Wendy's Co (WEN) 2010 Q3 法說會逐字稿

Good morning everyone and welcome to the Wendy's/Arby's Group third quarter 2010 conference call.

Our host 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.

Good morning everybody.

Today's conference call and our webcast is accompanied by a PowerPoint presentation.

You can find it on our Investor Relations page at our corporate website at www.wendysarbys.com.

For those who aren't listening by phone today, make sure select the appropriate webcast player option from our website and that will ensure you can sync up the slides with the audio.

The agenda for today's call and webcast will begin with an introduction from our President and CEO Roland Smith, who will provide a general overview of Wendy's/Arby's brands with respect to the third quarter.

Our Chief Financial Officer Steve Hare will then review our financial results and our updated 2010 outlook in greater detail as well as today's dividend and share repurchase announcements.

Following Steve's remarks, Roland will discuss current product initiatives at both brands as well as a strategic discussion of the business.

This will also include a preview of some of the topics we intend to discuss at our Investor Day in January.

And then afterwards we will open up the line for questions.

Earlier today we filed our 8-K that includes our earnings release and associated financial tables for the third quarter.

It also contains an updated historical sales and margins trends schedule.

Both of these documents include new cost of sales detailed by brand that will be part of our financial presentation going forward.

In addition, this morning we filed our form 10-Q for Wendy's/Arby's Group.

Our 10-Q is filed in accordance with the SEC's XBRL mandate and as such you will be able to access the interactive data using the viewer that is included on our website.

Now before we begin, I would like to refer 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 and development is forward-looking.

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

Some of those factors are 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 compare our reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measure.

Now let me turn the call over to Roland.

Thanks John.

Good morning everyone and thanks for joining us today.

Before I begin with the overview of the third quarter, I am pleased to report that the Board of Directors recently approved an additional $170 million in stock repurchases which, combined with the amount previously authorized and available, brings the total to $250 million.

Additionally, the Board authorized a 33% increase to our quarterly dividend.

We believe these actions demonstrate our continued commitment to enhancing shareholder value.

Let's begin by acknowledging that the third quarter was a difficult one and the results were simply not satisfactory.

Softer than expected same-store sales at both brands and higher year-over-year commodity costs negatively impacted our results.

For the three months, total revenue decreased slightly less than 5% to $861 million while adjusted EBITDA fell approximately 20% to $100 million versus third quarter of 2009.

Consistent with prior quarters, our results were affected by the weak economy and intense competition.

However, we recognize that our job is to outperform the competition regardless of the macro economic environment.

Year-to-date adjusted EBITDA is down 2.8% from the nine-month period a year ago, and we are reiterating our expectations for full-year 2010 adjusted EBITDA to decrease 3% to 5%.

Steve Hare will discuss our outlook in further detail later in the call.

We believe Wendy's/Arby's has significant long-term earnings growth potential.

In addition to being intensely focused on developing high-quality differentiated menu items for both brands, we are investing in new dayparts such as breakfast at Wendy's, continuing our remodeling programs, and creating a platform for further international expansion.

The Arby's brand turnaround is also a key focus, and we are encouraged by our most recent results especially October.

I will speak more about each of these key initiatives later in the call, but first I would like to share further details about Wendy's third quarter results.

Wendy's systemwide same-store sales decreased 1.7%.

Company-owned restaurants same-store sales declined 3.1%, and our franchise restaurants were down 1.3%.

The gap between Company-owned and franchise same-store sales was primarily due to higher pricing on certain menu items by franchisees.

We expect t begin to close this gap later this year and in 2011 as we implement elements of our strategic pricing initiatives in Company-owned stores.

Wendy's Company restaurant margin was 14.5% for the third quarter excluding incremental advertising for breakfast of 110 basis points, reflecting a 200 basis point decrease from a year ago.

The year-over-year difference was due to sales deleveraging and 160 basis points of higher commodity costs.

We kicked off the third quarter in July by promoting the Wendy's premium bacon cheeseburger line supported by our real quality brand positioning.

In August, we were pleased tha Zagat named Wendy's as having the best food among the mega-chains for the second year in a row.

Also in August, we launched four new premium salads.

Success in the salad category is in another key ingredient to our real quality positioning.

During the quarter, we more than doubled our total sales mix of salads from approximately 4% to a high of 11% and more importantly, we increased our market share of salad sales by more than 50% and solidified our brand position is having the highest quality salads in QSR.

Value continues to be in the important part of our barbell strategy and in September we return to a value message by promoting both the $0.99 Spicy Nuggets and $0.99 small Frosty.

Now let me talk about our third quarter same-store sales and margins at Arby's.

At Arby's, third quarter systemwide same-store sales decreased 5.9%.

Product promotions during the third quarter included the introduction of the new Junior Deluxe roast beef sandwich supported by national advertising in July and the introduction of the $2.99 meal deal featuring the Junior Deluxe roast beef sandwich in August and September.

Same-store sales at Company-owned restaurants were down 9.5% and franchise restaurants decreased 4.1%.

