Wendy's Co (WEN) 2009 Q2 法說會逐字稿

Welcome to the Wendy's/Arby's second quarter 2009 conference call.

Our host for today's call are John Barker, Chief Communications Officer; Roland Smith, President, Chief Executive Officer; and Steve Hare, Chief Financial Officer.

(Operator Instructions) This conference is being recorded today, Thursday, August 6, 2009.

I would now turn the conference over to our host, John Barker, Chief Communications Officer.

Please go ahead, sir.

Thank you very much.

Good afternoon, everybody.

Thank you for dialing in and listening in.

Today's call is being accompanied by a PowerPoint presentation.

I wanted to point that out right away.

You can find that if you haven't already on our Investor Relations page on our corporate website and there are some links there you can click on depending on the media player that you have.

Our agenda for today's call and the webcast will begin with comments from Roland who will discuss an overview of the second quarter results, brand performance highlights, progress we're making on our key profit drivers and then an outlook about our future growth for the company.

Then our CFO, Steve Hare, will review the financial results in a little more detail.

Steve will provide an analysis of our G&A savings to date.

He'll comment on our recent debt offering and resulting debt capitalization and lastly discuss our dividend and stock repurchase program.

Roland will come back then and update you on initiatives intended to drive performance of both of our brands and he'll make some final thoughts, comments, before we open up the line for the Q&A.

Our main focus on today's call is to discuss our financial performance as well as our plans to grow the business profitably and to generate shareholder value.

I'd like to take a minute to first summarize what is included if the financial statements which we put out today along with our Earnings Release.

There is a full P&L.

It has a consolidated second quarter and year-to-date results.

Please note that the results for 2008 reflect pre merger results for Triarc and, therefore, these do not include results of Wendy's.

You need to understand that difference when looking at the comparisons between 2009 and 2008 as it's not meaningful.

Also included with today's release are some key balance sheet items and then we also have a table that shows for the second quarter and year-to-date our EBITDA, our reconciliation of EBITDA to the reported net income or loss and adjusted EBITDA which excludes facilities, relocation, Wendy's special committee charges, corporate restructuring and integration costs.

In addition, there is a comparison to the pro forma results for 2008.

The pro forma results are as if the merger with Wendy's occurred at the beginning of 2008 and a complete P&L on a pro forma basis for each quarter of 2008 is now available on our IR section of our website at wendysarbys.com.

We also provided selected highlights for each of the brands and you can see that in the attachment.

That has same-store sales, revenues, and total number of restaurants at quarter end and then we also this morning we filed simultaneous with the release Form 10-Q.

Now, before we begin, I'd like to refer you for just a minute to the Safe Harbor statement that is attached to this morning's release.

Certain information that we may discuss today regarding future performance such as financial goals, plans, 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 referenced in the Safe Harbor statement that is attached to the news release.

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

Investors should review our reconciliations of non-GAAP terms to the most directly comparable GAAP financial measure.

With that, let me turn it over to Roland.

Thanks for joining us today.

I'd like to start our presentation with an overview of the second quarter.

We are very pleased with our second quarter EBITDA results.

I realize that we're having a little bit of trouble with the slides.

They're coming up a little slower than we had expected, but I'm going to continue and hopefully they'll catch up with us here in a minute.

Adjusted EBITDA was $117.2 million, an increase of 13.2% versus year pro forma results.

We are excited about the momentum we are building at the Wendy's brand.

For example, in Q2, we improved company operated EBITDA margins 370 basis points versus a year ago, and we've also developed a very strong new product pipeline.

By the end of the year, we will have tested at least 14 new products, which is more than Wendy's has tested in a single year in quite a long time.

At Arby's, we are disappointed with our top line; however, same-store sales have continued to improve sequentially each quarter as we continue to emphasize our premium Roastburger sandwiches and value.

Our key profit drivers remain on track and we are highly confident that we can deliver $60 million in G&A savings and $100 million in incremental margin improvement by the end of 2011.

And, finally, we are excited about two key growth opportunities.

International and dual branding and in a moment I'll talk more about both of these.

Now I'd like to cover some performance highlights on both of our brands.

On slide seven you can see that in the second quarter Wendy's company operated same-store sales were down 1.2% and franchise same-store sales were flat.

However, excluding the impact of serving breakfast in fewer stores, we would have delivered same-store sales in the second quarter of plus 0.6% in company stores and system same-store sales would have been positive.

We are pleased with this performance in light of the difficult economic environment and, as I'll speak about in a moment, July same-store sales for the company have been positive.

Most encouraging in the second quarter was our margin performance at Wendy's company operated stores.

Wendy's restaurant margin was 15.9%, up 370 basis points compared to the same quarter last year.

This year-over-year improvement was primarily due to menu price increases taken during the second half of 2008, reduced labor costs as we continue to emphasize an ownership mentality, which includes a new bonus program for restaurant managers that focus on store level profitability, lower controllable costs specifically in the areas of utilities and maintenance, and lower food waste.

It's very important to note that this margin improvement was achieved with no benefit from commodity costs as compared to the second quarter of 2008.

At Arby's, while company same-store sales were down 5.8% for the quarter, as you can see from the chart, we continued to make sequential improvement in same-store sales quarter-to-quarter.

From a margin perspective, Arby's generated a 14.9% restaurant store margin.

And while this was down 100 basis points from year ago primarily due to deleveraging, it was an improvement of 70 basis points versus the first quarter.

The next two slides provide an update on our two key profit drivers.

The chart on the bottom of slide 10, which hopefully will come up here in just a moment, highlights the timetable for or targeted 500 basis points of margin improvement at Wendy's company stores through 2011.

As I said a moment ago, we significantly exceeded our margin improvement target in Q2 and our year-to-date margin improvement was 240 basis points.

