Wendy's Co (WEN) 2010 Q1 法說會逐字稿

Good morning, everyone.

And welcome to Wendy's/Arby's Group first quarter and full year 2010 conference call.

Our hosts today are John Barker, Chief Communications Officer, Roland Smith, President and Chief Executive Officer, and Steve Hare, Chief Financial Officer.

At this time, all participants have been placed on a listen-only mode.

The floor will be open for questions and comments following the presentation.

I would now like to turn the call over to John Barker.

You may begin, sir.

Thanks, Beverly.

Good afternoon, everyone.

Today's conference call and our webcast is accompanied by a Power Point presentation, which can be found on our Investor Relations page, on our corporate website, which is wendysarbys.com.

For those of you who are listening by phone today, be sure to select the appropriate webcast player option from our website and that will assure that the slides and the audio are in sync.

The agenda for today's conference call and our webcast will begin with remarks from President and CEO, Roland Smith, who will discuss our first quarter highlights, Chief Financial Officer Steve Hare, who will review our financial results in greater detail and he will discuss our 2010 outlook.

And following Steve's discussion, Roland will come back and update you on Wendy's and Arby's brands and our international business and then we will open up the line for Q&A.

I would like to take a minute to summarize what's included in the financial statements, which are attached to today's earnings release.

There's a P&L with a full consolidated first quarter 2010 results.

Also included with today's release are key balance sheet items and a table that for the first quarter 2010 shows our EBITDA, a reconciliation of EBITDA to the reported net loss, and adjusted EBITDA, which excludes integrated, related and non-recurring items.

We also provided selected financial highlights for each brand, with same-store sales, revenues, four-wall restaurant EBITDA margin percent and the total number of restaurants at quarter end.

In addition, we filed our Form 10-Q for the Wendy's/Arby's Group this morning and later today we will file our Form 10-Q for Wendy's/Arby's Restaurants, which is a subsidiary of Wendy's/Arby's Group.

Before we begin, I would like to refer you for just a minute to the Safe Harbor Statement that is attached to today'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.

We have provided you reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measure.

Now, let me turn the call over to Roland.

Good afternoon, everyone, and thanks, again, for joining us today.

We're pleased with our first quarter EBITDA results.

Adjusted EBITDA was $92.1 million, an increase of 14.7% compared to a year-ago.

At Wendy's, we produced positive same-store sales and improved company-operated restaurant EBITDA margins by 430 basis points compared to the same quarter a year ago.

At Arby's, we focused on our turnaround plan and the rollout of our new everyday value menu.

While same-store sales and margins declined in the first quarter, we are encouraged with the transaction improvement, and I'll talk more about that in a moment.

Now I would like to share first quarter 2010 performance highlights for both Wendy's and Arby's.

At Wendy's, first quarter system-wide same-store sales increased 0.8%.

We believe this was among the strongest sales performance in the industry.

It's also important to point out that we were rolling over our strongest quarter of same-store sales growth in 2009, and we were negatively impacted by severe winter weather in February.

Wendy's company operated restaurant margin was 15.4% for the first quarter, reflecting a 430-basis point increase versus a year ago.

Approximately 300 basis points were driven by operational improvements in labor and controllables, lower advertising costs, as well as menu mix shifts to premium and higher margin products.

And about 130 basis points of improvement was driven by lower commodity costs.

Now, let me talk about our first quarter marketing calendar at Wendy's.

In January, we promoted our $0.99 spicy chicken nuggets, which drove improvement in same-store sales.

In February, we featured our Premium Fish Sandwich.

In March, we were pleased with the successful introduction of Wendy's new Bacon and Blue premium hamburger.

We are continuing to improve our entire hamburger line and we're very optimistic about enhancements to our ground beef, buns, fresh toppings and condiments that are currently in test.

Now I'll review Arby's first quarter.

At Arby's, system-wide same-store sales decreased 11.5% in the first quarter.

Arby's generated a 10.8% restaurant margin, a decline from last year due to sales deleveraging.

Now let's review Arby's first quarter marketing calendar.

Excuse me.

Arby's continued to roll out the Dollar Value Menu in the first quarter.

In January, about half of our system promoted the Dollar Value Menu.

Arby's same-store sales improved to negative 3.9% during the last three weeks of the month, after the start of local television advertising.

In February, severe winter weather in the central and eastern portions of the US negatively impacted sales at Arby's.

And in March, we rolled over our strongest 2009 monthly comps, when we introduced the Roast Burger line a year ago.

The 2009 Roast Burger launch included substantial national media and promotional activity, and by comparison, we did not have any national media in our 2010 March period.

We completed the rollout of our Dollar Value Menu and began advertising it nationally on April 11.

We are encouraged with the positive transactions and improving sales trends since the launch.

I'll talk more about April in our turnaround initiatives in just a few minutes.

Now I would like to comment on the formation of our third purchasing cooperative.

In April, we announced the formation of a new independent purchasing co-op, the Strategic Sourcing Group, or SSG.

SSG will utilize the purchasing power of our nearly 10,000 Wendy's and Arby's restaurants in North America.

The co-op is responsible for skirring a range of goods and services that are not within the scope of either Wendy's or Arby's purchasing co-ops.

SSG focuses on securing competitive contracts for non-branded supplies and services, such as equipment, kitchen small wares, furnishings, and menu boards, as well as utilities and restaurant level contract services.

The Company is committed to fund $4.9 million of operating expenses for SSG, which was recorded as a charge in the first quarter and will be paid over a 24-month period.

