Wendy's Co (WEN) 2007 Q4 法說會逐字稿

Good morning.

I will be your conference Operator today.

At this time, I would like to welcome everyone to the Wendy's International fourth quarter and year-end results conference call.

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

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

(OPERATOR INSTRUCTIONS) Thank you.

I would like to turn the call over to Mr.

Barker, Senior Vice President, Corporate Affairs and Investor Relations.

You may begin.

Thanks, and good morning, everybody.

The purpose of our investor call and our webcast today is to discuss our 2007 results and to provide an update on our key business initiatives.

We released our full year 2007 earnings as well as our fourth quarter results before the market opened this morning.

The news release as well as the financial statements and other investor information is all available if you don't have it yet on www.Wendy's-invest.Com.

The agenda for today's conference call will begin with remarks from our CEO and President, Kerrii Anderson.

Kerrii will review our financial highlights and discuss our strategic initiatives.

After that, Jay Fitzsimmons, our Chief Financial Officer, will discuss the financial details and then we'll be prepared to take your questions.

Also, with us on the conference call today are Chief Operations Officer, Dave Near; our Controller, Brendan Foley; our Senior Vice President of Marketing Strategy and Innovation, Paul Kershisnik; our Senior VP of Brand Management, Bob Holtcamp; and other members of our management team.

Now I'd like to refer you for just a minute to the Safe Harbor statement that is attached to this mornings news release.

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

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

Some of those factors are set forth in the Safe Harbor statement that is attached to the release.

Also some of the comments today will reference non-GAAP financial measures such as earnings before interest, taxes, depreciation, and amortization, or as we call it EBITDA.

You can find those reconciliations of non-GAAP terms to the most directly comparable GAAP financial measure.

They're either in our earnings release or on our website, either place.

Last Monday, the Company issued a news release from the Special Committee of our Board.

The committee was formed in April of 2007.

Jim Pickett, Chairman of the Board and the Special Committee said the review process being undertaken by the Special Committee has taken longer than anticipated primarily due to the continuing turmoil in the financial markets.

However, Mr.

Pickett said the Special Committee is working diligently to conclude its review of the strategic options and believes that the process is in its final stages.

Mr.

Pickett added that there's no assurance that the process will result in any changes to the Company's current plans or when a specific announcement may be made.

As we have stated before, the Company will report further developments regarding the Special Committee's actions only as circumstances warrant and as directed by the Special Committee.

We will not discuss this matter further in the conference call today.

When we get to the Q&A session, please limit your questions to our financial results, our overall business plans, marketing, and operations initiatives.

Now, let me turn it over to Kerrii.

Thanks, John, and good morning, everyone.

The results that we released earlier today, I believe show improvement in every significant financial category, whether it's sales or profits, store margins and cash flow.

And that really occurred as a result of the fact that in 2007, we executed our strategic plan, in addition we launched Phase II of our plan, focused on growing sales.

We achieved significant profit growth at both the Corporate level and in our Company restaurant.

And most importantly, we've strengthened the financial foundation of this Company.

We drove this performance despite challenges of a rapidly rising commodity cost, a weakening economy and fierce competitive environment.

We also delivered this performance in the face of all of the distractions of the Special Committee process that John just discussed.

I am so very proud of our franchisees and our Company employees for this effort.

Together, we produced tremendous improvement in our business and we're focused on more growth in 2008.

Now, what I'd like to do is just share a few of our financial highlights for 2007 and Jay is going to give us a lot more detail.

Our 2007 total adjusted EBITDA from continuing ops increased 38% to $305 million up from $221 million a year ago.

This was above the Wall Street consensus expectations for Wendy's EBITDA of $301 million.

Our EBITDA results exclude the full year expenses related to the Board's Special Committee process which was $24.7 million as well as some restructuring charges of $9.8 million.

Our U.S.

Company operated restaurant EBITDA margins improved 210 basis points to 11% in 2007 reflecting slightly positive same-store sales, labor efficiencies and improved menu management.

In addition to the financial results we are very proud of some other achievements in 2007.

We added outstanding talent to our executive team with Jay Fitzsimmons, our CFO, Tad Wampler as SVP of Supply Chain and Paul Kershisnik as the SVP of Marketing Strategy and Innovation.

We also earned three prestigious brand accolades during the year, including best hamburger in the business from Zagat.

We reclaimed the number one position in QSR magazine's Speed of Service survey, and we kept this organization focused the on the future and we did this by building on the turnaround that we started in 2006.

Now, as we move forward into 2008, we've continued to execute our strategic plan.

We recently launched Phase II off our plan called "Doing what's right for our Customers" and in 2008 our organization is focused on Wendy's hallmarks of quality and innovation in the four key cornerstones of our business which is operations, marketing, people, and our facility.

If you really look at it, the hallmarks of quality and innovation have historically set Wendy's apart from our competition and in the future, we are determined to deliver breakthrough products that distinguish Wendy's from our competition, that's our heritage and that's what we'll bring more customers into our restaurants.

Phase II of our plan focuses on growth drivers in the areas of core hamburgers, chicken, salads, as well as our long term value strategy of beverages, snacks, late night, and yes, breakfast.