Although we believe commodity costs will be lower in the third and fourth quarters compared to a year ago and the first half of 2009, we will see less of a benefit from pricing than we did in the first half.

So based on these factors and the excellent progress we are making to reduce labor, controllables and food costs, we now expect to exceed 200 basis points of margin improvement for the full year of 2009, well above our target.

Therefore, we are more confident than ever about our ability to improve Wendy's margins by 500 basis points by the end of 2011.

Our second key profit driver is cost savings from synergies and efficiencies.

We are more than halfway to our goal of achieving $60 million in G&A savings and we're ahead of schedule.

Our shared service center is now in place in Atlanta.

Our IT projects are right on track including our systems integration, and we are beginning to work on identifying integration and we are beginning to work on identifying additional savings beyond the $60 million target.

In a moment, Steve will provide you with a more detailed analysis of our G&A and cost savings.

Before I turn it over to Steve, I'd like to give you a high level overview of our financial outlook.

Most importantly, we continue to expect average annual adjusted EBITDA growth in the mid-teens through 2011 and based on our first half results, here is our outlook for 2009.

First, as I just mentioned, we expect Wendy's store level margins to improve by over 200 basis points versus a year ago, which is above our target.

Second, we continue to make great progress on our cost saving initiatives and we're ahead of schedule.

However, as you know, same-store sales have been soft at Arby's and the turnaround has been slower than we expected.

So when you net out all these factors, we expect mid-teens adjusted EBITDA growth for 2009.

We think mid-teens EBITDA growth will be an excellent result in light of the economic conditions that continue to challenge the restaurant industry.

Now I'll turn the call over to Steve for additional results or details on our second quarter.

Steve?

Thank you, Roland, and good afternoon.

I'd like to update you on our consolidated P&L and our brand operating results.

I will also provide a more details analysis of our G&A savings and, finally, I'd like to discuss our recent note offering and Board actions.

Slide 14 highlights the second quarter results as well as comments on some of the special expense items in the quarter.

Consolidated revenues were $913 million during the second quarter of 2009.

Cost of sales was $686 million, or 84.1% of sales, and reflects continued improvement in Wendy's restaurant margins.

G&A expense was approximately $113 million and that includes $4.3 million of merger related integration costs.

Depreciation and amortization was approximately $45 million, and that amount will remain relatively consistent for the remainder of fiscal 2009, impairment cost of $8.7 million primarily related to Arby's restaurants and the sale of a corporate aircraft.

Facilities relocation and corporate restructuring of $3 million is primarily related to severance cost in connection with the Wendy's merger.

Interest expense of approximately $31 million for the quarter included the write-off of deferred financing cost of $5.6 million.

Going forward, we expect that quarterly interest expense will increase to reflect our new note financing, partially offset by the reduction of bank debt with the proceeds from that offering.

We are also entering into fixed to floating interest rate swaps hedging about one-quarter of our total debt.

Net investment expense reflects gains during the quarter as well as the cost for early termination of our equity investment account.

Investment losses relate to the write-down of several non-restaurant equity positions.

Tax rate for the second quarter was 36.5%, and we continue to anticipate that our annual tax rate for 2009 will be approximately 38% to 40%.

Net income was $14.9 million, or $0.03 per share, which includes after tax special expense items of $12.4 million, or $0.03 per share.

Roland highlighted our adjusted EBITDA for the second quarter earlier.

The table on slide 15 gives you the adjustments to EBITDA which primarily include merger related operation costs in 2009 and Wendy's special committee charges from last year.

Adjusted EBITDA was $117.2 million and represented a 13.2% growth rate over last year.

Now let me talk about performance for each of the brands.

For the second quarter, Wendy's sales were $539 million and franchise revenues were $76 million.

Total revenue was $615 million compared to pro forma revenue of $632 million in the second quarter a year ago which was a year-over-year decrease of $17 million.

The year-over-year difference was primarily due to the negative effect of foreign exchange rates of approximately $8 million, lower same-store sales and 17 fewer restaurants.

North America system same-store sales were slightly negative as reported but slightly positive adjusted for the breakfast impact.

Wendy's company operated restaurant margin was 15.9% for the second quarter compared to 12.2% in the second quarter of 2008, reflecting 370 bais points of improvement.

Wendy's ended the second quarter of 2009 with 6,608 restaurants, a net decrease of 17 restaurants versus the second quarter of 2008.

The company now anticipates that Wendy's net restaurants will decline by approximately 15 to 20 units during 2009.

For the second quarter, Arby's sales were $277 million from company operated restaurants and franchise revenues were $21 million.

Total revenue was $298 million compared to $313 million in the second quarter a year ago, a decrease of $15 million which was primarily due to decreases in same-store sales.

North America system same-store sales were negative 6.9% versus last year but improved sequentially from the first quarter.

Arby's company operated restaurant margin was 14.9% in the second quarter compared to 15.9% in the second quarter of 2008.

The year-over-year difference was due primarily to sales deleveraging partially offset by increased pricing taken in the second half of 2008.

Arby's restaurant margin at company operated restaurants improved from 14.2% in the first quarter of 2009.

Arby's ended the second quarter with 3,745 restaurants, a net increase of 26 units from the end of the second quarter of 2008.

The company now anticipates that Arby's net restaurants will decline by approximately 50 to 60 units in 2009 primarily as a result of fewer franchise openings and higher closings than previously anticipated.

Now let me provide some detail about our G&A savings.

Many have asked questions about how to track the G&A savings that Roland described earlier.

So slide 18 provides you with a methodology to estimate the G&A savings.

As a starting point, our pro forma G&A for 2008 was $455 million.

To provide a basis for comparing against 2009, you need to first subtract integration cost, second, add back $29 million for performance-based bonuses that were not paid in 2008 but are being accrued as G&A expense in 2009.