We expect to benefit from the purchasing efficiencies realized by company-owned restaurants as well as from lower G&A expenses due to the transfer of strategic sourcing employees to the co-op.

These savings will be incremental to the three-year margin improvement and G&A savings targets of $160 million established at the time of the merger.

Now I would like to turn the call over to Steve.

Thanks, Roland.

First, I would like to update you on our first quarter 2010 consolidated P&L.

I'll also provide a review of our capitalization and cash flow and update you on our stock repurchase program and dividends.

I will also provide some comments on our progress with arranging a new credit facility.

And finally, I will review our financial outlook for the year.

Slide 13 highlights the first quarter results and the special expense items in the quarter.

Consolidated revenues were $837 million during the first quarter of 2010, and decreased 3% from a year ago, primarily due to negative same-store sales at Arby's.

Cost of sales was $641 million, or 85.7% of sales, and reflected continued improvement in Wendy's restaurant margin, partially offset by a decline in Arby's restaurant margin.

Although commodities were favorable in the first quarter, they are beginning to increase earlier than we had anticipated, especially beef.

We continue to anticipate a 2% to 3% increase in commodity costs for the full year, which will negatively impact margins for the remaining quarters.

G&A expense was $110.5 million, including a total of $7.8 million of merger-related integration costs, and the charge related to formation of the new purchasing co-op.

Excluding these costs and executive severance, G&A was lower on a comparable basis by approximately 5%.

We anticipate integration costs and G&A to be approximately $8 million for 2010, primarily related to continuing IT integration projects.

Depreciation and amortization was approximately $46 million and we expect the quarterly amount will increase slightly throughout the year due to our remodel spending.

Impairment charges of $11.6 million were related to the write-down of fixed assets for certain underperforming Arby's restaurants.

We did not incur any facilities relocation expense in the quarter and do not anticipate any further charges in 2010.

Interest expense was approximately $37 million for the quarter and was similar to the prior quarter.

We are in the process of arranging a new credit facility, but should decrease annual interest costs, and I'll update you further on that process in a moment.

The tax rate for the first quarter was 60%.

This rate was higher than the statutory rate, largely due to reductions in our valuational allowances related to certain state tax matters.

However, we expect the rate for the remainder of the year to be 38% to 40%.

Net loss was $3.4 million, or $0.01 per share, which included after-tax net special charges of $12 million, or $0.03 per share.

Roland highlighted our on adjusted EBITDA for the first quarter earlier, the table on slide 14 summarizes the adjustments to EBITDA, including those I discussed on the previous slide, merger related integration costs and G&A of $2.9 million and a charge of $4.9 million for the new SSG purchasing co-op, which represents approximately two years of operating costs.

Adjusted EBITDA was $92.1 million and represented a 14.7 % growth rate over the first quarter of last year.

Slide 15 summarizes our cash flow for the first quarter.

Cash from operations was $35.2 million and included a net loss of $3.4 million, depreciation and amortization of $46.3 million, a decrease in accrued expenses and other current liabilities of $42.3 million, largely due to payment of accrued bonuses and interest and other non-cash items of $34.6 million.

Capital expenditures were $27.1 million and were approximately $10 million higher than our spending in the first quarter of 2009.

We continue to anticipate capital expenditures to be approximately $165 million in 2010.

Net cash generated from operations was $8.1 million.

We returned $87.5 million in capital to our stockholders in the form of stock buybacks and cash dividends during the quarter, which was the primary driver of the $84 million reduction in the cash balance versus year end.

At quarter end, we had a cash balance of $507.3 million.

We continue to have a strong cash position, which provides us with significant financial flexibility going forward to fund our strategic growth initiatives and stock buyback programs.

Now, let's look at our debt capitalization.

At the end of the first quarter, we had total debt of approximately $1.5 billion and net debt of about $1 billion.

Based on our trailing 12-month adjusted EBITDA, our total debt multiple is 3.5 times.

Our net debt multiple is 2.3 times.

We believe our financial leverage will continue to improve, as we produce higher EBITDA levels and reinvest our cash balances back into the business.

Now I would like to review our progress on refinancing.

In order to address our medium term debt maturities and to take advantage of the current favorable credit and interest rate environment, the Company is in the process of arranging a new $650 million senior secured credit facility, which will include a $150 million revolver and a $500 million term loan.

The proceeds from the new term loan will be used to retire the existing senior secured credit facility, which expires in 2012, of approximately $251 million, as well as the existing senior notes due 2011 of $200 million.

The remainder will be used to pay related expenses of the transaction, with a small amount of residual cash added to the balance sheet.

We are optimistic that we will complete this transaction by the end of May.

Now, let me talk about recent Board actions.

The Board of Directors authorized a stock repurchase program beginning in 2009, and our total authorization is currently $250 million.

Of this total, we have repurchased 40 million common stock shares for $190 million, as of May 7 of this year, at an average share price of $4.76.

The authorization remains in effect through January 2, 2011, and will allow the Company to make repurchases as market conditions warrant.

Our stock repurchase program reflects the Board's and our confidence in the long-term prospects of the Company.

The Board also declared a cash dividend for the first quarter of $0.015 per share, or approximately $6.5 million.

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

And now I would like to briefly review our financial outlook for 2010, which has not changed since our announcement last quarter.

Although there are some positive signs, key economic trends remain weak for restaurants.

Unemployment remains high, especially among teenagers and young adults, which has a significant impact on the restaurant industry.

We don't expect that this will improve significantly in the short-term.

