator.

I apologize but there will be a slight delay in today's's conference.

Please hold and the conference will resume momentarily.

Thank you for your patience.

Ladies and gentlemen, this is the operator.

I apologize, but there will be a slight delay in today's conference.

Please hold, and the conference will resume momentarily.

Thank you for your patience.

Hello?

Are we connected again?

Operator?

Hey operator?

I believe we're connected.

Yes, I don't know if we're -- should we start?

I don't know if we're connected --

Yes, sir, you may begin.

Okay.

Are you sure we're connected?

Yes, I am.

Okay.

Thank you.

You're welcome.

We really apologize.

I think it may be on our end.

This is about the fourth different phone we're on.

So, you know, I think I'll start with the -- I don't know how much you've heard, but start with our test products this year.

In August, we had the Frescata sandwiches that proved out very well.

We plan to roll that sometime next year.

We also had our new salads tested in August, the Chicken Caesar and the Southwest Taco.

And we're considering adding these next year.

And then we also had -- [LOST AUDIO]

Ladies and gentlemen, this is the operator.

I apologize, but there will be a slight delay in today's conference.

Please hold, and the conference will resume momentarily.

Thank you for your patience.

Please go ahead, sir.

Okay.

Thank you.

Again, we'll try to get through this.

I think I left off at our test products in August.

I'm getting pretty good at doing this; but we did the Frescata sandwiches that tested very well and we plan to offer them to the system next year.

We also tested two new salads, the Chicken Caesar and the Southwest Taco, that we'll probably add sometime next year.

And then in February is our local pillar coming up, and we have a number of exciting tests going on, some line extensions with Frescata using our hamburger and also our chicken product.

We have a stuffed double with jalapeno cheese that's truly outstanding.

We'll be testing a high quality 99-cent chicken sandwich; and also regionally here in -- in some parts of the southeast, we'll do the Carolina Classic.

In the fourth quarter, right now we're promoting our Bacon Mushroom Melt that's a proven winner, and then we will continue with our hamburger personalization.

An update on our announced -- that we announced on July 29th of our strategic initiatives, which were to sell some of our real estate assets, close some underperforming stores, refranchise certain stores and slow new store development.

Selling real estate is our number one priority at this time that we own.

As you saw in our release, we already reached record [INAUDIBLE] gains from this initiative and we expect further later on.

We also slowed our new store development.

We now plan to open 30 to 40 Wendy's per year versus our -- our planned 71.

We're also working to close underperforming.

From Tim's standpoint, produced especially strong overall sales -- combined revenues up [23.2%, or 307] million.

In July, we had fresh baked cookies;

August, cinnamon rolls; and September, chocolate themed deserts.

Operating income increased nearly 19% and really continued to build new restaurants and same store sales.

In October, we're promoting our Hearty Vegetable Soup and Turkey Sandwich Combo.

Deal of the month is the Pumpkin Spice; and we're rolling out our new Hot Smoothee to all stores later on, and we're testing a hot breakfast sandwich in New England.

We continue to move forward with our plans for an IPO of 15 to 18%.

We plan to file our S-1 in December, and we continue to target March '06 for our IPO.

One last thing is that Tim's continues to get recognition.

Waterstone Human Capital named Tim's part of the Top Ten Most Admired Corporate Cultures in Canada, ranked Number 2; it's a great honor, and they beat out a number of institutions like RBC, Four Seasons, and Starbucks.

Now, about the rest of the year, we lowered our guidance to 2.12 to 2.15, from 2.06 last year; and this is to account for lower than expected sales, the impact of hurricanes, expenses for accelerated stock options, anticipated IPO costs in the fourth quarter and slower new store growth.

Now Kerrii will provide more details.

Well, thanks, Jack.

For the third quarter, we did produce record results in revenues and we generated earnings per share of $0.61.

This is, of course, one penny better than our reported results for 2004's third quarter; but we did have several items that impacted our results, certainly resulting in a benefit to us for the quarter.

I'd like to walk through those items.

Let's take a look at the income statement.

Our revenues increased about 5.1% to 961 million.

And, as Jack's indicated, new store development, we opened up 96 new restaurants during the quarter, 46 Wendy's, 48 Tim's and two Baja Fresh.

Our overall corporate effective tax rate declined for the quarter from 36.5 a year ago to 32.6.