And, third, adjust for spurs merger related synergies that were achieved in the fourth quarter of 2008 of approximately $6 million.

These adjustments in total provide a 2008 baseline G&A of $488 million for comparison purposes.

Now, to calculate 2009 G&A savings you can annualize the first half actual G&A and anticipate additional expenditures in the second half which would result in a G&A range of $445 million to $455 million for 2009.

For comparison purposes, this range excludes the effect of the 53rd week we will have in 2009.

Adjusting for expected integration cost of about $10 million brings the 2009 comparable G&A to a range of $435 million to $445 million.

This results in total G&A savings of $43 million to $53 million compared to the 2008 baseline G&A which supports Roland's comments that we are ahead of schedule on our target of $60 million by 2011.

Hopefully this gives you a framework for better understanding our progress on G&A savings.

Now let me talk about our recent note offering.

We completed a $565 million offering of 10% senior unsecured notes on June 23.

The notes were issued in a private placement by a subsidiary of Wendy's/Arby's group, Wendy's/Arby's restaurant LLC which will be a separate sub likely reporting company.

The primary purpose of the financing was to provide financial flexibility to fund our key strategic growth initiatives.

These initiatives include breakfast, dual branding and international expansion.

$132.5 million of the net proceeds were used to reduce our bank borrowings.

Additionally, $50 million may be used for stock repurchases which I will discuss further in just a minute.

At the end of the second quarter, upon completion of the note offering, we had total debt of approximately $1.5 billion and net debt of about $900 million.

Based on our trailing 12-month pro forma adjusted EBITDA, our total debt multiple is four times.

This leverage ratio excludes any EBITDA return on investment of the note proceeds.

Our net debt multiple is 2.4 times.

We believe our financial leverage is moderate and will continue to decrease over time as our key profit drivers contribute to higher EBITDA levels and positive cash flow and we begin to deploy our note proceeds into strategic capital investments.

One additional comment on our debt, in order to better manage our interest rate exposure we are entering into $425 million of fixed to floating interest rate swap agreements during the third quarter of 2009 to hedge approximately 25% of our fixed rate debt.

On August 4, the Board authorized a $50 million stock repurchase program that allows us to make repurchases as market conditions warrant.

The program will remain in effect through the end of 2010.

The Board also declared a cash dividend for the third quarter of 1.5 cents per share.

This dividend will be payable on September 15 to stockholders of record on September 1.

And now I'd like to turn the presentation back to Roland.

Thanks, Steve.

Now I'd like to provide you with an update on several key brand initiatives and growth opportunities.

At Wendy's, we continue to make progress on key initiatives that focus on improving sales by re-establishing leadership and new product innovation, enhancing our core products, and improving our marketing and advertising.

In late June, we introduced a great new product, Asian chicken boneless wings.

Our customers' reactions were very positive and we produced an all-time record sales week for company operated restaurants at the end of June.

I'm also very pleased to report that July same-store sales at company operated restaurants increased approximately 2%.

If we exclude the negative effect of fewer restaurants serving breakfast, our same-store sales in July would have been up approximately 3.4%.

We believe this will be among the best results in the restaurant industry for July.

National media promoting our barbecue and buffalo boneless wings, went on air this week and I hope you have all seen our new commercials and, more importantly, had a chance to try these great new products.

In the fourth quarter we will focus at Wendy's on what we do best.

We will be introducing a delicious new premium cheeseburger.

The new bacon deluxe will feature juicier beef, an improved bun, bacon cooked from scratch in our stores and improved packaging.

We believe this great new cheeseburger will strengthen Wendy's position as having the best tasting and highest quality hamburger in the QSR universe.

Last week we announced the selection of the Kaplan Thaler Group as Wendy's new lead advertising agency.

They are an outstanding agency and we have already begun working with them to develop some exciting new marketing and advertising to launch the bacon deluxe in the fourth quarter.

On slide 25, we highlight two accolades that we believe demonstrate the outstanding progress Wendy's has made over the past 10 months.

First, Zagat ranked Wendy's the number one mega chain in three categories, best food, best facilities and best overall.

And in August Consumer Reports ranked Wendy's fries the best among the big three, better than both McDonald's and Burger King.

We believe this was a direct result of significant improvements our operators made earlier this year.

For example, we improved the quality of our fry oil and changed our cooking and holding procedures.

At Arby's, we continue to focus on increasing visit frequency of our medium Arby's customers which represent about 50% of our revenue.

As I've said before, one additional visit each year from this target generates a 3% same-store sales increase.

So to attract this target we will continue to focus on both premium roast beef sandwiches and everyday value.

In July we promoted our new barbecue Roastburger with fries and drink for $5.

The mix was strong and same-store sales improved from the second quarter to minus 4.7%.

This month we are featuring our premium toasted subs and a new value program, our friends and family feast.

To encourage additional visits from groups, families and friends can come in and buy five roast beef sandwiches for $5 and add a fry and a drink for $1 each.

Then in the fourth quarter we plan to introduce a new everyday value program where customers can pick one of five full-sized sandwiches and match it with a fry and a drink for $5.

All of these sandwiches are made with our premium sliced meats and at the magic $5 price point, they are a great value for our customers.

We are particularly excited about two significant growth opportunities, international and dual branding.

Both of our brands are significantly underpenetrated in the international markets compared to our QSR peers.

We recently completed a market mapping exercise that showed we have the potential for over 8,000 international units so we are currently developing strategies to take advantage of this large growth opportunity.

In the second quarter, we announced international development agreements with two new franchisees.

The first agreement was signed in May with a new franchisee to build and operate 35 Wendy's restaurants in Singapore and the first restaurant is scheduled to open in late 2009.

The second agreement was signed in June with Al Jammaz Group to build 135 dual branded Wendy's and Arby's restaurants in nine countries in the Middle East and North Africa.