We have seen a modest uptick in consumer confidence in March and April and hopefully this index, which correlates to restaurant sales, will continue to increase throughout the year.

For the year, we continue to expect positive same-store sales and further margin expansion at Wendy's and negative same-store sales at Arby's, but improving on a year-over-year basis.

As a result, we continue to expect adjusted EBITDA growth in the low to mid single digits for 2010.

This increase excludes the effect of the 53rd week in 2009 of approximately $14 million, and incremental investment spending to expand Wendy's breakfast menu into additional markets during 2010.

Now, let me turn it back to Roland.

Thanks, Steve.

Now I would like to review our plans for Wendy's and Arby's, as well as our international business.

Let's start with Wendy's.

During April, Wendy's promoted our $2.99 Deluxe Value Meals to address the value portion of our marketing bar bell.

April same-store sales were negative 0.5%, excluding the negative impact of the Mother's Day shift into fiscal April 2010.

We expect to get the benefit of this calendar shift in our fiscal May same-store sales.

This month, Wendy's introduced our new Spicy Chipotle Chicken Boneless Wings.

This is an outstanding new premium product that adds news to our boneless wings lineup.

Later this quarter, we'll introduce two new deluxe value meals with a Barbecue Bacon Cheeseburger and Barbecue Bacon Crispy Chicken Sandwich, as we continue to focus on balancing value with premium promotions.

In the third quarter, we are very excited about launching a new salad line that produced strong results on our test market.

Our new salads include Apple Pecan Chicken, BLT Cob, Spicy Chicken Caesar and Baja.

Each offers a blend of quality ingredients with all natural dressings, including Pomegranate Vinegarette, Lemon Garlic Caesar, Creamy Red Jalapeno, and Avocado Ranch.

Our real positioning will be crystal clear to customers, as our new salads feature fresh ingredients, like romaine lettuce, all white chicken breast filet, a blend of roasted corn and seasoned black beans, grape tomatoes and shredded parmesan cheese.

We believe these new salads will drive positive transactions and sales.

Now I would like to comment on our progress with restaurant operations.

We have continued to focus on improving our customer experience in 2010.

In the first quarter, we increased the number of A and B level for well operated stores five points from 68% to 73%.

To further enhance the customer experience, in 2010, we plan to remodel up to 100 company-owned restaurants at Wendy's and we are pleased that franchisees are also increasing their level of remodeling.

Our curve and tower exterior and interior designs create an impressive curb appeal that welcomes customers and provide ambiance that enhances the eating experience.

Now, let me give you an update on Wendy's breakfast program.

As I stated before, our strategy is to provide unique breakfast products that build on Wendy's real quality fresh positioning.

In the first quarter, we tested a totally new menu and simplified operations.

Customer feedback on our new menu items has been very positive.

We will begin to introduce the new menu into our three existing breakfast markets in the second and third quarters.

In the fourth quarter, we plan to expand into additional company and franchise markets.

And finally, we plan to begin a national rollout in late 2011.

Now I would like to move on to Arby's.

We continue to implement a turnaround plan to reenergize Arby's and rebuild customer traffic and same-store sales.

Today, I'll update you on several of our key turnaround initiatives to include hiring an experienced president, nationally expanding Arby's new Dollar Value Menu, significantly increasing our share of voice by utilizing more national TV advertising, improving advertising effectiveness, revitalizing product innovation, and finally, investing in a significant remodeling program.

Let me start by talking about our new Arby's President.

Yesterday, we announced the appointment of Hala Moddelmog as Arby's new President.

We are very excited to have Hala return to Arby's where she started her business career as a market research manager for the Arby's franchise marketing association, or AFA.

Later, she also served as Vice President of Product Development and Strategic Planning for the AFA.

Hala is a seasoned restaurant industry executive, having led Church's Chicken as president for nearly ten years.

Church's is the world's fourth largest chicken chain with more than 1,650 restaurants.

Under her leadership, she completely reimaged the chain and drove eight years of positive same-store sales.

From 2006 to 2009, she was President and CEO of Susan G Komen for the cure, which is the largest grassroots organization working to eradicate breast cancer.

She strengthened Komen's operational and financial stewardship and almost tripled the number of corporate sponsors.

Hala will start on May 20 and will immediately focus on the turnaround plan at Arby's.

Because she is familiar with the brands, our system, and the QSR industry, I am confident that she will have an immediate positive impact on our business.

Now I would like to talk about Arby's value strategy.

We are encouraged by the transaction increases during the national launch of the Arby's Dollar Value Menu.

Arby's transactions in the fourth quarter of 2009 were negative 10.4%.

In the first quarter of 2010, transactions improved to negative 1.2%, as we continued to roll out the Dollar Value Menu, supported by local media.

In April, we completed our Dollar Value Menu rollout and began national advertising on April 11.

Transactions improved for the month to positive 4% and during the weeks when we advertised our Dollar Value Menu nationally, transactions improved to positive 7%.

We believe positive transaction growth and getting more customers into our stores is the first step in successfully turning around the Arby's brand.

Our check average declined approximately 12% in April, about 2 points more than our expectations, and same-store sales improved to negative 8.4%.

We improved the same-store sales trend in April, despite no media support until April 11.

And the negative effect of the Mother's Day holiday shifting to fiscal April 2010.

Arby's Dollar Value Menu is now an everyday value offering and we expect continued benefit in the second quarter as awareness grows.

Now I'll turn to Arby's media and advertising.

As I discussed on our call last quarter, we have increased the national media rate for 2010, from 1.2% to 2.4%, which is double the national media rate in 2009.