And I will take a few more minutes to explain that decline in just a couple minutes here.

The tax rate did have a positive impact on net income, and therefore net income was up about 4.3% in dollars --72.1 million compared to 69.1 million a year ago.

EPS was $0.61 compared to $0.60 a year ago.

So let's look at the items that did have a positive impact on our EPS.

We benefited about $0.07 per share from currency, and it really came in two ways.

We got about $0.04 of the $0.07 from just the translation of our Canadian operations, and that's because the rate did move from $1.31 last year to $1.20 this year.

The balance of the $0.03 came from a one-time mark to market benefit on cross border intercompany notes.

Since the notes had to be mark to market, we did go out and hedged those notes, and so they have now been hedged.

The hedge is a complicated thing, so I'd like to give you a little bit more detail on this.

As we position ourself for the Tim's IPO that Jack described, we had to determine how much cash we might -- you know, how would we get cash and distribute it to the parent company.

And we decided that certain cross border notes which had previously existed would no longer be permanently invested.

As a result, GAAP requires us to mark those notes to market, and we did during the quarter.

And our earnings reflect that mark to market.

In an effort to manage the risk of the fluctuation of currency and to really minimize future earnings impact, we entered into an effective hedge, which qualifies for hedge accounting treatment under FAS-133.

Prior to the execution of the hedge -- so in between the decision and the actual hedge -- the exchange rates improved; and it resulted in us generating a gain of 4.3 million for the quarter.

This gain, however, is not recognized for tax purposes.

So this is the primary driver that resulted in a lower effective tax rate.

And this was offset a little bit by the fact that certain of our IPO expenses are nondeductible for tax purposes.

We do not expect, however, significant future gains or losses on these notes.

And going forward, the hedge will be recognized, however, for tax purposes and it may impact our effective tax rate until the hedge is ultimately settled.

Also having a positive impact on EPS was the sale of real estate.

We picked up about a penny per share from completing the sale of certain real estate related to our strategic initiatives that we announced in July.

Now for all the items that had a negative impact on EPS.

Our all-time high beef cost of $1.55 versus $1.31 a year ago has impacted us about $0.02.5 negatively per share.

In addition, increased restricted stock expense had a negative impact of about $0.01.5 cents a share.

And that's $0.02.5 for this quarter versus a year ago only a penny per share of expense.

The average number of shares outstanding increased by about 2.5 million average shares, and that's from the increased stock action -- stock option activity, partially offset by our accelerated share repurchase of 2 million shares during the quarter.

So this -- the increase in shares had about a penny a share negative impact to the quarter.

And then, of course, the expenses that are required according to GAAP to be expensed on the TIm's IPO cost us about a penny per share in the quarter, and we do expect to have continued fourth quarter IPO expenses.

Now let's talk about operating margins.

The enterprise operating margin was 12.2%, and that compared with last year's margin of 13.1.

The majority of this 9 basis point decline came from Wendy's, where the 5.4% system-wide decline on average same store sales, along with higher beef costs, had a significant impact.

The Wendy's brand operating margin was $55 million, and that compared with about 71 million a year ago.

And operating margins were down from -- from 11.6 a year ago to 9.1%.

And that's all impacted by the negative same store sales and the 18% increase in beef.

Operating income at Tim's was about $80 million, and that was compared with about 66 a year ago.

And the operating margins at Tim's were 25.9%, and that's compared to 26.8 in the prior year.

It's a slight decline, but it's totally as a result of increasing coffee prices.

The developing brand performance was similar to the third quarter of 2004 when you exclude increased legal expenses that we incurred in 2005.

Legal reserves increased due to an unfavorable Baja Fresh settlement, and this was a dispute that really predated our acquisition in 2002 that has now been resolved.

Now let's look at the key lines of the third quarter income statement.

The cost of sales was about 513 million, and it's about 66.7% of retail sales.

And this is about 160 basis points higher than last year.

Again, it's -- what's really driving this is higher food costs, and particularly beef, along with the deleveraging of a 5% decline in average same store sales.

Company restaurant operating costs were about 165 million or 21.6% of retail sales; and as a percent of sales, this is basically the same as it was a year ago.

Operating costs were about 43.8 million, and that's about a $7 million increase from '04.

And again, this line primarily reflects Tim Hortons' cost.