Franchise restaurants fared better than Company-owned restaurants primarily due to the fact that franchisees were comparing to weaker 2009 sales levels than our Company restaurants.

Franchisees generally did not participate in the aggressive in-store value promotions in the third quarter of 2009 such as the Wednesday Freebies in July and August and the Five for $5 promotion in September.

Year-to-date transactions at Company-operated restaurants are down only 1.4% and represent a significant improvement to previous trends.

October transactions are up double-digits this is very encouraging because we believe that transaction improvement is the first step towards turning the brand around and I will talk more about that in a moment.

From a margin perspective, Arby's restaurant level of profitability fell 170 basis points from the prior year to 10.4%.

This decrease was primarily due to increased commodity costs and sales deleveraging on labor and fixed costs.

These negative variances were partially offset by a decrease in food cost due to the Wednesday Freebies promotion in the prior year, and a decrease in advertising expense.

Now I will turn the call over to Steve Hare.

Steve?

Thanks Roland.

Slide 11 highlights the third quarter results as compared to the prior year.

Consolidated revenues were $861 million during the third quarter of 2010, a decrease of approximately 5% from a year ago due primarily to negative same-store sales at Wendy's and Arby's.

Cost of sales was $667 million or 87.1% of sales, and was higher as a percentage of sales by 220 basis points compared to the prior year as both brands experienced sales deleveraging and commodity cost increases versus the third quarter of 2009.

G&A expense was $97.9 million in both periods, as lower merger integration expenses and legal expense accruals offset higher bad debt expense and franchisee incentive payments.

G&A is expected to be sequentially higher in the fourth quarter than the third quarter of 2010 although still lower than 2009 normalized for the 53rd week.

Depreciation and amortization was approximately $46 million which was slightly lower than the prior-year amounts.

Impairment charges of $27 million were primarily related to the write-down of fixed assets for specific underperforming Wendy's and Arby's restaurants.

Interest expense was approximately $34 million for the quarter, the decrease from prior-year was primarily due to the refinancing of our 6.25% notes and the favorable impact of interest rates swaps on our 6.2% notes.

In addition, we benefited from the favorable terms of our new credit facility as we said on our last call, we expect to save more than $5 million in interest expense during the second half of the year related to the refinancing.

We recorded a benefit from income taxes in the third quarter of $12.3 million.

The unusual effective tax rate benefit of 93% is principally the result of foreign tax credits from Canada, and adjustments to our uncertain tax positions added to the tax benefit on our loss from operations.

Cash income taxes paid for the nine months were $11.5 million principally to States and Canada.

We did not pay US federal income tax as a result of utilization of available net operating loss carryforwards.

Net loss as reported was $900,000, which rounded to zero cents per share based on 418 million diluted shares.

Compared to our net income of $14.7 million, or $0.03 per share, based on 471 million shares in the prior year.

Slide 12 provides detail on adjusted EBITDA.

Third quarter adjusted EBITDA was $100 million excluding $600,000 of integration cost in G&A and $5.5 million in incremental advertising for the new breakfast at Wendy's.

Integration costs were largely related to IT rationalization projects that will continue at approximately the same level in the fourth quarter.

We do not expect to incur any further integration cost in 2011.

The quarter adjusted EBITDA decreased 19.6%.

Year-to-date, adjusted EBITDA was $312.9 million excluding $4.3 million in integration costs and G&A, $4.9 million to establish and pre-fund the strategic sourcing group, our purchasing co-op for services equipment and supplies for both brands, and $5.5 million in incremental advertising for the new breakfast at Wendy's.

Year-to-date adjusted EBITDA for 2010 decreased 2.8% from the prior-year.

Now let's move to our net income and special items.

Net loss as reported for the third quarter of 2010, was $900,000 which rounded zero per share and included total net special charges after-tax of $20.7 million or $0.05 per share.

Net income year-to-date for 2010 was $6.4 million which rounded to $0.01 per share and included total net special charges after-tax of $48.2 million or $0.11 per share.

Now I'd like to review our year-to-date cash flow.

Slide 14 summarizes our cash flow for the first nine months of 2010 .

Cash flow from operations was $167.4 million.

Capital expenditures were $94.7 million, and were approximately $29 million higher than our spending in the first nine months of 2009 primarily to fund our restaurant remodel programs.

During the second quarter, we generated $26.7 million of proceeds from the issuance of long-term debt net of debt repayments which was primarily a result of our bank debt refinancing.

We also received payment on the Deerfield note receivable which resulted in cash proceeds of $30.8 million.

We returned $192.8 million of capital to our stockholders in stock buybacks and cash dividends during the first nine months.

These payments led to a $71 million reduction in the cash balance versus year end.

At quarter end, we had a cash balance of $520.5 million.

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

Now let's look at our debt capitalization.

At the end of the third quarter, we had total debt of $1.6 billion and net debt of approximately $1.1 billion.

Based on our trailing 12 month adjusted EBITDA, our total debt multiple is 3.8 times and net debt multiple is 2.5 times.