In the first half of '08 we plan to feature new quality products like our new premium fish -- cod fish sandwich that is in our stores this month and in fact we're advertising it on national TV beginning today.

We also have extensions of our very popular Baconator, Frosty brand extensions, as well as new snack items.

As for breakfast we have added our new breakfast menu in approximately 1,000 restaurants in over 86 markets, and about 35% of the stores are franchise owned.

We continue to focus our resources on a small group of fully implemented breakfast markets and we are determined to follow a disciplined approach with breakfast to ensure a profitable path for this major opportunity.

All these products and daypart opportunities have something in common.

Wendy's superior quality to drive sales.

In late January, in fact just a week ago, we held our franchise convention to share details about our initiatives to 2008 and beyond that focus on improvements in all areas of our business.

We had more than 2600 franchisees, employees, suppliers in attendance in Orlando and I am very pleased with the franchise turn out and their participation.

It was an extremely important event for our organization in an effort to build system unity, focus everyone in the organization on driving our business, and update our Operators about the most important programs scheduled for 2008.

NES to also celebrate Wendy's very special culture.

At the convention we announced that we are evolving our advertising and we unveiled our new TV ads.

The ad will invite customers into our restaurant.

They will spotlight our superior quality food and make you hungry.

They will leverage Wendy in a way that is genuine and true to our brand and when I speak to Wendy, I mean the Wendy icon.

The TV ads open and closed with an animated version of our familiar logo, the image of Wendy, she's a little girl who represents the daughter of our Founder, Dave Thomas.

Most importantly, the ads also features close-ups of our Wendy's delicious high quality food.

We do believe that the food for Wendy's is a clear point of difference between us and our competition, and we will spotlight our fresh, never frozen beef, center cut chicken breast, our fresh toppings, our freshly made salads and our premium cod fish sandwiches and chile that's made every day in our restaurants.

The advertising begins today on national TV and will be supported with a fully integrated plan for radio, billboards, Internet and our in-store merchandising.

Furthermore this campaign will be central to our strategy of highlighting Wendy's superior quality in everything we do.

Finally, we are committed to fiercely protecting this great brand and positioning it for future growth and profit.

We had both achievements and challenges over the last year and I know many of you, our shareholders, are frustrated with the length of the Special Committee process and the fact that there has been little public communication from the committee.

As John has already said the Special Committee is working diligently to conclude its review of strategic options and the committee will comment as circumstances warrant.

In the meantime, our management continues to focus on what we can control, the business and our plans to improve it.

We are optimistic about the future, although the first part of 2008 looks challenging due to economic headwinds and rising commodity costs.

Despite the macro issues we are focused on building momentum, driving transactions, and growing store profit margins.

We have a very powerful brand and as we align all of our resources and initiatives, I believe Wendy's is poised to grow sales, transactions, and profit, in every restaurant.

So, with that I'd like to turn it over to Jay to review some of our key financial results.

Thanks, Kerrii.

First I'll comment on some of our key financial results, excluding expenses related to the Board Special Committee and restructuring charges, we reported 2007 adjusted income from continuing operations of $108 million, that's up 50% from the $72 million a year ago.

Adjusted EPS on a diluted basis was $1.20 for the full year and that's up 94% to $0.62 a year ago, and adjusted EBITDA for the year increased 38% to $305 million.

As previously reported, same-store sales at U.S.

franchised operated restaurants increased 1.4% for the year compared to a 0.6% number a year ago.

Our franchisees have produced seven consecutive quarters of positive same-store sales growth.

As we previously reported, U.S.

Company operated same-store sales increased 0.9% for the year.

That compared to a 0.8% increase last year.

If we look at it on a two year basis, the Company same-store sales growth averaged 1.7%.

Sales were impacted positively by breakfast sales, improved menu management, which includes things like our three tier combos, the Baconator, value meal combo upgrades and menu price increases.

It's also partially offset by negative transactions compared to a year ago.

We were encouraged by our 2007 results but we recognize that further opportunities exist to grow top line sales and improve operating margins in 2008.

As Kerrii said we have a strategic plan in new initiatives in place to generate even better results in 2008.

The 2007 income statement and our detailed appendix to the earnings release demonstrates the excellent cost controls achieved in a difficult environment.

Now, I'll highlight some of the key items on the 2007 P&L.

Cost of sales were $1.32 billion, or 61.2% of sales.

That's down from the $1.35 billion or 62.8% of sales the year before.

The improvement as a percent of sales was driven by improved menu management and labor efficiency.

These improvements were partially offset by higher commodity cost which impact U.S.

margins by 90 basis points for the year.

G&A.

In 2007, G&A decreased 100 basis points as a percent of revenue from the 2006 results.

This is primarily the result of the Company's next chapter reorganization completed in 2006.

We also benefited from lower insurance cost and bonus expense.

Interest expense was higher in 2007 as a result of the sale of 2007 royalties that was entered into in 2006.

In 2006, the Company received $94 million in return for 2007 future royalties.

The $94 million was accounted for as debt in 2006.

In 2007 the repayment of the royalty related debt was accounted for as a typical low, comprising both the repayment of debt and the recording of interest expense.

As a result, interest expense is up in 2007.