In addition to continuing franchise development, we are now also exploring opportunities to expand current markets or open new markets with company store development.

Dual branding offers two great brands and the best of both menus under one roof.

Importantly, dual branding provides us and our franchisees the opportunity to generate higher sales volumes and, therefore, better return on investment.

Recently, we have made significant progress on menu development, kitchen layout and store design and we are focused on three specific dual branded opportunities.

International to attract new franchisees and accelerate growth, the US to penetrate high cost real estate markets and conversions to improve revenue and profits at existing units.

All of the new Middle East restaurants will be dual branded and we are currently developing three dual branded restaurants for test in the Atlanta area.

The picture on slide 28 is a rendering of our first US dual brand that we will build from the ground up and we expect that it will open in Atlanta by the middle of 2010.

In summary, we are very pleased with our second quarter results.

We are making significant progress at Wendy's.

Restaurant margin improvement is ahead of schedule and comp sales in July were up the 2%.

The Arby's turnaround is progressing slower than expected.

However, we continue to produce sequential quarterly same-store sales improvement.

Our key profit drivers are on track and in fact, they are ahead of schedule.

We have significant growth opportunities in breakfast, international and dual branding, and, finally, we are confident that we can generate annual EBITDA growth in the mid teens in 2009 and through 2011.

Now I'll turn it back over to John.

John.

Okay, Roland.

Thank you very much.

I'd like to open up the queue for questions.

Operator, considering the large number of participants on the call, we'd ask to try to have folks limit their questions to one at a time and if you could now open up the lines for questions, we'd appreciate it.

Thank you, sir.

(Operator Instructions) Our first question comes from the line of John Glass with Morgan Stanley.

Please go ahead.

Appreciate all the detail on the Wendy's margin improvement and your increased targets.

You still haven't specified, though, where you think the Arby's business can go, so can you talk to what a reasonable future target is for Arby's and what your expectations are for maybe this year and then maybe 2011 and can you maybe address what you think the margin impact is of that promotional activity that you are -- that you're targeting for the fourth quarter?

Yes, sure, John.

It's Roland.

Thanks for your question.

As I mentioned, we are pleased with the sequential improvement that we've seen quarter-over-quarter for Arby's same-store sales.

We expect that that improvement will continue.

And at Arby's, because the significance of the reduction year-over-year anyway of our margin has been from deleveraging, we see a significant and very quick improvement in margins as sales improve.

So we continue to see sales improving this year and with that we will continue to see margins improving.

We also see commodities softening obviously from the standpoint of cost.

The last time I updated you we were talking about commodities kind of increasing year-over-year around 2%.

We have further kind of looked at the commodity market and now we think that they will be flat to about minus one year-over-year.

So all in all, I think we see both sales and margins improving at Arby's this year and in the future.

In terms of specific target, though?

John, we don't give you specific targets, obviously and don't provide that guidance on a quarterly basis.

Okay.

You did at Wendy's, though, right?

So why not provide some sort of target?

Wendy's is a whole different story from the standpoint of margins.

Wendy's from a margin standpoint, we had a significant opportunity to kind of look at what happened over the last several years and then compare it to franchise and company stores and became very comfortable that the 500 basis point margin target was something that we certainly could achieve.

As we had spoken about that, John, obviously that is not dependent upon commodities improving or sales improving.

Now, certainly we would need to kind of be able to keep track with what's going on with inflation but because there is very little that is outside of our control typically in that 500 basis point improvement, we're happy to give you kind of projections as to what we think we can do year-over-year and because we've made such great improvement already this year of 370 basis points in the second quarter and we see commodities begin to soften and we know the improvement we've made in labor and controllables and food costs, we're comfortable saying that we think we're going to beat our projection of 160 to 180 basis points and produce this year greater than 200 basis points of improvement at Wendy's.

Thank you.

Thank you.

Our next question comes from the line of Reza Vahabzadeh with Barclays Capital.

Please go ahead.

Good morning.

Just on the topic of commodities, you just touched on it with respect to your expectations.

Do you have pretty high visibility on that as in are you forward contracted on the vast majority of your commodities?

We do have a fairly good picture of what commodities look like for the remainder of the year seeing that we're halfway through it.

Our contracts are a combination of forward purchasing.

Some of which is as far as for the entire year, for example, some chicken contracts we have contracted for the entire year.

Our beef contracts, depending on what brand you're speaking about, are short as every couple of weeks and are as long as once a quarter.

It really depends on the particular product that we are contracting for and whether we think it is in our best interest to contract for a longer or a shorter time frame, based on what we expect the commodity market to do based on our research and the guidance and counsel of many of the experts to give us guidance on that.

That all being said, we feel pretty comfortable that year-over-year.

As I mentioned a moment ago, the commodities will be down or flat or down 1%.

If you take a look at it I guess second quarter of 2008 versus second quarter of 2009, we think it will be down in the neighborhood of 4% to 6%.

So certainly that will be a tailwind for us as we go forward for the remainder of the year.

I'm sorry, second quarter of 2009 versus 2008?

Second half, I'm sorry.

Second half.

My misstatement.

Second half of 2009 versus second half of 2008.

Thank you for pointing that out.

Were commodities basically flattish for you in the second quarter that you just reported?

That's correct.

That's why my comment about the 370 basis points of margin improvement at Wendy's was not kind of driven by commodity improvement year-over-year.

They were basically flat.

Got it.

Thank you much.

You're welcome.

Next question comes from the line of my call Michael Gallo with CLK.

Please go ahead.

Hi, good morning.

Question I have is just can you drill down a little bit more on the Wendy's company operated margins in the second quarter as to where the 370 basis points came from, how much was labor versus controllables.

It seemed like food costs didn't really drive much.

Thank you.

Hi, Michael.

Thanks for the question.

We don't get into obviously the particulars of the P&L line by line publicly.