Next I'd like to discuss stock repurchases and dividends.

As disclosed in today's earnings release, our Board of Directors has authorized an additional $170 million for the stock buyback program, bringing the total amount currently authorized and available to $250 million.

The Board of Directors authorized a stock repurchase program beginning in 2009 and since that time, we have repurchased 52 million shares of common stock for $245 million at an average per share price of $4.69.

The new authorization will remain in effect through January 1, 2012.

As many of you know, Trian, our largest shareholder, has a schedule 13D on file with the SEC which indicated that it received an inquiry from a third-party expressing interest in a potential acquisition involving the Company.

And that Trian was considering this inquiry as well as alternatives with respect to its investment in this Company.

Because of this disclosure, we refrained from buying stock during the quarter.

We have asked Trian to bring this to a head as promptly as practicable so we as a Company can continue to focus on ways to enhance shareholder value including through recommencing share repurchases under our stock repurchase program as legal and market conditions permit.

Also in today's earnings release, we announced that the Board has authorized a 33% increase in our quarterly cash dividend to $0.02 share.

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

Both of these Board actions demonstrate our confidence in the Company's long-term earnings growth potential.

Now I will review our expectations for 2010.

For the full year, we are reaffirming our outlook for adjusted EBITDA decline from between 3% to 5% but we now believe that we will be at the lower end of that range.

The year-ago adjusted EBITDA comparison is $411.6 million which is normalized for the effect of the 53rd week.

Our 2010 outlook excludes approximately $8 million of incremental advertising spending for Wendy's new breakfast test program with approximately $2.5 million planned for the fourth quarter.

We have revised some of the components of our outlook and now expect the following -- same-store sales at Wendy's North American Company-operated restaurants down approximately 1%.

Previous 2010 guidance was flat.

Improvement of 30 basis points in Wendy's Company-operated restaurant margin.

This compares to our previous expectation of a 70 basis point to 90 basis point improvement.

The current and previous expectations excluding impact of incremental spending to support the expansion of Wendy's new breakfast program and the effect of the 53rd week in 2009.

At Arby's, we expect negative same-store sales but still improving on a year-over-year basis.

We still expect commodities to increase 2% to 3% for the full year, but as you have seen in our third quarter results, a significantly higher impact in the second half of the year.

We now expect capital expenditures to total approximately $145 million for the year, which is down from our earlier projection of $165 million.

We will however, still complete all 100 scheduled remodels at both brands in 2010.

Before I turn the call back to Roland, I want to share with you that we plan to host our Investor Day on January 27, 2011 at the Lighthouse at Chelsea Piers in New York City.

At that time, we plan to issue a news release with preliminary 2010 results as well as our outlook for 2011.

We intend to provide investors with a comprehensive overview of our current performance, as well as a greater understanding of our strategic plans for future growth.

Our corporate and brand leadership teams will present during the Investor Day, and we will feature Wendy's new breakfast products in the morning and both Wendy's and Arby's new products at lunch.

I will now turn the call back to

Thanks Steve.

Now I would like to review our fourth-quarter plans for Wendy's and Arby's and let's start with Wendy's.

In October, Wendy's began offering our new Pick Two promotion that gives customers a choice of a half-size premium salads plus one of seven items from the Wendy's menu, all for only $4.99.

There 28 combinations in all, and 18 of them are less than 600 calories.

Wendy's October same-store sales at Company restaurants improved from the third quarter and were down less than 2%.

Over the last year, we have lost value transactions.

To reverse this trend, this month we launched our new $0.99 everyday value menu that we call My $0.99 which gives our customers seven items to choose from such as our baked potato, a Double Stack, or small Frosty, each for $0.99.

This promotion is intended to remind customers that great tasting value-priced products are available every day, not just when promoted nationally.

A significant event for the brand is our November launch of all new natural cut skin on french fries with sea salt which we believe will be the best quality french fries in the QSR segment.

Test results exceeded in driving sales and transactions as well is increasing combo meal mix.

We believe this major improvement to one of our core products will contribute to sustainable same-store sales growth.

Based on these two menu initiatives, we expect same-store sales trends at Wendy's will improve in November and December.

We've also developed an exciting new premium cheeseburger line that is being tested this quarter.

These cheeseburgers will have a thicker patty, melted cheese, crinkle cut pickles and red onions, all surrounded by a buttered toasted bun.

Initial customer reaction has been very positive and assuming positive test market results, we expect to launch this new line in 2011.

We view these core product improvements as more than just routine product innovations.

They are wholesale changes to our core menu items and they are part of our plan to expand our quality advantage over our competition.

At Arby's, we promoted $1 value menu with national advertising in October and same-store sales at Company-operated restaurants increased 5.5%.

Let me say that again.

Company-operated restaurants increased 5.5% with double-digit increases in transactions.

This dynamic reversal of those sales and transaction trends reflects early traction in our efforts to turn around performance at Arby's.

In November and December, we plan to feature our new Prime-cut Chicken Tenders with Buffalo Sauce.

And our Holiday Value Book will be available to customers in the fourth quarter.