This increased media rate will allow us to execute three national advertising events with significantly higher media weights than we have historically been able to buy.

We are currently working on revisions to our creative to provide an improved focus on our quality products.

In addition to the value message, which is in our current television spots, this revised creative will be used during the second quarter in local advertising and during the third quarter, as we return to national advertising of the Dollar Value Menu.

Slide 30 lays out Arby's marketing calendar for the second and third quarters of 2010.

In May, we are promoting our Signature Beef and Cheddar and we will continue to remind customers about Arby's everyday value by tagging our TV commercials with the Dollar Value Menu.

And in June, we plan to introduce two new premium products, a new Steakhouse Toasted Sub, and Prime Cut Chicken.

In the third quarter, we'll promote our everyday Dollar Value Menu with another national media campaign featuring a new Junior Deluxe Roast Beef Sandwich with lettuce and tomato.

And finally, at Arby's in 2010, we are launching a three-year remodeling program with a goal of having 75% of our system at pinnacle image restaurants by the end of 2012.

We continue to see stronger sales and margins performance from our pinnacle image restaurants, which represent about half of the system.

We are on track to remodel 100 Arby's company owned restaurants in 2010 and we anticipate investing up to $100 million over the next three years.

Now I would like to discuss our international business.

Earlier this week, we announced the opening of our first international dual branded Wendy's and Arby's restaurant in Dubai.

The restaurant is located in the Festival City Mall, and as you can see, it's a great looking store.

The Al Jammaz Group is planning to open approximately 80 dual-branded restaurants and their initial focus is on developing in the United Arab Emirates.

Additionally, this past weekend, our franchise partner in Singapore, opened a second Wendy's location as part of their 35-store development agreement.

In 2010, we expect our franchisees to open 35 to 45 new international restaurants and we are targeting signing new development agreements for a total of about 400 new restaurants.

We are actively pursuing development opportunities in a number of countries and anticipate entering three to four new countries in 2010.

Longer term, as I've said before, we see the potential for a total of 8000 restaurants outside of North America.

Now let me summarize our results and outlook for 2010.

In summary, we produced strong adjusted EBITDA growth in the first quarter of 14.7%.

Wendy's continues to be on track to produce positive same-store sales and improved restaurant margin for the year.

At Arby's, we are focused on our turnaround plan and we are encouraged by positive transactions and improving sales trends in April, and we look forward to Hala joining Arby's as our new President.

We are excited about the long-term savings opportunities represented by the launch of the SSG co-op.

We are investing in future growth, specifically in the areas of Wendy's breakfast, remodeling at both brands, and international development.

We are returning capital to our stockholders through dividends and share repurchases.

And finally, we anticipate delivering low to mid single-digit adjusted EBITDA growth in 2010.

Now I'll turn it back over to John Barker to cover upcoming events and the Q&A.

John?

Thanks, Roland.

Before we open for Q&A, just a few things I want to mention about upcoming investor events.

On May 27, we will hold our annual stockholder meeting in New York.

Earlier this year we did provide stockholders with our 2009 annual report and our proxy statement.

Both of those are available on our corporate website.

In June, we plan to present at the Oppenheimer conference in Boston.

And on November 18, we are planning to host an investor day in Dublin, Ohio, and there we'll showcase our Wendy's business and the Wendy's management team.

We will be providing more information as those plans develop.

Now I would like to open it up for questions.

Considering we have a large number of participants on this call, well over 100, we ask that you limit your questions, if you could.

Operator, would you please open up the phone line for questions.

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

Hi.

Thanks very much.

First question is, can you talk about what your new expectations, if you have new expectations for the Wendy's margins this year?

Sounds like over 300 basis points improvement came from your cost management initiatives.

And I think initially you said you thought they could improve by 160 to 180 basis points this year.

So do you expect to give back some of those gains in the back half, or are you setting a new higher bar for the Wendy's business this year?

Good morning, John.

It's Roland.

Let me take that question.

Let me first of all talk about what we forecasted when we first completed the merger.

We said that we could expect to improve margins 500 basis points over a three-year period, with an average of about 160 to 180 basis points a year.

Clearly, in 2009, we far exceeded our expectation, by improving margins by over 300 basis points.

And as you know from our conversation this morning, we certainly exceeded expectations in the first quarter by improving our margins over 400 basis points.

As we talked about, our outlook in the first quarter, what we expected this year from a Wendy's margin standpoint was margin improvement of between 90 and 110 basis points.

And I would reconfirm that that's what we expect the margin improvement to be this year.

Certainly we got some tailwind from commodities in the first quarter.

As Steve mentioned to you, we think the commodities are going to go up in the third and the fourth quarter, and we were actually experiencing that happening even a little earlier than we expected in the area of beef this quarter.

And so while we are off to a great start, we think that our guidance of 90 to 110 basis points remains intact for this year and that we will clearly achieve our 500-point total improvement in 2011.

And then on Wendy's, there was a little back slip in same-store sales in April.

I wonder if you could maybe talk about that.

It's not enormous, and you also said a Mother's Day shift, which I'm not as familiar with in QSR.

Can you maybe quantify what that was?

Sure, John.

Mother's Day is a day when an awful lot of people eat out of home, but they do not eat out of home in quick service restaurants.

And so if you take a look at the history of our business, the Mother's Day is a very slow day and a low revenue day for QSR.

Wendy's, Arby's, McDonald's, Burger King, they all kind of experience the same thing.

It's been a historical trend for a lot of years.