We certainly do that in our company restaurants because that's the diligence and discipline we need to manage them.

What I can say and what I will say is that from the standpoint of the benefit that we received among what happens in the P&L, the biggest benefit came from price increases that we took in 2008 that we're enjoying now in 2009.

Second was from labor and I've talked a lot about kind of how we're managing labor as we go forward and I'm certainly happy to talk about that in more detail if you would like.

Certainly we have a new bonus program in place that we've talked about.

We have taken hours out of our labor schedule and generally are managing our labor much more carefully than we have in the past.

Third was controllable costs specifically in the areas of utilities and maintenance where again our managers have done a great job of line by line looking at our P&L, understanding what needs to be spent and what doesn't need to be spent from the standpoint of as I mentioned in some of the discussions we had, core tiling all our restaurants, finding out who's doing well and who's not doing well and using those best practice and then, lastly, we did enjoy the benefit of a tighter management of a theoretical food cost to actual food cost which predominantly come negligently came in the area of lower food waste.

The combination of those four is what has provided us the 370 basis points.

As I mentioned a moment ago, just to kind of complete the thought, currently we believe we're going to get some benefit of commodities as we go forward to the third and the fourth quarter which will obviously help us improve upon what we've already done but we're going to have less benefit from price increases as we begin to roll over price increase that we took in 2008 so the net of that is that we continue to believe that the benefit of labor and the other key controllables on our P&L and the progress and the discipline that we've put in place will still allow us to do a very good job in the second half of the year of improving margins and that's why I forecasted that it will be better than 200 basis points versus year ago.

Thank you.

Thank you.

Our next question comes from the line of Mitch Speiser with Buckingham Research.

Please go ahead.

Thanks very much.

On the Boneless Wings launch, did you support that with national advertising in July?

Yes, we did.

I'm disappointed to hear you haven't seen the commercial because we're very proud of it.

Okay.

Just wasn't sure if it was national or not because you said you were going to continue the national advertising in August?

At Wendy's, yes, we are.

We continue but we're going to change our focus on the two other flavors of Boneless Wings, which are buffalo and barbecue.

Quite honestly, since the commercial is on air and, as I mentioned, I hope some of you have seen it.

We've used a little bit of the concept of what we launched the product with which was very, very successful of engaging the consumer at the beginning of the commercial, kind of having them believe this product is actually being served in a casual dining restaurant and then it morphs in to a Wendy's restaurant where the consumer goes, wow, you can get that quality of a product at a Wendy's.

That's great.

I'm going to go there which is obviously what we're about.

Now we get a little bit more specific about price point if you've seen the commercial and actually have a little fun with the fact that we don't charge our customers for many of the things that our casual dining competitors charge them for and we have a little fun with big screen TVs and singing happy birthday and a few things like that and there's a little sign over top of the wings that kind of continues to go from $4.99 to $6.99 to $9.99 but then at Wendy's you don't pay for anything but the great quality food and we are actually highlighting a $3.99 price point which we think is a fantastic value for such a great product.

Does the national advertising continue into September or is it just an August window?

Predominantly in August hand then in September we go into a different campaign.

Okay.

Thank you.

You're welcome.

Thank you.

Our next question comes from the line of Jeffery Bernstein with Barclays Capital.

Please go ahead.

Great.

Thank you very much.

In terms of the debt that you took on and the use of proceeds.

I think you kind of went through in a little bit of detail in terms of what you spend it on.

Seems like it would generate net cash of give or take $400 million after the paydown you've already done.

Just wondering whether you could talk a little bit about, you mentioned breakfast and international.

One, I guess, are we thinking primarily the best use would be an acquisition to kind of enhance the breakfast business domestically and to grow the international business?

Separately, whether or not it's the potential for an acquisition of a third brand would be considered rather than just kind of a fill-in of breakfast or international and just lastly, you mentioned the $50 million share repurchase, just wondering how you arrive at $50 million when you're playing with the $400 million in cash, kind of what's used to determine the amount of the share repurchase?

Thanks.

Thanks, Jeff.

I'm going to start off with your first question which has to do with how we plan on using the proceeds.

Then I'm going to turn it over to Steve and let him talk a little bit about the $50 million share repurchase program that we announced that our Board approved earlier this week.

First of all, from the standpoint of what we plan to use this capital for, I would say that our highest priority right now is organic growth and by that I really mean the three big categories that we've been talking about which is breakfast, which is a great opportunity for us and I can talk a little bit about -- more about that if you'd like.

I haven't highlighted that a lot today because there's not a lot of new news from the last time we spoke.

We continue to make great progress against the menu and our positioning to make sure we have a reason for people to want to participate at Wendy's during the breakfast day part.

We have tests in place.

We are expanding those early next year.

We have research in place and I'm fully confident that we can develop a menu that's exciting, that is as high a quality of food as the rest of our menu is and that customers know us for and that we can take a significant share of the breakfast market and participate in the great revenue and profitability that that will provide.

Obviously, that's going to take some money as we spoke about before.

There will be equipment that will be necessary.

There will be signage that will be necessary.

There will be media investment that will be necessary to kind of generate awareness that we're in the breakfast business.

The next obviously I spoke about is dual branding.

We think that's a great opportunity from the standpoint of taking our two great brands and two great menus and putting them under the same roof.

We've developed a menu for Wendy's to Arby's conversions and Arby's to Wendy's conversions and also ground up and I've got to tell you, each time I look at it I'm more excited about what the consumer can actually choose from at a dual brand because it provides everything from the best hamburger and frosties and salads to the best roast beef sandwich and curly fries and Jamocha shakes.

It's very exciting from our standpoint, from the standpoint of what this can do from both a revenue standpoint and a profitability standpoint and we are beginning to expend money on that as we speak.

As I mentioned a moment ago you saw the prototype which we're very excited about.