However, because October will be the only month in the fourth quarter supported by national media, we anticipate November and December same-store sales will soften from October levels.

Now I would like to turn to a discussion of our longer term key initiatives.

You may recall that when we completed the merger in September 2008, we identified three major areas of opportunity, two of which focused on cost and operations, while the third focused on re-energizing the Wendy's brand.

We have made substantial progress on all three fronts.

We achieved G&A synergies and efficiencies of more than $60 million, well in advance of our anticipated three-year schedule.

We expect to achieve 360 basis points of margin improvement at Wendy's by the end of 2010 as compared to pre-merger margins despite significant commodity increases and lower than expected same-store sales.

We are re-energizing the Wendy's brand with our real quality position and improved advertising.

We have rebuilt the new product pipeline, and introduced a new -- a number of new products and core menu innovations.

We've also improved the customer service experience by accelerating operational improvements.

We have more than doubled the number of A and B- level or well-operated stores from 32% of the system in the first quarter of 2008 to 77% by August of 2010.

While we are proud of these accomplishments, we recognize that we have much more to do in each of these areas to fully re-energize the Wendy's brand.

Now I want to share with you a preview of our longer-term initiatives that we plan to discuss in greater detail at our Investor Day in January.

These longer term growth initiatives include organic growth in sales at both brands, global expansion and key international markets and underpenetrated North American markets, and financial strategies that complement organic growth.

Let's start with sales growth at both brands beginning with Arby's.

Arby's is a well-established national brand that is in the early stages of a turnaround.

And although we are very pleased that October same-store sales were up by 5.5%, we understand that one-month does not make a trend.

That said, as you can see from the transaction chart on this slide, our turnaround plan is driving improved transaction trends which will serve as the basis for our longer-term recovery.

In January at our Investor Day, we will provide more details about the turnaround strategy and address our longer-term plans.

Now let me turn to Wendy's.

We believe Wendy's is one of the most attractive growth stories in the QSR industry.

We have numerous key initiatives that will drive incremental sales, and leverage our fixed costs.

These include innovating core menu items and introducing exciting new products, expanding dayparts and modernizing our facilities.

I want to expand on each of these starting with product innovation.

We believe the key to successful product innovation is aggressive differentiation through quality.

Wendy's unique selling proposition has always been its quality positioning, featuring fresh, never frozen beef.

Our new premium salads and the November launch of our new natural cut french fries with sea salt demonstrate our commitment to delivering a highest-quality products.

These products plus the expected launch of our new premium cheeseburger line are examples of how we intend to further separate ourselves from our competitors and exploit the inherent advantage that comes with quality.

Our next sales growth opportunity is the daypart expansion.

Wendy's has one of the highest average unit volumes in the QSR sector, generating approximately $1.4 million per unit annually.

Yet we generate these volumes with practically no breakfast sales.

Breakfast is the fastest growing daypart in QSR and represents about a 25% of industry-wide traffic.

We fully knowledge that there may be skepticism about our breakfast program, possibly linked to prior unsuccessful attempts.

This time around however, we have taken a far more disciplined approach, stressing quality and unique products over speed to market and that approach has yielded encouraging results in our forecast markets and we are moving towards a national rollout beginning in late 2011.

A successful breakfast offering can also lead to other daypart opportunities including stores open 24 hours a day where appropriate like some of our competitors.

In addition, growth opportunities exist in beverages and snacks.

Importantly, all of these initiatives will leverage our existing infrastructure.

At our Investor Day in January we will talk more about our breakfast test results and provide color on capital requirements, advertising strategy, and operational considerations.

We will also be serving our breakfast products so you can better appreciate why we are so excited about this new breakfast program.

Additional sales growth will also be driven by continuing to modernize our facilities at both brands through our remodel programs.

We plan to invest in our restaurants to ensure that our customers continue to find our brands appealing places to visit.

We will also provide you more details at on our store remodel plans in January.

The second key initiative is to build restaurants internationally and in underpenetrated North American markets.

International expansion will require several years of investment and execution to drive meaningful financial performance but the ultimate earnings power of an international system is significant, as evidenced by our two largest peers who have more than 45% of their restaurants in international markets.

We believe there is an opportunity for more than 8,000 restaurants outside of North America.

Since the merger, franchisees have opened 45 restaurants outside of North America and we have signed development agreements for more than 400 new restaurants in markets such as Singapore, Russia, the Caribbean, Turkey, and the Middle East.

And we are actively pursuing what we considered to be significant opportunities in China, Brazil, and Japan which may include Company-owned restaurants.

Additionally, we believe we have the potential to grow the Wendy's brand in underpenetrated North American markets.

Since our involvement in the Wendy's brands, we have grown restaurant margins and laid the groundwork for expanding average unit volumes with our key sales at initiatives including breakfast.

With expanded unit volumes and improved margins, many of the expensive real estate areas where we are not highly concentrated such as the Northeast and West Coast will become more attractive investment opportunities to us and our franchisees.

Finally, the third initiative is a financial strategy that complements our investments in organic growth.