Now, I will describe the significant items that affect the comparability of 2007 results to 2006, and there are a lot of them.

This information is provided in detail in the appendix to the earnings release for the year in the fourth quarter.

All of the following comments refer to our full year 2007 and 2006 results.

We encourage Special Committee charges of $24.7 million in 2007.

These charges did not occur in 2006.

We had restructuring cost of $9.8 million in 2007, which includes $7.4 million in pension settlement charges.

This compares to $38.9 million in restructuring cost in 2006.

The Company made a special advertising contribution of $25 million in incremental pre-tax advertising expense in 2006 which impacted the operating cost line on the income statement.

This did not recur in 2007.

And in 2007, we did not have the Tim Win joint venture income of $7.2 million which impacted several lines on the income statement in 2006.

Excluding these items, adjusted EBITDA was $305.4 million in 2007 and that compares to $220.7 million a year ago.

This represents a 38% increase over 2006.

We also had other significant items affecting comparability for the year.

Insurance gains related to Hurricane Katrina of $9 million in 2007 which impacted the other income line.

These gains did not the occur in 2006.

We had store closure charges of $7.3 million in 2007, which compares to $16.7 million in 2006 and this impacted the other income line in both years.

We paid franchise incentives of $6.4 million in 2007 which impacted the operating cost line.

This compares to $1.1 million in 2006.

These expenses were established to encourage franchisees to remodel and upgrade their restaurants.

A gain from the Tim Horton's tax agreement of $5.7 million impacted the other income line in 2007, this gain did not the occur in 2006.

Finally, we recorded a pasta pomadora impairment charge of $5 million in 2007, which also impacted the other income line.

This charge did not occur in 2006.

Now a couple of quick comments on the fourth quarter.

Excluding expenses related to the Board's Special Committee and restructuring charges, we reported fourth quarter adjusted EBITDA from continuing operations of $57 million, up 48% from the $38 million a year ago, and adjusted EPS on a diluted basis was $0.21 for the fourth quarter, up 50% compared to the $0.14 a year ago.

We have provided a detailed review of the fourth quarter in the appendix.

Finally, let's take a minute to talk about 2008.

As previously announced, we do not plan to provide detailed guidance until the completion of the Special Committee process.

That said, we expect a challenging first quarter of the year due to consumers nervousness about the economy and the current slowdown in restaurant spending.

In addition, we continue to see commodity price increases in 2008 which we plan to offset with menu price increases and further cost reductions.

Higher grain prices and petroleum are expected to keep food cost increasing in 2008.

For instance, compared to last year, 2008 corn futures are up approximately 42%.

Wheat futures are up 17%, and soy beans are up 45%.

For the year, food and paper cost are expected to increase in the range of 140 to 180 basis points compared to 2007, or about 3.5 to 5%, as a percent of food cost.

For example, beef should be up around 3 to 4% and chicken as much as 5 to 8%.

We expect store closure cost in the first quarter of 2008 in the range of 5 to $10 million.

In 2007, we had store closure charges of $7.3 million for the full year, which impacted the other income line on the income statement, so again, in the first quarter of 2008, our estimate for store closure cost is 5 to $10 million.

In addition, the expenses for the January franchise convention will be recorded in the first quarter of 2008.

The first quarter of 2007 did not include any similar expenses.

It's important to note historically, we would expect 20% of full year EBITDA in each of the first and fourth quarters of the year.

And about 30% of our EBITDA in each of the second and third quarters due primarily to the seasonality of our business.

We believe that the first quarter of 2008 will experience more pressure due to the facts previously mentioned.

As you think about Wendy's 2008 EBITDA, I would encourage you to consider all of the non-recurring items I just discussed.

Finally, although we are not going to provide you with detailed earnings guidance for 2008, we are comfortable in saying that we expect our 2008 EBITDA to be near the lower end of current analyst estimates on First Call and that's excluding Special Committee charges, restructuring charges, and pension settlement charges.

The analyst estimates for 2008 as of Friday range from a low of $324 million to a high of $358 million.

Again, we believe it is prudent to expect our performance near the lower end of that range.

If the Board of Directors decides that Wendy's should continue to operate as a public Company, we would plan for a conference call or meeting to provide more detailed information about our outlook for 2008 in the longer term.

Thank you.

Now let me turn it back to John.

Thanks, Jay.

A couple notes before we open up the phone lines for questions.

First, the Board of Directors has approved our 120th consecutive quarterly dividend and that will be paid on February 29, to shareholders of record as of February 14.

Quarterly payment will be $0.125 per share, and this is our fifth dividend payment since the Board voted to increase our annual dividend rate by 47% from $0.34 previously to $0.50 per share.

As I mentioned at the beginning of the call the Company will report further developments regarding the Special Committee's action only as circumstances warrant.

We do not intend to discuss this matter further on the conference call today.

Please focus your questions on the financial results that we just reviewed as well as the business initiatives, marketing and operations.

Now, I'd like to open up the Q&A session for those on the call.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Glen Petraglia.

Good morning, it's actually Glen Petraglia from Citi.

Good morning, Glen, we knew it was you.

Thank you.