Because of the way our fiscal year works, we actually closed out the month of April in early May and Mother's Day this year will actually -- we actually recorded the Mother's Day event in our first quarter.

And so we're rolling over -- April, I'm sorry.

In April.

You were talking about obviously April sales.

So in April this year, we actually had the negative impact of having Mother's Day this year, where next year, or sorry, when we roll over the positive impact of Mother's Day, it will be this week or this Sunday, and so we'll get the benefit of the Mother's Day this Sunday.

The two will probably neutralize themselves out, as they usually do.

If they happen in the same quarter or the same month, we never talk about it.

It just happens to be an unusual shift this year from one month fiscally to the next month.

What was the amount of that shift?

It generally speaking, you have to estimate it, John, because it's not a fine science, but we think it's about a half a point.

All right, thank you.

Your next question comes from the line of Matt DiFrisco with Oppenheimer.

Thank you for explaining that Mother's Day.

It was confusing a little bit in the release.

I was taking away you were saying it was a benefit.

Can you tell us, just to add, to follow on to that, what was April of last year?

I couldn't find it in last year's remarks, for 2009 for both brands.

I'm not sure we have publicly disclosed, Matt, April of last year.

But if you'll give us a little bit of time, we'll go back and research that and we'll get directly back to you later on today.

Okay.

Specifically I'm thinking sequentially, is it an outlier as a portion of the quarter?

Did the quarter get tougher or easier, so we could think about how to expect the current trends to sustain.

Secondarily, I want to understand better the marketing strategy and what you're seeing as far as what you expect to see or have you tested this, or anecdotally what you could draw form it, switching to nationally versus local, putting more dollars behind the national side.

Some other brands are doing the reverse and saying that there is a benefit from going a little closer to the local side.

Can you -- what are the benefits and have you seen a lift in sales when you shift more to national rather than, say, the signage and billboards and more local radio and advertisement at the per store level, a little bit greater?

Yes, Matt, I can talk about that.

I'm not sure what brands might be doing that.

Our analysis, which suggests that more brands are in fact doing the opposite, because national TV advertising compared to local TV advertising is significantly more effective.

In the range of 30% to 40% more effective from the standpoint of our ability to reach frequency and reach targets with our customers.

We've had some national TV in the past, and I'm sure you're referring to Arby's, and generally speaking, when we are on with national TV, we see a very significant trend of positive same-store sales reaction based on that.

One of the things that I mentioned a moment ago, or alluded to a moment ago was the fact that in the first quarter for Arby's, we had a couple of significant hurdles that kept us from delivering the sales that we would have expected.

One obviously was the impact of the severe winter weather in February, which many brands have spoken about.

The second, which is unique to Arby's, is that last year in 2009, in March, we rolled out probably the most significant new product introduction that we had had in sometime, and that's our Roast Burger line.

And as I mentioned, that was supported by national TV advertising, and this year, our March calendar, as we planned it, and we understood this, did not have national TV advertising.

And so we expected that rollover to be very, very difficult.

If I go back to March, for example, of last year, our same-store sales improved to better than minus 3% based on the Roast Burger launch and the national advertising.

So just another data point that would suggest that national advertising is much more effective than local advertising.

We were nationally advertising beginning April 11 our Dollar Value Menu.

And as I mentioned, during that promoted time, our transactions were significantly positive.

In fact, they were plus 7 points.

And I don't mean a trend change of plus 7 points.

I mean positive 7 points from zero, from a trend change, almost double digits.

So clearly that is based on two things, in our opinion.

One is the message, which was something that our consumers have asked to us do for a long time, which was provide them better value.

And the second was the way that we delivered that message, which is a combination of national advertising.

By the way, one additional difference in 2010 is that as we say, when we're on, we're on, which means that we are buying a significant level of national media.

We measure that in GRPs, or gross rating points, and in April we had right at 1000 GRPs, which is more than we would typically have because of the way we planned our media this year and we'll be able to replicate that a couple more times this year.

Based on all the data we have and based on not only our history, but what we know from what it costs to buy GRPs and what our competition is doing, we believe national media is clearly the way to go and much more effective than local.

Okay, and just if I may, one follow-up, I appreciate that detail you gave.

But as far as the system expansion, I didn't see any reference to that in the guidance.

Do you still, even though the same-store sales are still somewhat flat, do you still feel confident about the overall Wendy's system, not necessarily the Arby's, but the Wendy's system holding flat and not contracting as it has in the prior years?

Overall stores?

Yes, I think that's right, Matt.

On the Wendy's side, we would expect the system count this year to be relatively flat.

Great.

Thank you.

Your next question is from the line of Michael Gallo with CL King.

Hi, good morning.

Just wanted to dig in a little bit on the two co-ops.

I was wondering if you can quantify at all how much SG&A you would expect to be transferred to the two co-ops and also while it might be early, if it's possible to quantify at all what kind of improvement in cost of goods you might expect for the system from the creation of the co-op and when we should expect to start to see that.

Thank you.

As Michael, good morning, by the way, alluded, to we now have two co-ops, one at each brand, and a third co-op, which is our new SSG co-op.

The QSCC, or the Wendy's co-op, as you know, was formed in January, and we are looking forward to having some benefit from that co-op as we get into the year.

But as I think you all understand, because of the way they work from a contractual basis, there are still many contracts that they have not been able to yet impact because they have not come due.

So we'll see the benefit of that as the year goes along.

And then, Michael, as you mentioned, the SSG co-op is something that we just warmed and the press release just went out.