We intend to use the strength of our balance sheet and free cash flow to maximize stockholder value through the return of capital, specifically dividends and share repurchases as we implement our longer term growth initiatives.

So in closing, we continue to believe in the long-term earnings potential of Wendy's/Arby's and look forward to talking about this potential in more detail at our Investor Day in January.

Now I will turn it back over to John Barker to cover Q&A.

John?

Okay Roland, thanks.

We have a large number of participants on the call this morning so we ask you to go ahead and queue up.

We would like you to limit your questions if you can so we can get more people in the queue to ask questions.

Operator, if you would open up the lines, we will take the questions now.

(Operator Instructions) Your first question comes from the line of David Palmer with UBS Company.

Hey guys.

Two questions.

On Arby's, what do your test markets tell you, and how confident do they make you that you can reinflate the check on that brand with premium options and innovation while holding onto that trafficking that you may have gotten this year through reinforcing that $1 menu.

And just a side question on the financials, your 10.5% debt continues to be a big deal for your PE.

My hope is that you can retire that debt in 2012.

Could you perhaps talk about that at all in a way that we can start thinking about that?

Thanks.

Good morning David.

I'll start off about talking your question on Arby's and then I will turn it over to Steve.

Your question was really about what are our test markets telling us about the opportunity to continue to drive value transactions while at the same time be able to keep our check up when we introduce premium products.

I think I probably should review quickly what we have seen from the standpoint of what is going on with traffic and sales and margins and check over the last couple of months, David.

As I mentioned obviously in my prepared comments, we are very excited about the 5.5 % increase in sales and the over 15% increase in transactions in October.

I think what is important about that is that check has declined, what we expected, between 8% and 10% .

The margin impact has been what we expected which is about 50 basis points, and overall, the mix is what we expected right around 15%.

So, it is working pretty much exactly how we had expected.

We knew that Arby's had to get into an entry value position and we believe that this third execution of national advertising is finally having the amount of impact of that we thought it would have.

And it just takes time obviously to build awareness around a concept that Arby's has never had in its 44-year history.

From a test market perspective, we have launched a couple of premium new products around a full muscle Angus roast beef product that we are very excited about that we can sell at a premium price.

And the initial results from those test markets are that the customer reaction to those products has been very good.

The mix has been very good, and it seems like they understand the balance between when I need value product, I can go in and use the value menu.

And when I really want a premium product and it doesn't get much more premium than whole muscle Angus roast beef, which we are the only concept that can provide fresh off the slicer, that they're going to have to pay a little bit more money for that.

We have also the past couple of months really dialed up the add-on items that we think that our consumers are looking for.

In particular, not long ago, we introduced a chocolate turnover that has done a really nice job of keeping our check relatively high based on customers using that as an add-on item.

And we also recently launched a premium onion ring, which is also a product that you can get almost nowhere else in the marketplace.

And finally, I guess I would say that we are pleased that the average check in October is around $6.80.

So, all in all we think it is working very, very well.

We are pleased with the results and we are excited that this might be the first step in really starting to cement a turnaround at the brand.

I will turn it over to Steve and let him talk about your debt

David, I think on the 10.5% notes that we have outstanding, I think while we will continue to look at refinancing opportunities.

I think from a cost standpoint, given the terms of that, I think that is not a near-term opportunity for us in this environment, but that is something that we will continue to monitor.

I think more importantly, the cash that we have on the balance sheet that you and I have talked about many times, I think the opportunities there continued to be reinvest back into the business along the lines that Roland has talked about.

I think they are very interesting opportunities here for us here on the remodeled side.

I think our experience this year, which we want to share some results during our Investor Day with you, I think are pretty attractive in terms of the returns that we are seeing on Arby's and Wendy's.

And I think hopefully we will be able to accelerate that program going forward.

So, I think that is a big opportunity to put that cash to work directly in the business as well as when we look at some of the longer-term opportunities.

I think supporting the breakfast rollout is a nice opportunity for us as well.

And then as we get more traction around the international side as Roland mentioned, there is the opportunity there to perhaps some Company-operated units.

And obviously that would be another way I think to invest business -- invest money in the business for long-term growth.

Then, obviously, as we have announced this quarter, eventually I think funding of the stock buyback is another good way to use that cash on the balance sheet.

Thanks guys.

Your next question comes from the line of Michael Gallo with CL King & Associates.

Hi good morning.

My question, is I guess on both brands.

When I look as we headed into October, the franchise system at Arby's has been outperforming Company stores by 250 to 300 basis points and Wendy's franchisees by 150 to 200 basis points.

Did that continue in October or do expect that to narrow?

And do you expect to take pricing at the Wendy's Company stores or is it just going to be the strategic -- the impact of the rollout of the strategic pricing initiatives to offset some of the commodity cost pressure?

Thank you.

Michael, let me talk about that in some detail and I will start off with reiterating the differences between the franchise systems at both Wendy's and Arby's from the standpoint of the third quarter starting off with Arby's.