In terms of, maybe Dave Near could answer this question but in terms of a remodeled prototype presuming that the Company does remain standalone the system that you folks have been working on for quite some time.

I'm curious to know where we stand in that process?

Thanks and then I have a follow-up.

Glen, in terms of a new prototype, we have several different prototypes currently.

We have a small building design.

We have a square building design.

And then we have our current E-2000 design we continue to build.

We've also explored drive-through onlys, as you know which continue to be an opportunity for us as we move forward but we have not done a tremendous amount of work in terms of really driving an initiative towards an entirely new prototype building.

That may be something that we'd look at towards the latter half of the year but currently we've got several different options that are available.

And in terms of I think one of the things you folks have talked about a lot over the course of the last, let's call it one to two years is at some point needing to remodel the system.

Do you think that you're at a point that if you decide to remain a standalone Company that you're in a position to get franchisees to make those necessary investments?

You know, Glen, I do.

I think that it's certainly something as a franchisee that everyone signs a franchise agreement that has very specific detail in there as to when remodels need to take place and we feel very strongly that we need to enforce that to the degree that it's necessary to make sure that our brand stays current.

So I do and I think there's also a general understanding and feeling in the franchise community that reinvestment is really a big driver of the business and something that needs to happen so I do feel like going forward our franchise system will embrace the reim.

piece.

And Glen, I might add--.

Sure.

We had been testing a number of different designs for re models and Dave, I know Ed Choe is here at the table, we had tested a number in Cincinnati and Columbus and we settled on two that, Ed, are within about $100,000 on the outside remodel, right?

Yes, we have worked our design schemes or exterior designs down to two that we, as management, are pleased with but more importantly our consumers are pleased with.

We will be under construction with them in the next 30 days and we will read the results of those two new designs.

And we shared those with our franchisees at convention.

Okay, and then what gives you the confidence that this ad campaign is the right one?

I think maybe it was eight months ago that you launched the red wig campaign and I think that that was, there was a lot of hope in Dublin about that campaign and I guess why is this one the right one?

I've seen the ads that were sent out by John last week and they don't, to me, at least they don't scream 18 to 34 year old core hamburger user.

So if you could maybe address that?

Sure, and I'll have Bob Holtcamp and Paul jump in here with me.

First, I would say this, the red wig campaign did a lot of good things for Wendy's.

It broke through the clutter, it raised our awareness and we have now the research tools and information to really measure what our attributes are from an advertising perspective and we know it did that; however, it did polarize as we actually shared with our franchisees, we now know from research that has been done the red wig campaign looked polarized.

Having said that, this new campaign and Bob and Paul can comment, we have already done significant consumer research from a qualitative perspective and it's undergoing quantitative at the moment.

That says to us that it has very in line with who we stand for at Wendy's and that we can't be something that we're not.

So we've started to get some very preliminary results that indicate that it is received very positively and most importantly also, while we haven't changed our target and Paul and Bob can speak to that.

Our target certainly the sweet spot is always 18 to 34.

They're the frequent users.

That said, we know from research performed that what attracts them to our industry is high quality delicious food and that's what we're focused on delivering.

So I'd have Paul and Bob maybe make any comments you think would be helpful in answering Glen's question?

Yes, this is Bob Holtcamp.

What Kerrii spoke to, this is a much more authentic approach to the Wendy's brand and the red wig campaign did do some good things for us.

More specifically it heightened the awareness around Wendy herself, Wendy the icon, and for us, we just simply didn't want to continue to look like a brand that wasn't really real and authentic to what the brand is all about.

This advertising is designed to go squarely against elevating our premium quality look and feel and the brand has stood for that for many years and what we weren't seeing in the current advertising was the increases in consumer ratings around quality, and so this approach is designed to not only leverage the Wendy icon in a more authentic and honest manner but it's also designed to go squarely against delivering on higher quality and higher premium quality versus our competition.

Kerrii mentioned this, we did take the creative into focus groups, we're in quantitative now on Finished Creative and in the focus groups done in five cities, we put the two different campaigns head-to-head against each other and what consumers fed back to us was that this new approach was more true to the fundamental principles of the brand, that it did speak directly to quality, that it was a more honest approach to our food and what our food delivered for consumers and so in that regard, we see this as a very strong evolution from the red wig campaign, one that's a bit more true to the brand.

Thank you.

Your next question comes from the line of John Ivankoe.

Hi, thank you.

A few questions if I may.

First, and thank you for the commodity guidance for 2008.

If you could review for us various operational cost savings initiatives that will be incremental in '08 versus '07?

And then I'll have some follow-ups.

John?

Yes.

Hello?

Yes.

There we go.

What we've got from a cost savings perspective in '08, we are continuing to look at labor efficiencies in the store.

We will be rolling over certain pieces of that in the first two quarters of this year that we -- where we implemented some of those initiatives in the back half of '07 so we'll continue to see some efficiency there.

We'll also continue to look at some of the different management layers that we have in the store in terms of our general manager, co-manager, and assistant ranks and I think there's some opportunity for us to become more efficient there as well.

We're also, have developed a new daily operations plan that helps us load our crew and management more efficiently as we move forward and I think that will yield some cost savings as well.

So I think that's kind of the bulk of it from a labor perspective.