We think this is a way to expand development in a significant way both in the US and in international, and speaking of international, as I mentioned we just completed a significant study to get a little bit of a handle on what the opportunity really was.

And clearly, I wouldn't sit here today and say we fully expect to take advantage of 8,000 opportunities in the near future.

I certainly wouldn't try not to do it, but that will take a fair amount of investment and effort.

We have begun to generate some excitement in the international community with new franchisees as evidenced by the two new agreements that we signed recently and as those stores get open and as our dual branded stores get open in the United States, I think it will also generate additional excitement.

I also mentioned that we believe that in order to kind of jump start our development internationally, we will consider looking at the opportunity for some company development.

Take a look at our key competitors, certainly they have a significant amount of their international restaurants that are company owned and operated and there's very good reason for that from the standpoint of the ability that that gives them both structurally and also from the standpoint of selling their concept into the international marketplaces as to why that's been successful.

As an example, I would say that China being the large opportunity market that it is, we are beginning to look at the opportunity of opening some company operated stores in some of the key provinces, so as I mentioned, we can use those as a significant kind of selling platforms as we bring in new franchisees that want to participate with us.

So overall, Jeffery, our kind of expectations for the use of the these proceeds is really primarily around organic growth.

Clearly, we mentioned as we took this to the market that strategic acquisition would be something that we would keep our ears and eyes open about but as I also mentioned, although I don't think the market kind of listened as carefully as we would have hoped, we had no specific opportunity that we were looking at and nor do we today.

If one presented itself specifically from the opportunity to maybe allow us to jump start breakfast more quickly, we would probably certainly consider that but that is not a key priority for us at this point and we are spending our time and attention focused on organically growing these two great brands and the opportunities that we've presented today.

Steve, why don't you talk about the share price repurchase.

On the stock repurchase program, I think just by way of background, the Triarc had a stock repurchase program that had expired last year.

It was a similar size, $50 million program.

So I think as we discussed with the Board at the last meeting, the thought of allocating some amount of the net proceeds to be available for stock repurchase program we thought made sense.

The size of the program is consistent with what we have had in the past.

And, clearly, as Roland had talked about, the priority for the bulk of the proceeds, the $400 million net proceeds that you mentioned, is for strategic capital investment but I think we were all comfortable that while it's still early, we still want to preserve flexibility as we had talked about on the offering of the notes to provide flexibility if we need to derisk the balance sheet in terms of future debt maturities.

We want that flexibility but to allocate $50 million such that if the stock price doesn't reflect hopefully the progress that you'll see from Wendy's/Arby's going forward that we'll be able to make opportunistic investments in the stock directly as part of the program.

But, clearly, I think the message you're hearing from Roland is one that the bulk of the proceeds will be reinvested over time back into what we think are some high return potential growth opportunities for us in the business.

Thank you, our next question comes from the lined of Thomas Forte with Telsey Advisory Group.

Please go ahead.

I had a couple follow-up questions on the Boneless Wings.

Wanted to get a sense of where the product stands as far as percent of sales mix versus some of your other comparable chicken items, and then wanted to find out what your plans were for the remainder of 2009 on pricing in general for both Wendy's and Arby's.

Thanks, Thomas.

The Boneless Wings, as I mentioned, have been very well accepted by our consumers and are mixing currently in the mid single digits which we think is a very successful mix for a new product, a new chicken product.

Certainly have done a great job of driving our same-store sales in July to plus 2 and as I mentioned if you exclude less breakfast restaurants, 3.4.

From a pricing standpoint, clearly we have looked very carefully at what's going on economically.

Certainly, we are looking at what's happening from the standpoint of unemployment.

The current forecasts are that's going to top 10% by late 2009 and maybe kind of come back down to 9.5% or so in 2010.

But it's a very competitive, very aggressive pricing market still and so we are very careful with what we will do with pricing as we go forward.

We will continue to look at a market.

We will continue to look at what our competitors do.

We'll continue to look at what costs are.

As you know, minimum wage went up recently, although that didn't have a major impact on us because while it's at $7.25 the majority of our labor is already being paid $7 or slightly more than that.

But all these factors will come into play as we take a look at price increases, but at this point we don't expect any significant price increases at either brand tore the remainder of the year.

Thank you.

Thank you.

Our next question comes from the line of Paul Westra with Cowen and Company.

Please go ahead.

Great.

Good afternoon, everyone.

Hi, Paul.

Hi, Paul.

Couple questions.

First, just on the interest expense line.

I was wondering if you could give us a little more color on this swap you did, what is the pricing currently on the floating portion I guess, and maybe give us a little color now that things have sort of settled down post the issue, what kind of normalized quarterly run rate should be for that interest expense line?

Paul, this is Steve.

We haven't completed the swaps program.

We've just got it started.

Our goal is to hedge $425 million, but we're not completed yet so I can't give you any more detail on that program.

Really, what we're trying to do is we looked at the debt portfolio after the high yield offering, effectively all our debt was fixed and so the thought process was that given current market conditions to use the swaps to give us some more exposure to some of the floating rate short-term debt so at about 25% we think that's about the right balance that we want to have going forward.

And we don't -- we're not going to provide a specific interest rate forecast for you but I did say in my comments you should expect the quarterly interest rate to increase given the increased amount of debt that we have now on the balance sheet.

Maybe just one more comment.

I guess my observation is, I guess others as well, that you have industry leading comp momentum kind of marketing a reasonably premium priced product which is sort of somewhat counter intuitive, trying to figure out is there anything you're seeing in your research where Wendy's opportunity is?

Is this adding to maybe less competitive day parts like late night and then, of course, as you look out the rest of the year, you've at least shown us your premium cheeseburger is coming out as well, another premium product, and just I guess your observation about the opportunity in premium products in today's difficult environment.