The increase relates to higher rent expense due to the increased number of properties being subleased to franchisees and a higher percentage of rent due to higher sales and foreign exchange.

The increase is more than offset by associated higher income in the franchise revenue section.

Depreciation was up about $4.6 million versus a year ago at 51.2.

And that's really due to the additional restaurant development.

G&A expenses were 73.7 million, and that's about flat compared to a year ago as a percentage of revenues.

The $3.3 million increase does reflect, however, 3.5 million additional higher restrictive stock, and the stronger Canadian dollar which gets through all the lines of the income statement, and the 2 million of IPO-related expenses, partially offset by lower performance-related bonuses.

Remember, Wendy's store operations employee bonus compensation is in the area -- line item of CROP -- company restaurant operating costs.

The other income line, we produce about 4.4 million of income compared to 2 million a year ago.

And the other income expense generally includes items such as the -- our share of the income from the joint venture with IWS, currency adjustments and other items not really related to our primary business.

This year's improvement does reflect the mark to market currency game on inner company notes that I mentioned earlier, as well as the gain on the Wendy's leased properties that were sold to third parties.

This favorable impact was partially offset by an increase in the legal reserves related to the Baja Fresh settlement, as well as a number of dead site costs because we had slowed development at Wendy's.

From a balance sheet perspective, we ended the quarter with a strong cash position of 263.9 million.

This does reflect cash flows from operations and stock option proceeds that more than offset capital expenditures, dividends paid, and our recent completion of an accelerated share repurchase.

Cash is increased about 87 million year end.

From a dividend perspective, the Board approved our 111th quarterly dividend.

It will be $0.17 per share; and in accordance with what we announced, our annual dividend -- you know, when we announced our initiative in July, our annual dividend rate has gone from $0.54 to $0.68 per share, which followed an increase of 12.5% the previous year.

We have also recently announced that we intend to pay off the 100 million in debt due in December, and we will consider additional share repurchase opportunities as appropriate in the future.

Due to our previously announced strategic initiatives and our planned S-1 filing, we expect to be prohibited from repurchasing shares at certain times.

Looking ahead to the balance of the year, we have adjusted our 2005 full year EPS estimate to the range of 2.12 to 2.15; and as mentioned in the release, we are accelerating the vesting of all outstanding stock options.

The primary reason for this action is to eliminate 13 to 15 million of pre-tax expense in '06 and '07.

We also believe this decision will have a positive impact on employee morale and retention, as well as the perception of value at various levels of the Company.

Other factors included in the revised EPS guidance are: Lower than expected same store sales at our Wendy's brand, the impact of hurricanes in the third quarter, the anticipated IPO cost in the fourth quarter, and lower store development goals for the enterprise.

Our goal has historically been a range of 510 to 560 new restaurants.

We have revised that range to 425 to 450.

Even though we face some challenges at Wendy's, we have controlled cost effectively throughout the organization and we expect to do so the rest of the year.

Our strong sales momentum at Tim's continues, both in Canada and the U.S., and we are focused on improving Wendy's results.

So I'd like to turn it over for Q&A.

Yes.

Operator, we'd like to have you queue up for questions; we're ready.

[OPERATOR INSTRUCTIONS] .

Your first question comes from John Glass with CIBC.

Thanks.

Jack, as you step back into the roll of the North American operations, maybe if you could talk about what your initial focus is.

I know you've talked about everything from operations to development, but is there a single element that deserves your attention first?

And I guess from your comments, it sounds a little bit like maybe operations have slipped recently.

Yes, it's really the energized -- our operations energized our marketing.

And we have some great people in the field and we've had meetings with them.

And basically, we said, "run your regions, let's get this thing moving".

We're now providing the marketing.

You take care of the customer.

Let's get out there and have some fun operating our restaurants.

And the message is getting through.

Okay.

I guess and then just on a separate topic, what's your initial read on how the refranchising process is going to go?

Are you seeing the valuations that you would like to see?

Are you getting the expected interest level that you -- that you'd like?

Yes.

The first -- our primary focus is to sell the 217 real estate pieces that we own that we lease to the franchisees.

That's our first focus.

And then we will concentrate on the refranchising.

Okay.

And should the real estate sales be done by the end of this calendar year, perhaps, or is that too --?

That's probably our goal, yes.