Certainly there was a significant difference between franchisees and Company stores of around 9.5% down at Company stores and a little over 4% at franchise stores.

The largest difference, Michael, was the fact that in 2009, the Company stores were running some very, very aggressive in-store promotions while we were trying to get our value menu ready to launch, which didn't launch until as you know, formally after that.

But what we were doing from an in-store promotions standpoint was something called Wednesday Freebies where you got a significant amount of free food on Wednesdays.

And then later on in the summer with also launched a Five for Five promotion, five roast beef sandwiches for $5.00.

That did a very good job of driving transactions, as you can imagine, and also drove sales.

But, as you can see, from a margin standpoint, it did not help us from is profitability standpoint.

And it was certainly just a measure to put in place while we got our value menu really cemented into the marketplace.

The franchisees in most cases, Michael, did not run those aggressive promotions and so they were lapping in 2010 significantly less aggressive same-store sales.

So, the gap at Arby's really was that differentiation during the third quarter of those aggressive promotions at Company stores and not those aggressive promotions at franchise stores.

So, from an October standpoint, I expect that, that gap will close.

And while it is too early, honestly, to talk about franchise sales for the month of October, because they are not in, while they have also performed quite well, we believe Company stores may slightly outperform them in October.

So, I think certainly there is a significant closing of that gap.

From a Wendy's perspective, the third quarter was really a story about differences in pricing.

The gap was much less than Arby's, obviously, but it was still over a 1 point gap.

We have been very, very careful from a pricing standpoint that we have relayed to you over the past couple of quarters.

Because we have put in place, and have now almost a year of experience, of a significant project that I've mentioned to you several times, where we began to input-- I think it is actually billions of lines of code from all of our stores into a very sophisticated price analysis program where we can start to understand the factors that influence customers at specific locations and the pricing of products that influence their purchasing behavior.

And so our franchisees in particular products, specifically the Junior bacon, they took prices significantly in the third quarter, because we had improved the bacon on that sandwich and a food costs went significantly higher.

We think it was the right thing to do, but we chose not to take that price until we really had the benefit of our pricing study.

That benefit is now in place, it has been very significant for us.

We are now going to be able to make decisions here in a couple of weeks or take price increases on selective products, in selective stores, that we think we'll have a much more positive impact to our profitability than if we had just taken a blanket price increase.

At least that's what our pricing initiative is telling us.

And so to answer your question specifically, we do believe that the gap between franchisees and Company stores in the fourth quarter will begin to close also at Wendy's.

And we would expect in 2011 that, that gap to -- would be closed for both brands.

Very helpful thank you.

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

Thank you.

My question is with respect to the advertising.

How would 2011 look in relation to 2010 with Wendy's -- the breakfast introduction in the back half of 2011, and what would that look like going forward, the Company?

Are we going to expect an aggregate higher advertising budget to support the broader dayparts?

Or are you going to foreseeably pull from another daypart to support the extra daypart of breakfast?

Thank you.

Morning Matthew.

We are going to talk in great detail in January about our breakfast test with some results and also as I mentioned, our advertising strategy and operational considerations.

As I mentioned, our current plan is to begin the national rollout in the later part of 2011.

And we are looking very carefully at our test results and incremental advertising that we have spent to date, which is one of the things that we highlighted today, as it relates to margins and also our overall profitability.

We know that the lunch and dinner dayparts are incredibly competitive, and we do not want to subtract from our advertising impact during those dayparts to launch breakfast.

We believe that long term, breakfast will be a self-supporting daypart but we are going to have to spend some incremental advertising as we begin to launch advertising.

So, that we can build up that awareness and ultimately going to have it be a profit producing daypart for the brand.

Which we think is very significant as we get into 2012.

We will give you a much more detailed overview of what we expect that advertising expenditure to be.

How it will impact margins and what it will do to profitability, as we not only let you demo the products in January but we sit down and take you through the test results of our three test markets that have been in place for some time.

And our new fourth test market, Shreveport, which we opened up recently that was not a test market that had the previous breakfast in it.

And Interestingly enough, not to our surprise while we are very encouraged by the performance of all four of our breakfast test markets, we're probably more encouraged by Shreveport, because it's outperforming the other three.

Possibly because the consumers have not been confused over the last couple of years and this new breakfast launch to them was not only new, it was exciting from the quality of the products.

Okay.

Could you give us some detail on 2011, though?

When you do look at it as being rolled out, would we expect that the franchisees are on board also to look at this as an upfront investment and shoulder some of the investment burden as well?

Or would you be investing upfront for them as sort of a goodwill to get it rolled out across the franchise system as well?

All great questions, Matthew, that we plan to give you great detail on in January.

I will say to you what I have said to our franchisees, we expect our franchisees to participate, because they see the inherent benefit of increased sales and profitability.

That is an exciting concept for franchisees and as we show them results of our test market, we expect them to step up and certainly shoulder some of the responsibilities for the incremental investment.

We are probably work on incentive programs to make it as easy as possible for our franchisees to participate, because at the end of the day, we will all win when we launch breakfast.