Well, I think it's a great question, Paul.

We believe that consumers continue to want high quality, great tasting fast food.

Clearly, they want it at a great value but value is relative and I don't think all value is defined by $1 price points.

We do believe that we need to be able to speak to a variety of customers but we have seen with our Boneless Wings launch that there are a significant number of customers out there that if you price things at what they consider to be a value, which doesn't have to be $1, and the product is great and the advertising is motivating and the experience in the store is kind of meeting or exceeding their expectations, that they will come and visit you and we're very pleased with that and we think that we'll be able to continue on that momentum at Wendy's as we go forward.

And similarly at Arby's, while our sales are certainly not what we would like them to be, the success of our Roastburger launch would also suggest that when priced correctly, consumers will really respond to kind of great quality products.

Our Roastburgers are still mixing somewhere between the high single digits and the high double digits depending on whether it's a promoted or non-promoted month.

We've read and I guess I could reference what others have called kind of a barbell strategy.

We think that our both brands have a real barbell strategy because we have clearly significant premium great tasting products and we are providing also great value.

Arby's, as you know from my comments a moment ago, is getting more aggressive from the value standpoint with some of the programs that we plan on introducing, be it five for $5, $1 for a drink and a fry, family and friends feast, or whether it be the $5 combos which are great sandwiches with our premium sliced meats add a significant price point from the standpoint of what seems to be exciting for the customer.

So we believe that we can continue this momentum with a combination of both premium products and value and at Wendy's we are very excited about the fourth quarter.

Having eaten our new deluxe, I can tell you, it's a fabulous product and the improvements we made are significant and meaningful.

The customer reaction has been significant.

It's been tested in number of markets now and is doing quite well and I believe that while it is a premium product and while it does enjoy a premium price, our research and results so far would suggest that, again, priced right with the right quality of food and the right taste, consumers will come in and participate and we expect the results to be kind of corresponding to this as we complete the year.

Great.

And just maybe just one more.

If you didn't comment already, was there a noticeable performance difference between lunch, dinner and late night at brand Wendy's?

Not from previous periods, no.

Okay.

Great.

Thanks so much.

You're welcome.

Thank you.

Our next question comes from Adam Plissner with Credit Suisse.

Please go ahead.

Good afternoon.

Back to the margin improvement story on the Wendy's side, Roland, when you think about the buckets, the food costs, labor, controllables you originally sort of assigned the breakout of the 500 basis point margin target, are there buckets that you're exceeding, buckets that still remain bigger opportunities, and then let me just remember correctly, were menu price increases which were a huge part of the improvement this quarter even part of the 500 basis point makeup and is that incremental as would be commodity prices?

We did provide some specific information, and I think it's on the website, around kind of the buckets, as you refer to them, of the key areas of the P&L and where we're going to get the improvement over the period of time that we talked about and also based on the fact that it was kind of not based on kind of commodities as I've mentioned earlier.

The largest bucket, as I'll remind you, was labor and we continue to do very well with labor and labor was our number two kind of contributor in the 370 basis points that we enjoyed in the second quarter.

We weren't expecting kind of the benefit of all of the price increase obviously that we got in the second quarter, but we did note that Wendy's certainly had an opportunity to what I would call normalize its pricing as we did our research.

We looked at Wendy's pricing in the past and they had not always done kind of local pricing and for a while had national pricing across kind of the entire US.

And so pricing was a little bit of it but certainly not as much as we kind of benefited from certainly in the second quarter.

Going forward, we think we're making great progress against each of the buckets and I wouldn't say that any of the buckets quite honestly is an issue at this point.

As we complete kind of this year, we will see less and less impact of pricing, which I mentioned to you earlier, and so that will become less and less of a factor and certainly was not something that we expected to have to take place in order to generate our 500 basis points.

Said another way, or a question to ask the other way, do we have to continue to take pricing in order to enjoy the 500 basis points?

The answer is no.

And we will depend more on the organic, so-to-speak, internal benefits that we are seeing in labor and controllables and food costs.

And the pace of achieving these margin improvements away from the menu price effect, do you consider that more of a pull forward, sort of a rapid improvement, or do you feel like overall you're sort of out-achieving your original targets?

I think it's probably more of a pull forward rapid achievement.

We are accomplishing the improvement more quickly than we expected.

That being said, if same-store sales continue to progress as I hope they do and as we've seen at least starting in July, we should be able to exceed that 500 basis points because you remember the 500 basis points was kind of comp sales neutral.

So as those comp sales go up and certainly exceed what inflation would be, I would expect that we might be able to kind of beat that in the out years.

Great.

Real quick, Steve, did you say that you were planning on filing a 10-Q for the Wendy's/Arby's restaurant LLC level?

Yes.

We're in the process.

We'll have to do an exchange offer and then once we have the exchange offer done, then we'll have WAR, Wendy's/Arby's restaurants will then be filing a 10-Q.

You will also see us file an 8-K next week that will have financials that will look like a 10-Q for all intents and purposes next week.

Great.

Thank you .

Maybe I'll just add one other comment, Adam, to make sure everyone is clear.

We're excited about our margin improvement at Wendy's.

As I mentioned, we are now forecasting to exceed 200 basis points.

That being said, we certainly -- and you've already done the math -- are not going to be able to enjoy 370 basis points in the next two quarters because some of the corresponding reduction in pricing and kind of depending more on the internal organic factors that we are excited about, we're making progress on as we go forward.

Our next question comes from the line of Ed Einboden with WM Smith and Company.

Please go ahead.

Good afternoon, everyone.

Hi, Ed.

Thanks for the additional color you guys provided on the pro forma EBITDA numbers.

Appreciate that.

You're welcome.

Quickly, I just wanted to see what your thought process was.

You guys have a new channel of innovation.

It seems like you guys are well ahead of that pace.