I mean, we would see the majority completed by then.

Okay.

Thank you.

And our next question comes from Joe Buckley with Bear Stearns.

Thank you.

Just a follow-up on the real estate question.

Your balance sheet is showing 135 million of assets for disposition.

Is that the real estate?

That is, in fact, the real estate that's now showing for disposition is the leased property that Jack's referring to.

Okay.

And how does that -- what drives that balance sheet entry, Kerrii?

Is that the carrying value, basically, of the assets?

That is the book value of the assets.

And what drives that is the accounting literature requires that once you've made a decision to dispose of it, you must classify it appropriately.

Okay.

And can you give us a sense of how many of the 217 sites have already been sold in the -- in the third quarter?

Very few, Joe.

I would say maybe two to three, at most.

We do have commitments now.

We've got to close the deals.

And that's what we're concentrating on.

As you know, when you have to close 217 deals, you're going to get most of them.

There may be a straggler or two; but we expect most of it to get done in the fourth quarter.

Okay.

And Kerrii, a question on your cross border notes.

I'm not sure what they are.

What gives rise to their -- to their existence?

What gives rise to their existence is that we had notes that existed between a Canadian corporation and a U.S. corporation, and -- because we were making investments, of course, in Canada over time.

And so it maybe gives rise a little bit when we made the purchase of Ron Joyce's stock.

So those things resulted in the notes being placed several years ago.

We had made a decision that they were permanently invested, and when we then made a decision to bring some of that note -- those money back and actually repay some of that note, that's when it triggered the mark to market, because of the IPO -- planning for the IPO proceeds and things.

Okay.

Thank you.

Your next question comes from Mark Wiltamuth of Morgan Stanley.

Hi.

My question is on the cut in the new store development.

Is this due to construction costs rising and pushing you below return hurdles, or is it the operating environment, or are you just resetting to a slower growth progression in line with your restructuring announcement?

I think it's more of your first two that the cost environment is -- is pretty high right now.

And then also, I think, the environment of -- of the slower sales, we think it's best to slow it down, get a handle back on it, look at our costs of our building, get some costs out, and I think it's just the prudent thing to do here in the short term.

And, Mark, definitely, we are not meeting our hurdle rates, and that was our decision strategically to slow growth until we can actually invest wisely and meet our costs of capital.

Okay.

Thank you.

Your next question comes from Dean Haskell with JMP Securities.

Thank you very much.

On that real estate issue, as well, are you selling most of these to the franchisees that are leasing them from you, or are you expecting to sell them to an entity?

For example, say a lease back back -- ?

We offer all the properties to franchisees -- I think we have acceptance of about 30% of the properties.

And then the rest would be sold to the third party.

Okay.

And then a question on the jalapeno double cheese stuff, is that going to be with the Frescata?

No.

It's going to be on our normal bun.

Dean, I can't wait until you have that.

It's an awesome sandwich.

The only other question I have is the 99-cent chicken sandwich hopefully is not a move back towards discounting.

Tell us more about that.

Well, we never have discounted.

I mean, we've always provided great value through our Super Value Menu.

And the chicken product, the technology is so much better, Dean; it's high quality, all white meat, not dark meat and lips and knuckles.

This is a high quality piece of chicken.

And we think it's going to drive sales.

And it has a favorable food cost.

So we're not discounting, we don't discount; but we do offer value through our Value Menu.

Excellent.

And I'll have a bacon mushroom melt on Friday as I always do.

Your next question is from Rachel Rothman of Merrill Lynch.

Hi, guys.

Hi.

Can you tell us a little bit about your price history at Tim Hortons; and in light of the coffee price increases, when was the last time you guys took price there?

Well, first of all as you know, we have 99% of the stores are franchise.

So we -- we sell them the coffee at cost-plus.

And we usually take -- we went probably from 1994 to 2001 -- to 2002 without taking a national price increase.

And because of some minimum wage actions in local provinces, we've had to take some price increases, but it's -- it's been pretty nominal.

Okay.

And then if you could, is there any thought to putting back -- putting in place a program to buy back, since you guys would be locked up potentially throughout the year and in light of all the cash that you're going to get?

I think what we have said is we always like to try to offset the dilutions of stock options.

There have been tremendous amounts exercised.

We'll be in the market when we can be.