Okay, thank you.

Next question comes from the line of John Glass with Morgan Stanley.

Thanks.

Is this quarter, do you think, the high watermark for commodities for the-- I guess, particularly for beef?

And Steve, do you have a view on where the fourth quarter, maybe early next year, looks like for that?

Yes, I actually think John we may have one more quarter of where it is actually even a little worse from where I sit today.

And then hopefully, I don't think it will be -- I don't think we are going to see any significant declines in the first half of the year, but hopefully it will stabilize in 2011.

And we will give you a pretty detailed overview of our expectation of commodities for 2011, obviously in January when we talk about our 2011 forecast and projections.

And as we said before we still think the full year is 2% to 3%, but clearly, almost all of that is coming in the third and a fourth quarter.

And we saw certainly a big impact in the third quarter and we are expecting to see a similar impact in the fourth quarter from a commodity standpoint.

If you take that comment about where the commodity markets are, the fact that you're below planned sales and maybe therefore, less margin expansion menu than you had thought.

How do you still stay within your guidance range for the full year?

In other words, what is offsetting that so you're allowed to stay within that range at all?

Well, we gave you a range, because that gave us the possibility of things slightly moving from a quarterly standpoint.

And so, as Steve said, earlier in our call, we are going to be at the lower end of the range, but we still expect to make that range.

Quite honestly, some of the other benefit we are seeing at Arby's from significant positive sales in October.

And we do expect that sales will improve in November and December at the Wendy's brand based on the introduction of our new everyday value platform; My 99.

And maybe one of the most exciting new product launches the brand has had in ten years.

Brands do not change their fries very often.

It is an important staple of our business.

You've got to be very careful when you do that.

We spent an awful lot of time in testing and consumer sensory panels.

Consumers love the new fries.

The test market results were more encouraging than we even expected.

And we think the combination of an everyday value platform, as I mentioned, that people will start to understand and the introduction of some of the exciting new products like fries and 2011, our new premium cheeseburger line is going to have a positive impact.

John, the one thing I would say in terms of the outlook that we made.

That was predicated on a 2% to 3% commodity basket increase which hasn't moved.

It's just that it hit us very hard in the second half of the year.

I think frankly, as you and I had talked, I think the fact that we started out of the gate on much more favorable commodity trend, I think some people were struggling to see that 2% and 3% hit us.

And it is, but it is hitting us disproportionately hard in Q3 and, as I just said, I think Q4 will be just as tough if not even a little worse.

But it was consistent with our down 3% to 5% range.

And I would point out something that I think you mentioned that maybe the rest of the audience didn't hear clearly.

For the year, at Wendy's, we are still expecting a 360 basis point improvement versus the pre-merger margins, which is I think pretty exciting.

In light of the fact that commodities have risen and same-store sales have been soft.

So, I think our field teams have done an excellent job of significantly improving how they run our restaurants from a food cost management, from the labor cost management, and the other costs in the store.

And as sales improve, I still believe that we will be able to achieve the 500 basis points of margin improvement that we have been talking about for some time.

Thank you.

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

Great.

Thank you very much.

Two questions actually.

First, on the quarter that just ended; Arby's seems like perhaps moving in the right direction.

My question is just more on Wendy's.

It seems like there is more of a surprise to the downside of late.

I'm just wondering if you can talk about what you would view as maybe the largest culprit of the recent pressure?

Whether you look at comps by daypart, whether you see some areas of greater weakness than others.

I am just trying to see perhaps where the shortfall is coming from.

Who potentially is taking that share?

And the comment you made about improving through November and December.

I'm just trying to figure out whether that is driven primarily by what looks like even compares or do you really think on a two year basis, you are going to see an uptick in sales at Wendy's for the fourth quarter?

And then I had a follow-up question.

Thanks.

Okay Jeffrey.

Let me start with that and we will talk about the third quarter same-store sales at Wendy's.

Let me start off by talking a little bit about what the macro environment was.

Clearly it continues to be weak economic environment and our competitors continue to be very aggressive from a price standpoint and value promotions.

In july, we started off the quarter by lapping over one of the strongest timeframes that we had in 2009 which was our successful launch of boneless wings.

Which you remember in 2009 drove our same-store sales north of 2%.

So, we had a pretty tough hurdle in first part of the third quarter.

And then in August, we launched our new premium salads, four new outstanding premium salads that quite honestly made a big impact from the standpoint of our overall salad share.

You probably remember some of my comments.

Our salad share more than doubled and our mix went from around 4% of sales to at the high point, 11% of sales.

And that we came right back with our Pick Two promotion which gave the consumer the opportunity for half-size salads along with one of seven items that they could get at a very good value.

All of which they could get, as you remember, for $4.99.

So, we saw very nice share increases and we saw the beginning of transaction increases as we launched our salads.

Quite honestly, where we think we had the biggest decline is in the area of value transactions.

We have looked at value transactions against our competitors for the last couple of quarters, and it seemed that our value transactions have gone negative year-over-year compared to some of our competitors that, quite honestly, has gone positive.