We did some prefunding, as we mentioned in our release today.

We will transfer kind of G&A costs kind of over to that co-op as we go forward.

We're quantifying that as we speak, but it's in the neighborhood of several million dollars on an annualized basis.

I can't give you a really good estimate yet as to the savings we expect to be able to enjoy.

Again, we're just in the process of looking at agreements, letting RFPs for kind of different kind of things that we purchase that are non-branded.

But I do think as the year goes along, we'll be able to enjoy some reasonably significant savings because we're negotiating for 10,000 units, versus just the numbers that we currently have in each brand.

I used this analogy last time, so you've probably all heard it, but I'll just quickly mention it to you.

As the source of some validity that this will provide value, the very first contract that came up happened to be kind of concurrent when the SSG was being formed.

We took advantage of the 10,000 restaurants.

We negotiated for disposable plastic gloves for 10,000 restaurants versus our ability to do it for either 6,000 or 3,700 stores, and we enjoyed a savings for the system of a little over $3.5 million.

So the savings there is real.

It will take some time to realize.

And we really have not baked that into our forecast at this point.

Okay, great.

Thanks.

And then just a question on -- could you give us just a follow-up on the rollout of store by store pricing, where you stand on that, and whether you still expect that to start to roll out in the third quarter?

Yes, great question, Michael.

We spoke about that at our last call.

We do have a strategic pricing initiative that we have initiated at Wendy's.

It's been under way now for about four or five months.

We brought in a major consultant to help us get into the clearer data analysis and research.

We are now in the process of actually building the model that would allow to us go from several years ago national pricing to a couple of years ago regional pricing, to as Michael mentioned, hopefully in the future, individual restaurant pricing by product.

We have not instituted that yet.

It will take some additional time this year to finalize the model and the software to use the model.

We are optimistic that will provide us some reasonable kind of ability from a pricing elasticity standpoint to improve our sales.

But we are not forecasting the benefit of that particular initiative until 2011 and beyond.

Thanks very much.

Your next question comes from the line of Joe Buckley with Banc of America-Merrill Lynch.

Thank you.

First, on the entire Mother's Day conversation, I just want to clarify that the minus 0.5% in April excludes that, right, that's not because of that?

That's correct, Joe.

Okay, very good.

And then question on breakfast.

You talked about new products, what you're featuring now in Kansas City, Pittsburgh, I know there's one more and I'm forgetting which one, is that the new menu, or is that -- or are you about to replace those menus with the newly developed breakfast product?

Well, Joe, first of all, the third city is Phoenix.

Thank you.

Kansas City, Pittsburgh and Phoenix.

We are in the process of rolling that new menu out to those three markets, as you would imagine, store by store, as we train the store operators to be able to bring in those products.

To specifically answer your question, we are entirely replacing almost the entire line of menu that we currently have from the old breakfast line with our new products.

So it is a significant change to the consumers and the consumer reaction, as I mentioned in my comments, has been very positive.

I could go into a longer discussion about an artisan kind of toasted muffin with a fresh cracked egg and freshly cooked bacon, asiago cheese and hollandaise sauce on and on and on, but as I think you know, these are items unlike any other QSR has from a breakfast standpoint.

It's consistent with Arby's -- sorry, with Wendy's positioning of real fresh, high quality products, and I think it is the answer to how we're going to make a significant impact in the breakfast business.

Okay, and then just one more, with all the changes in the co-op and sourcing, are Wendy's beef costs still set at the beginning of the quarter for the full quarter?

Is that pricing that is still in place?

Yes, generally speaking, it is, Joe.

Okay.

Thank you.

Your next question comes from the line of Jeffrey Bernstein with Barclays Capital.

Great, thank you.

One question on each brand.

First, on Arby's with the dollar menu, I think you mentioned not only is it -- when it's pushed national at plus 7, but the swing was close to double digits in terms of traffic.

I know in the past you said it was enough traffic to offset the 50 basis point or so margin hit.

Just wondering if you could talk a little bit about your margin expectations at Arby's, kind of bigger picture.

I know you said it was an average check hit more than you thought, and are we resetting the bar perhaps to a low double-digit margin at Arby's or would you view this as more tentative in terms of a longer-term outlook?

I don't think we're re-setting the bar to a low double digit margin at Arby's, Jeff.

As I mentioned, and I think you certainly understand the significant pressure on our margins at Arby's has been almost entirely driven by deleveraging from the standpoint of the same-store sales decline.

One of the things that Arby's has been good at for a number of years is managing very strong P&L based on the sales that we've had.

Now, obviously we've lost a fair amount of sales over the last year or so and that's showing up in our margins.

We are not concerned about a margin decline based on our new Dollar Value Menu because we think long-term we will more than benefit from transactions and sales to cover the half point margin difference between what we would currently have and what we would expect in the future.

What we do believe is that as same-store sales increase or improve at Arby's, we will see margin expansion coming quickly thereafter.

Okay.

So in reality, the dollar menu is not really the primary driver of the significant pull-up, and you still expect to get back to close to where you were before, rather than where you are now?

Absolutely correct.

It is not -- not only not the significant driver.

It's a very small impact on our overall margin decline.

Okay, and then just separately at Wendy's, I know you mentioned third quarter four or five new premium salads, and we had heard price points north of $5 or so.

Wondering if you could talk bigger picture about value versus premium and what kind of competitive pressures do you think, success on that product versus what everyone else is doing, kind of talk more about the environment as a whole as it relates to putting out that type of product.

Sure.

We are great believers in the concept of bar belling pricing and quality.