Yes.

And because of the S-1 filing, there is certain window -- or certain criteria we have to meet in order to get back in the market.

And we're still authorized for a billion shares and.

Dollars.

I mean billion dollars.

And when we feel that we can execute something meaningful, we will.

And we are going to get a good chunk of cash for the IPO.

We are going to get a good chunk of cash on the sale of the real estate, the franchise real estate; and then it's a matter of putting together a program when we can enter into the market.

Is there some way that you can set up a program in advance?

And I may have my letters or numbers reversed.

I think it's 10-5 B-1 program such that you're able to buy back even when you are in possession of --?

The only way you can do -- that you can set that.

But it has to be set in a window when you don't have the information.

Okay.

And would there be any time within the next six months that that would be a --

I can't comment on that.

Thank you.

Your next question comes from Steven Kron of Goldman Sachs.

Thanks.

Hi.

The first question I had was on Tim's in the U.S..

And if I look at the recent sales trends on a multiyear basis it seems to have slowed slightly.

I was just wondering, given the drive-thru business that you do in those units, I was wondering if you can comment on the economic sensitivity and the gas price sensitivity perhaps that Tim's in the U.S. is seeing?

I think everybody to a certain extent is being affected by the gas price.

And we would be glad to see it moderate; and it has been and we hope it continues.

We are also concerned with the latest conference board report on consumer confidence.

That was down I think to 85%.

But that seems to be more of a lag factor, really reflecting how people felt 30 days ago or 45 days ago.

So if the gas continues to come down, I think that will be good for us.

But then again, you have high utility costs right now.

And that could affect us.

Well, is there any update, Jack, on the best [INAUDIBLE] conversions and any new data points to share there?

Not really.

Okay.

And then lastly, on Wendy's on the marketing front, I know you've recently made some changes in your advertising campaign.

I realize it's a bit of a work in progress.

But is there any early feedback from the new branding, if you will, whether consumers are identifying better with the brand or what perception?

I think it's -- it's broken down into different consumer segments.

You know, one thing we are always trying is targeting the male 18 to 34.

There are certain commercials that do a very good job at that.

And then there's other commercials that are targeting more of a traditional demographic.

So we feel like we've made progress.

We feel pretty good about it.

But it's still some work in progress.

But if you look at our two Bacon Mushroom Melt commercials, that will really show you one aimed at the younger demographics and the other commercial aimed at a mid to older demographic.

Okay.

Thanks a lot.

Your next question comes from David Palmer of UBS.

Hey, guys, your guidance for fourth quarter is a lot lower; and you mentioned some one-time type of expenses that will happen in the quarter -- and stuff like stock options vesting.

Presumably there will be some facilities actions, losses associated with the decreased opening schedule, the IPO costs and ongoing costs from Katrina.

I was wondering if you could give us a sense of how much do these things add up to?

And the reason I ask this is because given the fact that you have some one-time-type costs in the fourth quarter of '04, if you don't have these things add up to something, it really does imply, even sequentially versus the third quarter, not very good margin trends.

So --?

I'm not quite sure what you just said, to tell you the truth.

Kerrii, did you follow me there at all?

Take one question at a time here.

I think from a margin perspective, we've given an understanding that beef's going to be $1.39 in the fourth quarter.

It was a $1.40 a year ago.

That's no great - It's a great improvement from the third quarter, but not that much different than a year ago.

Yes.

Well, I'm not just talking beef.

I mean, the fact is, given the fact that you had the Baja fresh stuff last year in the fourth quarter, you had a lot of pennies, stuff that you wouldn't call core operating stuff.

Right.

This year, you're coming into the fourth quarter, you mentioned some stuff in the release.

It's pretty tough for us to add up the pennies as to what that might be.

Right.

And the biggest -- I think you get some sense.

You know, you've got -- we gave 2.20 to 2.26 last time.

We lowered that to 2.12 to 2.15.

So we're trying to give the information that those four or five items, sales being the most significant one, has an impact on lowering overall guidance, plus the stock.

I mean, part of it's from third quarter, okay, the reason you lowered it, and part of it's fourth quarter.

So third -- third quarter would be hurricanes, lower sales, some IPO costs.

Fourth quarter would be IPO costs, 5 million in accelerated stock options.

So I think it hangs together pretty good.