Okay, is there anything else on the food side that's possible relative to what you've already done?

I think, John, the biggest opportunity from a food standpoint is what we call menu management, or menu mix in the sense that if you can't increase the percentage of beverages sold or combos or french fries or things of that nature, what you end up doing is you end up shifting -- you lower your food cost and you increase your gross margin because you are shifting the product mix, and that is a very key component to us driving what we call the snack daypart along with the Frosty extension and so that is probably the biggest opportunity from a food cost index because certainly from a commodity standpoint there's not much positive news on the horizon.

I know you moved to market based pricing throughout 2007.

I mean, can you talk about the success of that from a consumer perspective and whether there's more opportunities in '08?

Paul?

Yes.

I think there will be more opportunities, this is Paul Kershisnik, I think there will be more opportunities for that going forward, and the important part about it is that it allows us just to be more competitive on a market by market basis, and so neutral markets are freer to do what they need to do to be competitive so I do think we'll continue to do that and we'll continue to see positive results because of it.

When is the biggest lap that we should be sensitive to in fiscal '07 for that?

Was there like a point in time to where it was significant change just to refresh my memory?

Well, actually, John, we came out at the beginning of the year.

We had talked about our market based pricing taking place, really January 1, of '07.

Okay.

So I wouldn't say there's a big lap.

Okay, that's very good and my final question in getting back to some of Glen's points on remodels, at least in my model, I have franchisee remodel assistance, actually fairly significant in '08 and '09 relative to your previous guidance I think you gave a year ago.

Is that still something we should plan for or will there be a significant step function up relative to '07 with that program or might it be delayed?

Well, I would say certainly the impact of a Special Committee decision, whatever that decision might be, has probably I would say the greatest impact on the timing.

The franchise incentive exists and it is available to them until 2010.

We've actually talked about, could we even think of other areas to expand the incentive, so at this point in time, we would -- the most important thing and the most positive thing would be for us to pay those incentives because franchisees are reinvesting back in their business.

Jay, I don't know if you've got the comments about -- we did talk about how much we spent this year in '07 versus '06 and we would expect '08 to be greater.

Yes, clearly, the Special Committee Has impacted the amount of special incentives that have actually been taken by the franchisees and the amount that we took this year was less than we had originally planned in our forecast.

We've forecasted more next year but again, it could be dependent upon first, whether we decide to revamp that program and offer it for different purposes to the franchisees or whether the Special Committee makes a decision which would impact the desirability of using that money.

Okay, thank you very much.

Your next question comes from the line of [Mitch Pfizer].

Good morning, Mitch.

Good morning, thank you, and a couple questions.

First, on the commodity cost guidance up 140 to 180 bips in '08, does that include price increases or is that before any imminent price increases?

It's before price increases.

That's just on what would happen to the cost line, if you looked at the cost of the individual products.

Do you plan on offsetting that with increased prices?

Yes.

As we said in the call, we plan on offsetting it with higher prices.

And John, I can tell you that Tad is also working with suppliers specifically on removing costs throughout the manufacturing process as well as with freight.

Great, thanks and secondly, I guess on the Stack Attack, is that a permanent menu item or is that a potential LTO type item?

Yes, Mitch.

We ran the Stack Attack in January as a national promotion at $0.99 and we have, we have continued to require it, that's what we call a required item in our restaurant.

In other words it's not an option.

It is offered in every Wendy's restaurant.

Now the price at which it is offered although we highly have recommend that we stay with $0.99 given the current competitive environment with certainly what we see with Burger King and McDonald's it is up to the individual franchisee as to what they do charge.

We see the Snack Attack as part of the evolving, part of the overall value strategy for Wendy's which you know we've been in value since 1989 at $0.99.

We think that's part of the evolution of value and we are encouraging our franchisees to stay with that price but it is a longer term strategy.

Got it, thanks and just lastly on the priscata which I believe is now discontinued, maybe just a big picture view as to why it was pulled off the menu, was it just because of lower sales or were there operational issues or anything along those lines?

Thanks.

It was purely because of sales declines on that, but one thing that we're excited about is that priscata did appeal to a certain target that's important for us, women, and we've got some good new products coming out this year that will appeal to that segment as well, so we hope to rebound on that front, having taken it off the menu recently, we hope that the new additions will get that particular segment excited again with Wendy's.

And I would also add, Mitch, what drove our decision was certainly the product mix which is what Paul has alluded to.

At the same time, we did acknowledge that it did create some more complexity in operations and so with the lower sales it was important to go in and pull it out so that we could continue to focus on improving operations by reducing the complexity.

And my last, lastly is just on food cost again.

Does your margin forecast, does that reflect commodities being down in the third or fourth quarter or if you just give us a sense of what your second half '08 outlook is on commodities?

We haven't specifically looked into the quarters from a commodity cost.

Our crystal ball is not that clairvoyant; however, what I would say is I think the best news you can come up with on the commodity side is that hopefully, commodities will not rise as quickly as they did last year, but I think the trend unfortunately is for higher cost.

And I would maybe add to that, I think the majority of your commodity cost impacts you're already feeling today.