We believe that both of our brands, and specifically Wendy's, has a great ability to run a significant bar bell.

Wendy's started the Super Value Menu, as you all know, years and years ago, when we have very good value for their customers.

Wendy's is known for some of the highest quality products in the marketplace.

So we are in a very good position from the standpoint of our perception with consumers.

But, in order to run the bar bell successfully, you need to do both and it's relatively easy just to discount your product.

It's a little bit more difficult to ensure that you continue to bring to the consumer great new premium high quality products that balance out that bar bell, and we believe salad is exactly one of those products for us.

And that consumers will pay a little bit more for a great quality salad based on what the trends are in the current marketplace.

You might also remember that a number of years ago, Wendy's really kind of started the salad kind of push in the QSR business with Salad Sensations.

As a matter of fact, the same gentleman that happened to develop and launch those, Ken Calwell, has come back to Wendy's now 18 months ago and has been instrumental in reformulating our salad line with what we think are great quality, fresh salads that really are unique and are unparalleled from the standpoint of anyone else in the QSR business being able to replicate, kind of the quality and the freshness of them.

Now, from a pricing standpoint, we've had them test in several markets.

Generally speaking, we're charging under $6 for them.

But the reaction from the consumers has been fantastic.

In fact, even a little surprising to us, to be kind of fair, because the response from the standpoint of the freshness and the quality and the size of the salads and the ingredients, and some of the uniqueness of those ingredients has really kind of significantly accelerated our salad sales.

We've seen the same reaction in some of the franchise markets that are testing them.

So we are very excited about rolling these salads out to the customers, because we think the impact is going to be significant.

One of the interesting pieces of trivia about our salads is they have 14 fresh ingredients.

I mean that's -- you don't find that in the QSR world.

So we are not concerned about the price for two reasons.

One, we think it's still a great value.

And two, the consumer has spoken with their checkbook in our test markets.

And in fact they are up to almost 10% mix in our test markets, which is a great number from the standpoint of a product.

Great.

Thank you very much.

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

Hi, thanks, and hi.

I know this first question is a tough one, but what do you think this new advertising scale at Arby's can do?

Do you think it is enough for you to really maintain your traffic gains from the dollar menu that you've rolled out lately, perhaps pulsing a little reminder that it's there while you pick up the check trends with the new premium items, particularly those coming in June?

Do you have enough weight to kind of support both ends of the bar bell, do you think?

David, we think yes.

And you ought to come down and join the marketing department, because that's exactly what we're in the process of trying to do.

Seeing that you've asked the question about Arby's, I want to take a moment and talk more about Arby's in a little more detail, in addition to what I've covered in our more formal presentation.

First of all, the great news about the Arby's brand is that consumers continue to love our food.

We've done a number of research studies over the last, kind of couple of months, and before that really validates that they really do love the quality and the taste of our food.

We think the key to sales and profit growth at Arby's is to continue what I've been speaking to you about over the last quarter or so, which is our turnaround plan.

And you mentioned a key aspect of the turnaround plan.

But it really starts with the right talent.

And as you know from my comments in the press release yesterday, we are in the process of in just a week bringing on a brand-new president.

Hala is a veteran and understands the QSR industry.

And interestingly enough, as I spoke to her in the interviewing process, she was very interested in what plans we had and did her own due diligence.

I spent hours and hours with her on the turnaround plan.

She is joining us because one, she believes in the brand, and two, she believes in the turnaround plan, because certainly she has a lot of success behind her and wouldn't join a brand that she didn't think she could successfully move into the future.

Now, talking about the other key aspects of the turnaround plan, certainly expanding the value strategy and to change our customers' perception of how we're seen from a value standpoint.

I shared some data with you about that the last call, as to where we sit kind of at the bottom of the pack.

We've already begun to see some change in perception, which just doesn't change overnight, but we are encouraged by how quickly customers are giving us credit for that.

We think that credit is happening, because as you mentioned, we have moved to a shift of national advertising, which is more effective, and we're using much more effective and engaging, creative.

Now, to your point, we are not on national advertising 52 weeks, like some of our competitors.

However, we believe the way we've rolled out our calendar this year by, as I've mentioned, when we're on, we're really on.

We make a big impact.

We make a lot of impressions.

And then we follow it up in the months that follow with local advertising which continues to keep that level of awareness reasonable and then we come back with another big pulse of national advertising.

In fact, the next time we're on with national advertising with a new product is July.

And then we'll come back yet again with national advertising in October.

And then finally, as I've mentioned before, it's marketing's job to get people in the store for trial.

It's operation's job to get them back in for repeat.

We have a very clear focus on the customer experience.

We've made improvements in cleanliness and friendliness over the last couple of months and we also think that the remodel program is going to have a significant impact on the customer experience, both from the curb appeal standpoint and from an overall experience standpoint.

I know it's a little longer answer than what you were asking for, but we do believe, to your point, that this pulsing of national media, along with the local media that will come on to follow it up is going to be enough to keep awareness high, and we'll enjoy the benefit of kind of improving our value perception as time goes along.

And the last point I would make is that, as I mentioned, the transactions in April are positive 4% and during the promoted timeframe, positive 7.

So we are getting people back in our stores and we think that's the first really important kind of key step to ensuring that we continue the turnaround.

Thanks for that detail.

I'll get back in the queue.

Thanks.

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

My questions have been answered.

Thank you.

Your next question comes from the line of John Ivankoe of JPMorgan.

Hi.

Thanks.

Just a couple of questions on Arby's, if I may.