Even today, I know from the Wilma storm, we have, what, Jack, how many restaurants?

We still have from Wilma 124 restaurants closed.

From Katrina, we have 35 restaurants closed, and then Rita only five.

But Wilma, 124.

And I think you're going to have some of these restaurants closed for anywhere from the next two to four weeks.

So you've got to take this into consideration.

I don't think we would be good managers if we didn't give you that kind of guidance.

And a small second question.

In Tim Hortons' revenue growth looked strong even versus -- even when you kind of add up the unit growth and the comps and the currency.

Was there a high warehouse sales number this quarter that maybe we should be thinking about not being as high next quarter?

No.

Just for us, fairly normal.

Okay.

Thank you.

Thanks.

Your next question comes from Peter Oakes with Piper Jeffrey.

Hi.

Just following up on that Wilma and Katrina.

Do you have a sense as to how significant is company units versus franchise?

Yes.

Here's the breakdown.

On Katrina, 27 company, 8 franchise for a total of 35.

Rita, 5 franchise for a total of five.

And then Wilma, 82 company, 42 franchise for a total of 124.

South Florida is a major company market for us.

And that's -- those are closed today.

And those are closed today.

Okay.

Those are the old [INAUDIBLE] units, right?

No.

That's Orlando.

This is --

Oh, okay.

South Florida would be Lauderdale, Miami, Miami Beach, West Palm.

Okay.

Jack, could you take a step back?

The comps for the last couple quarters for brand Wendy's have been the softest in about a decade, and margins pretty much track along that path.

What is this possibly doing to the health of the franchise system and their ability to remodel and put in new equipment, or possibly be on the other side of the equation of buying some of these company units?

You know, it's something that we monitor.

I think one could say that with the sales that it is tighter than it has been.

On the other hand, we have franchisees that have had 15 record years that have stocked away -- stocked away a lot of cash.

And I think any good businessman would do that for the rainy day.

We are watching it.

We are monitoring it, we are very cautious.

And we feel that we are going to come out of this, and we will.

But it's a good -- we need to just keep our eye on it.

Jack, on the balance sheet, the accounts receivable line is actually up -- I think it's 24%, which is about $30 million.

Is that related to royalties or is that financing some of these real estate transactions?

It's not royalties.

Well, it's never up -- No, it's up from year end, but that's pretty typical of things we go through.

We have not -- you know, we've seen a little bit of softening in the collections.

Our rate's like 98% or so.

Just to Jack's point, I think you see some that you will have watched from time to time.

But the biggest reason accounts receivable is up about $10 million of that is the property that we actually saw destroyed in New Orleans; you have to record an impairment for the property, Peter, and we have also booked about a $10 million receivable for that impairment.

In other words, the stores are gone.

So you write the asset off, and we have booked a receivable from an insurance standpoint at booked value.

So that's part of it.

The other 13 million increase is a result of a tax refund that we actually got about a week ago.

So those are really the two big things that would be driving receivables up.

Okay.

Thanks a lot.

Your next question comes from Joe Buckley with Bear Stearns.

Thank you.

Question on the Frescata sandwiches.

There were some reports earlier this year that there were some operational difficulties with the sandwiches; and I think at one point there was some talk of the sandwiches rolling out this year rather than in '06.

I guess I'm curious if you can just give us a update on that and if you're comfortable you have that ironed down for the '06 rollout?

It really wasn't anything operational, Joe.

We changed one sandwich in the lineup to more like a chicken club sandwich.

And the feedback we got from the first test, people wanted at least one sandwich that was more mainstream.

And that's why we switched to the chicken club, and that made all the difference in the world.

Okay.

Thank you.

Your next question comes from Martha Shelton with FBR.

Hi, this is Martha Shelton on behalf of Howard Penney.

The question is for Ms. Anderson.

You mentioned that you all identified that you had stopped meeting your hurdle rate.

Can you tell me exactly when ya'll figured that out?

No.

Wait a minute.

We didn't stop meeting our hurdle rate.

We stopped -- some of ours, we weren't meeting the hurdle rate.

Got it.

Okay?

Right.

And so what we focused on was slowing development, and you saw the announcement that we made on the 29th of July [LOST AUDIO].

This concludes today's conference call.

If you have any questions, you can follow up with investor relations.

Thank you.

You may now disconnect.