As we usually have annual contracts, we're very diligent, we do have beef that fluctuates on a quarter by quarter basis which you guys all know.

So you might see a little more pressure on beef in the back half than we'd see in the first half but it's still higher than last year at this time.

Great, thank you very much.

Your next question comes from the line of [Roger Saks].

Hello?

Hi, Roger.

Hi, how are you guys?

Good.

Wanted to circle back on a couple of your earlier questions.

First just a point of clarification on the franchise agreements and what that means in terms of reinvestment or remodeling in stores.

Is there some kind of provision that basically stipulates that franchisees have to do a certain amount of reinvestment over time or how does that work?

Roger, this is Dave.

We've got franchise agreements, we have every 20 years, think is a renewal on the franchise agreement which requires the franchisee to bring that individual store up to whatever the then current standard is and then within the franchise agreement, within that 20 year term, we have something called a review, which is something that every 5 to 7 years, we can require our franchisees to bring stores up to current standard as well, so there are, we do have stipulations in those agreements where we can require our systems to do certain things and over the course of time I think our system has been very good about the reinvestment piece but we do contractually have that in all of our franchise agreements.

How does that get enforced?

You basically just say now you have to do it because we're telling you to?

It's kind of enforced on a store by store or franchisee by franchisee basis just depending on what the exact needs are of the individual store, so we have a third party that goes out and does assessments on stores.

We also have internal folks, franchise area directors that go out and evaluate stores and so we just deal with that kind of on a store by store and individual by individual basis.

And of the current franchisees, how many are drilling off of a five to seven year cycle that this would to be enforced?

I tell you, we provided that about a year ago when we did our analyst meeting, Roger.

I can pull that out.

We had a couple charts which showed where things are going to be rolling over the next few years.

I don't know if you still have any of that but if you don't I can send that to you.

I'll take a look through my files and if not I'll get in touch.

And just a second question on the new marketing campaign, through all of Wendy's research and such, is there anything that you've located that ties into your target audience, 18 to 34 year olds and again the look and feel of how stores should be?

Yes.

I mean, the bottom line is what the we've found thus far is that the younger you are, the more likely it is that you don't have a connection with the brand, and the new advertising that we're working on that we've developed really kind of level sets the stage and clearly articulates what the brand is about.

It's more of a reinforcement for anybody who is a bit older, but it's also a good grounding for those consumers who are a bit younger who are just not as familiar with the brand.

Our intention is that every bit of research that we've used thus far to bring us to this point on the advertising obviously that's being used as well and Dave and Ed's work related to the restaurants and ensuring that the restaurant themselves are also a strong communication point for the values of the brand, both in the way we may merchandise our products in POP as well as the basic structure and design and decor of the restaurants.

And what sorts of things are in your stores, is it having more drive-through is it in the signage?

What correlates to 18 to 34 year olds that you have to do in your stores?

Well, a couple things.

First of all, it's the products that we market and what mix we're trying to drive on the different products and we know that with the younger target, it's stuff like the Frosty evolution and moving that particular franchise from more of a $0.99 small item to leveraging some premium quality products off of that brand base that will retail in the neighborhood of $2 to $3 if you will.

So that's one part of it, the other part of it is ensuring that that consumer understands what our hamburger business is built off of which are some of those things that make it a better tasting product and customized exactly to their taste.

So we want to continue to leverage that as an aspect of our business, but the basic design of our POP elements as well is designed now to really highlight the quality of the product.

We're eliminating unnecessary types.

We're being much more straightforward and direct with those elements that drive premium quality in the type and the copy.

We're also including elements along the Wendy icon utilizing her in a much stronger way than we've had in the past in that POP, and then as far as the actual pictures that we have in our restaurants, the decor package, those will highlight specifically food versus other aspects of the brand, so we want consumers when they walk in the door as well as when they drive through the pick up window to see a brand that's really built off of quality in the QSR space.

Terrific.

Okay, thank you very much.

Appreciate it.

Your next question comes from the line of David Palmer.

Good morning, David.

Hi, Kerrii.

I have two questions.

My first question is on breakfast.

Just embracing the numbers that you said out of the thousand and 35% of those are franchised and just backing into that, it appears about 45% of Company restaurants had breakfast at year-end.

You're now about 7% of franchise units had it.

Meanwhile, the comps at your Company stores have been about 1 percentage point worse than what you've seen in the franchise stores.

So I'm wondering just seeing this general math, how do you explain this in light of breakfast and what are the implications for the future of breakfast?

I'll start by saying this, with respect to Company comps, the Company as we talked about went to market based pricing in 2007 which certainly had quite, I would say an impact on overall Company markets and from a same-store sales perspective, so we, our franchisees in many cases had already changed price relative to where the Company was, so from that perspective that's kind of just a general comment relative to our comps versus our franchisees.

Now, Jay, from a branded standpoint?

Yes, David, we went back and did some research on this to see why there was a discrepancy, as you remember, typically the Company's franchise, the Company same-store sales have exceeded the franchise same-store sales.

So it's been just a trend which started this year where we've lagged that and when we looked at the individual markets in which we're in and compared them to the franchisees in our markets, the disparity is not nearly as great so some of it is the distribution of Company stores versus the franchise stores.