I'm not used to seeing a 12% average ticket decline.

The question is really where you -- in markets where you've had the Arby's value menu the longest, I mean what has been the experience of the average ticket once that value menu has been in place for the longest amount of time?

In other words, the customers start to use the value menu as trade-up or does that average ticket stay at fairly depressed levels?

Great question, and good afternoon.

Obviously the most immediate impact on check tends to be on the initial launch, specifically when that launch is national advertising, but if you take a look at some of the markets that have been in it longer, the average check decline is below 12.

As a matter of fact, it's probably in the -- in the 7% range, and it's because as time moves forward, consumers tend to use that value menu a little differently.

The initial stages, they tend to come in and buy only off the value menu, which declines the check average.

And then as time goes along, they tend to not only do that, but also augment their other purchases with add-on items from the value menu, which has a moderating effect on the overall decline of average check.

And so while I mentioned in our comments that the average check at 12% is about 2 points higher than our expectations, we knew it would be relatively high during the national launch timeframe and we would expect that to settle down over a period of time.

And what about the trend in traffic for those markets, where it's been in the longest?

I would also expect the impact of traffic would be the highest when you begin national advertising.

The answer to that question is yes, that's correct.

But the traffic numbers that I shared with you today are obviously traffic numbers for our total company stores.

Okay.

It includes the benefit of some traffic that is for the initial markets, but also some traffic that is for markets that have been around a while.

If I can just kind of give you one further kind of comment about that, the numbers we talked about today for April are obviously our company store markets, where we have the data on a regular basis.

I didn't talk about our franchisees, because we won't get our franchise numbers for yet a couple of weeks from the standpoint of enough to be able to make a comment that we would feel comfortable about.

But anecdotally and based on what we've gotten so far from royalty and revenue information, our franchisees in the month of April experienced stronger transactions and same-store sales trends than we did because to your point, for many of our franchise system, this was the first time out of the box for this value menu.

So you probably see that kind of as we finalize our second quarter numbers and come back and talk to you later on this year.

Okay, thank you.

And if I may continue, what has been the average sales lift for the remodels at the Arby's brand?

Yes, John, we tend to target about 10% lift on our remodels, and that really goes across either brand.

Now, we do get a range of results, depending on the locations of these.

But that's our target.

So when we talk about doing 100 on each brand, we're trying to go through and find opportunities where we think we can get sort of that range of sales lift.

And finally, a question, if I may, 2009 we began to talk about health of franchisees of the Arby's system, and I know there was at least some -- I guess not a heightened concern, if you will, for Wendy's/Arby's at the corporate level.

Could you comment on the health of the franchise system broadly or even specifically, what the current sales and margin trends across Arby's, if there's anything special or unique that you're doing in this current environment for them?

First, on the Wendy's side of the equation, franchise side of the system is very healthy and they had an outstanding year with both sales and margin performance.

So not seeing any real signs of difficulty on that side.

On the Arby's side, as we've talked about in the past, we have about 10% of the franchisees that we are working fairly closely with right now.

They tend to be those franchisees that have leveraged their business to a fairly high level and obviously with the same-store sales in decline, the way they have been over the last couple of quarters, they are under stress and we're working with them, along with their banks and their landlords to try to buy some time, take some of the pressure of their leverage off so that we can keep the, what generally are good stores, open through this period of stress.

That number has stayed relatively -- relatively the same over the last couple of quarters.

But really the answer for us is to get the improvement in the same-store sales from the turnaround plan that row land Rowland has laid out.

Other than that 10% list, I would still say the larger franchisees and the ones that are not leveraged continue to do -- continue to do well on the Arby's side.

Operator, this is John Barker.

Could you -- just one last question, please.

Certainly.

Your final question comes from the line of Tom Forte with Telsey Advisory Group.

Great.

Thank you.

Keeping short on time, since you announced the new strategy for breakfast at Wendy's, you're starting to see McDonald's roll out the dollar menu at breakfast and Subway's come out with somewhat of a value focus.

Understanding the high quality of the items you're putting together for Wendy's, where does value fit into the equation, including value at lower price points?

Thank you.

Great question, Tom.

We realize that breakfast is going to be similar to the other day parts of our restaurant, and so our marketing plan is going to be similarly focused on a bar bell strategy.

We will need to have some products that allow our customers to come in from a value standpoint and participate at a price point that is interesting and meaningful to them.

We do, however, think that the overall strategy is still going to be great quality, fresh products, that you can't get at any other quick service restaurant.

And I am not surprised at the significant increase in advertising and focus that McDonald's has recently kind of put onto their breakfast brand, because I think they are worried and they are trying to shore up their brand before we get out there with our products and actually start to make an impact in that very important day part.

Thank you.

So thank you all for participating today.

I appreciate your questions.

I appreciate your time.

Just as a quick summary, we are very pleased with our strong EBITDA growth of 14.7%.

We are continuing to expect positive same-store sales and improve restaurant margins at Wendy's.

The Arby's turnaround plan is in place.

We are beginning to see some real momentum from the standpoint of transactions and some improved sales.

We're very much looking forward to Hala joining us just in a week.

The SSG co-op I believe will start to pay dividends later on this year.

We're investing in breakfast and remodeling and international.

We continue to return value to our shareholders and dividends and share repurchases, and we continue to repeat our guidance of low to mid single-digit adjusted EBITDA growth for 2010.

Thank you, again, for your time.

I look forward to seeing you out in the marketplace.

Thank you for joining today's conference call.

You may now disconnect.