How much did that contribute to selecting Kaplan Thaler and sort of what's your expectations of what they can provide on the marketing side?

Great question.

We have looked at this very systematically from day one and even before we completed the transaction I sat down with my senior team, which I had the luxury of already selecting, and we talked about what were going to be the key priorities that we were going to focus on at Wendy's and at Arby's and at WAG.

At Wendy's a couple of the key priorities were around the concept of absolutely understanding what our brand vision was, improving some of our core products, and then improving our marketing and advertising.

[Ken Calwell] and his team have done a fabulous job defining the Wendy's positioning.

We've developed something that we call our brand book which is kind of the Wendy's Bible which in detail explains exactly what our positioning is, who are targets are, and what we can do and what we can't do so that we have kind of guide posts, so to speak, as we go forward.

That being done, we now can take a look at how we move forward.

The next step obviously is to improve core products.

We made great improvements in a number of our products.

We are probably most proud of the improvements we made in our french fries, and I mentioned earlier we got rated kind of the number one french fry among the big three and that wasn't a mistake.

We had made great strides in improving our shortening and also improving our operational procedures.

You know what?

I think we have the best product in the marketplace at Wendy's and the hamburger segment and I think we deserve the best advertising and so at the right time, which was several months ago when our brand book was complete and we had our pipeline well established so we actually had new products that we could go and develop exciting new advertising for, we put our business our for bid.

We looked at initially about 140 advertising agencies.

By screening them we netted that down to about 40, further screening netted them down 10 and then we started kind of significant interaction with those 10 agencies to net it down to 5 and then we did a full-blown pitch with all five of those agencies to include in our previous agency, KBP, which was doing a very fine job for us and I will say on the call that they have produced some great advertising and we would not have been surprised if they would have won that pitch at the end of the day.

Nevertheless, as we looked at those pitches and it was a specific group of people that included myself and Ken Calwell and some of our key executives, David Karam, Steve [Hare], our President, our COO, also three key franchisees in our system were on the committee to include the heads of [WENAP] and [CNAP], that's our UA and Canadian advertising organizations and also the head of our creative development committee.

We spent and they spent countless hours kind of evaluating the agencies and their creative, and I should say on the call how much we appreciate the support that our franchise community has provided to use over the last ten months and quite honestly made a very difficult call which is what we think is the right advertising agency for Wendy's to go forward.

We are very excited about the concepts and the advertising that they presented.

I think our culture matches incredibly well and we already spent another 40 - 50 hours with them since we have announced that last week and are beginning to develop, as I mentioned, some very innovative and exciting advertising and marketing to launch some new products in the fourth quarter.

So I see it as the continued process of our key priorities that we established as we take over Wendy's and I'm excited about working with Kaplan Thaler and I think they will do a great job for us.

Great.

Thank you very much.

Operator, this is John.

We will take one last question, please.

Okay.

Thank you.

Our last question is a followup question from the line of Mitch Speiser with Buckingham Research.

Please go ahead.

Great.

Thank you.

Definitely a solid quarter across the board.

You pretty much beat expectations in each metric.

I guess one area is just the Arby's franchise system which looked like comps were a little bit slow there.

There were more closures than you expect.

Can you just give us a general update of the health of the franchisee system?

Is there any potential that you might have to assist franchisees and just a general view of how the franchisees are faring in this tough environment?

Thank you.

Sure.

Great question.

Certainly with the softness in sales at Arby's over the last several quarters, our franchisees has experienced some difficulty.

Obviously that is dependent upon their own balance sheet as to where they are currently.

We have seen delinquencies rise and over the last couple of quarters based on the same-store sales and we certainly are working very carefully with our franchisees to provide whatever assistance we can from the standpoint of helping them kind of work through this difficult time and get back kind of positive as we work on additional sequential improvement in our same-store sales.

Now, as you look at the second quarter in particular, certainly you did see a fairly significant difference between our company operated performance and our franchise operated performance and I think that was almost entirely driven by the fact that we tested many new additional value offerings at our company stores and we're a little bit more aggressive in value and our franchisees would expect us to do that because we need to bring to them tested and well thought out programs that we can bring to our system which has a great kind of chance at success.

Fortunately, the benefit of those value programs seem to have worked because we did outperform them.

We are now taking many of those ideas as I mentioned earlier in to broader execution in the third and the fourth quarter and I think you should expect to see our franchisees improve significantly based on a greater emphasis on value.

So that's a little bit of the overall health of our franchise system as it relates clearly to Arby's.

Thank you all for your time today.

Thank you for the great questions and giving us a chance to kind of update you on our business.

I would like us to end by reiterating how excited we are about our second quarter results, the fact that we made such great progress at Wendy's and that our margin improvement is well ahead of what we expected it to be at this point and that we're starting off the third quarter obviously with great results on our Boneless Wing product up 2%.

As you asked and I just answered the question, the progress that Wendy's -- I'm sorry, Arby's is slower than we expected; however, we do continue to make sequential improvement and we think that will continue in the third and fourth quarter.

Our key profit drivers are on track and, as I said earlier, they actually are ahead of schedule.

We are continuing to focus on significant growth opportunities that we think will provide great opportunity for sales and profits and shareholder value in the out years to include breakfast, dual branding and international and then, finally, we are excited about our ability to reiterate our guidance from the standpoint of EBITDA growth in 2009 and through 2011 of the mid teens.

So thank you again for your time and attention.

I look forward to seeing you -- most of you in the market in the next couple of months before we get back together again and talk about our third quarter results.

Have a great afternoon.

Thank you, sir.

Ladies and gentlemen, this concludes the Wendy's/Arby's second quarter 2009 conference call.

You may access the replay system any time by dialing 303-590-3030 or 1-800-406-7325 and entering the access code 4128760.

Thank you for your participation.

You may now disconnect.