To the effect of breakfast, yes, it is a positive effect to the comp; however, there is some cannibalization on breakfast because of the fact that we don't have a concentration of stores it's hard to measure what that cannibalization is, but it does cannibalize your lunch and dinner sales at the same time as building up the sales line from the breakfast standpoint.

David, one other thing, historically if you go back on an annual basis, I know I've shared this with you, you'll see years where the Company is ahead of franchisees fairly significantly and years where the franchisees were significantly ahead of Company, and some others just catching up to programs, do we put new products in before they do and test, do we renovate certain things?

There's a number of factors but for example, 2002, franchisees were up 7.1 for the year and Wendy's Company stores were up 4.7.

Great, that's helpful.

The second question I had was in your value message, to the consumer.

Basically, I guess it comes back to the Stack Attack introduction.

How did that work to drive traffic in the first quarter and perhaps can you give any color about how, what sort of impact that had to margins?

And broadly speaking, if the Stack Attack is not going to be kind of the big value weapons to drive traffic in EBITDA, I'm wondering what you might be thinking about to reinforce your value message to the consumer?

Well, a couple things.

The Stack Attack I think was successful for us in the sense that we were bringing in more of the typically lower guest check customers that we've lost over some period of time because of pricing action, et cetera.

So I think we were appealing to the right kind of customer with the stack attack, that's why we're leaving it on the menu, it's will be at $0.99 in all Company stores so we're keeping that pressure on but beyond that we want to take value to a place where it goes beyond just a single menu item because you can all imagine, if you're duking it out at $0.99 on the specific item, there's just never going to be enough margin there to make that work over the long term particularly with all of the commodity pressures that are growing so our real focus is on trying to broaden the value picture so it's not just about the sandwich, but it's rather about the sandwich, a drink and a side and do that in a way that provides value to the consumer at a price point that's relevant and that keeps the traditional Wendy's focus on quality.

One thing we're not going to budge on on our value menu is the quality of our product and so we've only got price and portioning to deal with, so I think you'll see in the coming months a shift away from a single product focus on our value strategy to a broader based meal sort of approach that will improve our margins while still allowing us to keep some fairly significant price pressure out there because we understand that we can't price combo meals or value meals in order to be high priced because that will lose the appeal but that's going to be the approach.

It will help us stay relevant for the value consumer on a price end and it will increase our opportunity to become stronger on the food cost and margin side as we pushed multiple menu items versus just a single one.

Okay, thanks very much, guys.

Thank you.

Your next question comes from the line of Joe Buckley.

Go Giants.

Go Giants, Buckley.

Yes, go Giants, can you guys hear me okay?

Yes.

Just a question, I couldn't hear Jay's answer on the pricing question.

I guess I was curious on a weighted average basis for the Company stores how much price you took last year and then sort of what your pricing plans for '08 might be?

And then just had one follow-up.

Okay, we didn't actually give the amount of pricing that we took last year.

I think the answer that we gave was that the pricing was taken early in the year so the majority of it had an impact on 2007 and there's not an anniversary impact on it.

I think we did say that this year like most other people we're planning on taking 3 to 4% in price and our intention was to take most of that at the beginning of the year.

Okay, and then a question on they talked about the consumer and restaurant sales, looking at your fourth quarter sales pattern, it actually deemed fairly consistent December was actually a little bit better than November I think on both a one year and a two year basis.

Are you seeing further pressures at the start of '08?

I guess, Joe, I would start with what our same-store sales were in '07 that we're comping against.

January we were--?

4.8 in January, 3.3 in February, and 3.6 in March.

So the first quarter for us last year were very very strong same-store sales comp and we have to acknowledge that those are the strongest quarter that will that we'll go up against in '08 against '07 so from that standpoint, certainly I think we feel that there has -- we've seen a lot of value in January which we felt was important to run Stack Attack.

Consumer I think coming out of year-end is with gas prices and credit card bills, I will tell you, we are continuing to watch consumer carefully to think about how do we create opportunities to leverage their concerns and focus on value.

Okay, and then maybe just one more.

The franchise convention cost, can you quantify that?

Is that -- you mentioned it's something we should be aware of for the first quarter.

Just curious if you could clarify?

Joe it will be a couple million probably.

Okay, thank you very much.

Thanks, Joe.

Your next question comes from the line of Steven Kron.

Good morning.

A couple of follow-ups I guess just following on Joe's question as it relates to the consumer.

Kerrii, you have a lot of initiatives in place, a lot of new products trying to drive better mix in the menu, taking more price, you have more marketing coming through.

I guess in this environment, are you guys able to really get a good read on how successful these different initiatives are given that the consumer is certainly seems to be a bit more frugal with with their spending particularly in the more recent time period?

Well, I mean, as we sit down and evaluate the effectiveness of the stuff that we put out into the marketplace, there are a couple of levels that are important for us.

One is, are we driving traffic and sales and the other is what kind of feedback are we getting from consumers both qualitatively and quantitatively with regard to specific reactions to specific food items that we put out there, and I would say that Wendy's has historically been known as an innovator, a Company that comes out with lots of new products that are meaningful, and we're really trying to make sure that that heritage is as bright and promising as we go forward into 2008 as it has ever been, and we have had some sales softness as you guys have seen and so that's been a disappointment.

There have been I think a lot of competitive reasons for it and demographic shifts et cetera.

But I think the product line-ups that we've got in 2008 will more effectively address those and so I think what we will see is consumers reacting positively to the kind and quality of products that we put out there and that will also begin to reflect itself more positively in terms of garnering more of their traffic and dollars.

So I think we'll see much much better sales in 2008 because of those product initiatives and there have also been -- If I can just take an opportunity to say something too about some of the advertising questions that have come, that I think we have to be all around the food.

People don't go to Wendy's because Wendy's is a cool place, and they will never go to Wendy's because Wendy's is a cool place, and I think all of the things that Bob talked about with regard to how the advertising focuses on the food.

You will see a continued R&D focus on making sure that he's got great stuff to talk about, great stuff to photograph, and great stuff to put on air and I think that will really appeal to consumers in the near and long term.

And the other thing I might add, just as a side benefit to the new advertising and the campaign slogan which is, it's way better than fast food, it's Wendy's, what's been interesting for me and a very much of a positive is that we've always been the operations leader in this QSR industry and when I say that, that means great speed of service as well as accuracy and quality and cleanliness and all of the other areas, we're still number one in a number of them but we do not have the margin of gap between us and our competitors that we would like to see.

One of the most exciting things from a franchisee perspective is when you stand up and say to somebody, we're way better than fast food, it's Wendy's, it's a call to action quite honestly and a rallying cry where we need to be better in all areas.

We need to be better in the people we hire and train and motivate.

We need to be better in the food that we bring out as Paul just indicated and the way we advertise, we need to show quality advertising, we also need to be better in our operations and how we execute the brand at the store level every day and then better in our facility.

So it truly is more than just an advertising slogan.

It's a call to action for us and our system to really step up and be what Wendy's always has been which is the best in QSR, and we're excited about that.

Okay, thanks for that.

And one other question, at it relates to the EBITDA comments that you made talking about the lower end of current consensus expectations around $325 million.

Just to be clear, this is off of the 305 adjusted EBITDA from continuing ops that you reported for '07 is that correct?

Correct.

So that represents around 6% growth and I recognize we have another year of material commodity inflation and you've talked about that but I just want to make sure that I'm not missing a bigger point here because given all of the opportunity that you have, given that you expect through the year as a lot of this stuff starts to take hold, do you expect better sales trends I'm just curious as to why only 6% growth given there's still significant opportunity here.

Does it reflect greater top line concerns and perhaps deleverage or are we just cycling just more limited cost opportunities?

Well, I think first of all, I would characterize it not at the 6, I would characterize it as about a 10% increase and clearly, we're not quite as, we're not quite satisfied with that, but we do have to acknowledge that we're starting the year with a very low momentum in sales, and in this business, as you know, it's sales that really drives the numbers and so I think what we've done is we've been conservative in how we put this together and that's why we're encouraging you to look towards the lower end of the current estimates.

Thank you.

This is John.

We'll take one last question on the call.

Your next question comes from the line of Larry Miller.

Good morning, Larry.

I apologize if you guys talked about this but I just had two questions.

Jay, can you update us on the share repurchase authorization and also, whether or not you can actually be in the market given the strategic action and my second question was on refranchising.

You guys talked about doing 300 or 400 beginning '08.

Was that still a legitimate target and are the franchisees able to get financing?

And do they have the appetite to take on some of these stores?

And what, finally what proceeds should we kind of think about, if any, as a result of those sales?

Thanks.

We still have 4 million shares that we can buyback and Jonathan, that limitation is through October 1, of 2008.

We have 4 million shares.

The answer to whether or not we can do anything during the Special Committee process, it doesn't make any sense for us at this point in time to do anything through the Special Committee process so we have not done any share repurchases.

And then from a refranchising standpoint, Larry, a couple things, you're right.

We continue to believe that refranchising a number of our restaurants and reducing the Company stores is the right thing to do, but we have to recognize in light of Special Committee process, we need a decision from them before we can move forward with that, while we had talked about maybe refranchising up to 400 stores in '08 originally, certainly we're already into January waiting for a decision from them, you probably wouldn't get more than half of those done, 200 to 250, if you started tomorrow, and we know which ones we want to refranchise.

We know what markets make sense and where we can reduce expenses and to answer your question with franchisees, yes, we have a number of franchisees who very much would like to increase, it helps them diversify.

Can they get financing?

Financing is available and actually with some of the most rate decreases it's actually sort of a positive to the current environment for them to be able to borrow funds.

So there is a lot of interest from refranchising, that said, they also want to see certainty in decision.

Any thought on if you were to get some done with proceeds per store might be, to you guys?

I know it will vary, but just generally speaking?

Yes, it obviously varies by store.

Traditionally, to be realistic in the industry it's about six times EBITDA.

Thank you very much, guys.

Okay, thanks so much, Larry.

Okay, thank you, all for dialing in today.

If you have any follow-up questions you can reach me, Marsha Gordon, or Kim Messner today.

Thanks.

This concludes today's Wendy's International fourth quarter and year-end results conference call.

You may now disconnect.