And we have done a lot of analysis and study into that.

We haven't walked away from value as you know.

But our hypotheses has been that our value promotions had been a little disjointed.

We started off with the Trio, then we had the Core Four, then we had the $2.99, then we had $0.99 nuggets.

All of which were reasonably accepted by the consumer when they were promoted.

But when they weren't promoted, we believe that's when the majority of those value transactions were lost.

Because consumers need to be told on a regular basis what they can expect.

And I think they found it hard to understand that Wendy's had value every single day, even when we didn't have a promoted value promotion.

And so that was the real emphasis for the launch just recently of our new seven items at $0.99 which we have tagged, My 99.

I hope you have seen the advertising.

It is upbeat.

It is energetic.

We are getting great response from consumers about it.

And we think that, that will begin to cement in our consumers' mind the fact that there is value at Wendy's every single day.

By the way, back in 1989, as I think you probably know, Wendy's started this whole concept of a super value menu, and we've gotten away from that a little bit and we think it is time to get back onto it.

And so we believe that, that is going to shore up our value transactions.

And the exciting new products that we have in the premium area we think are going to be drivers of same-store sales.

The continued emphasis on our salad line, which next year, we'll have some new seasonal salads which will keep that exciting to our consumers.

The launch of our New Skin On Natural Cut Sea Salt Fries.

And the test, which is in market now, with new advertising of our brand-new premium cheeseburger line with a thicker patty and melted cheese and a crinkle cut pickle and red onions, along with something that is very exciting that Wendy's got away from for a number of years, which is a real butter toasted bun, really produces, I think the best cheeseburger in the business .

The combination of all of those, we believe is going to get us back to positive same-store sales.

We see that improvement already happening in October versus the third quarter, and we expect that, that improvement will continue to happen in November and December based on both value transactions improving and maintaining the number of transactions around our premium products.

Your follow-up

Yes thank you.

On the follow-up front, without revealing too much detail and spoiling your January Analyst Day, just broadly looking to 2011 though, in your long-term guidance initially was mid-teens EBITDA growth and it looks like you achieved that in 2009.

Obviously 2010 is looking like it's down 5%.

Just wondering whether you could talk directionally, I would assume the mid-teens is unrealistic for 2011 but would you be expecting directionally any growth in 2011?

Are we talking about single digit growth, does that seem reasonable for 2011?

More broadly, I guess you talked about the different levers to sustain EBITDA.

I Think You mentioned G&A you are ahead of your promises initially, but I didn't know whether there were any low hanging cost saves or whether those are complete and therefore comps are the primary driver of return to growth in 2011?

I'm smiling at your question, Jeffrey.

You know what the answer is going to be.

We certainly are not prepared to give you guidance on 2011.

We want to see the results of November and December which are going to be pretty important to us and we have high expectations.

And then we want to complete our plans for 2011 on our key growth initiatives and then we will lay them out in detail in January.

Thank you.

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

Yes thanks.

Thanks guys.

Just two questions on Arby's.

You said November and December, you expect softer sales.

I was wondering if you can comment.

Do still expect them to be positive?

Then secondly, I wanted to ask you about the advertising program at Arby's.

Looks like you measure it by sales.

It's clearly one of the most successful programs.

Can you talk about what worked here, what you learned, and what you're thinking about doing in 2011 and where that share that you've gained might have come from?

Thanks.

Yes, as I mentioned Larry, we do expect in November and December to soften from October, but remember October was 5.5%.

And the biggest reason for that is we are moving from national advertising, which we had in October, to local advertising which is less effective, obviously, than the impact of national advertising.

Although we do have an exciting new product that we have already gotten into the market which is our premium new Chicken Tenders which has been well accepted.

And so while we do expect sales to soften from November and December we think from a quarter-to-quarter standpoint, they're going to continue to be very strong as a comparison to third quarter.

That being said, we are not giving guidance for the fourth quarter at this point.

We are providing guidance for the full year.

From an advertising program standpoint, we believe that the success in October was not just about advertising, I think it was about many things that we have had in our turnaround plan that are beginning to take hold .

And by the way, we have many other things in our turnaround plan that we have not yet introduced that we expect to talk about in great detail in January.

Yes, we did have national advertising and certainly that is effective.

We also had what we thought was a very a piece of copy that highlighted for our customers how they could use our value menu no matter what type of demographic that they were coming from.

But we also think that there are other things that clearly were beneficial.

But remember that October national advertising this year was rolling over October national advertising in 2009.

So, we don't believe it was an anomaly or that we've gotten some freebie from the standpoint of what might have happened in October, so that's why we continue to be optimistic about November and

Okay thank you.

That is the final question we will take.

It is just a little bit after 9.30 AM.

Steven, Kay and I will be available.

We have several calls set up with this afternoon, so we look forward to catching up with that.

If you have any other questions, just email us or give us a call and Roland is going to close the meeting.

Thanks John and thanks again for all your questions and participating with us today.

As we said earlier, our third quarter results were not satisfactory and we are determined to improve our performance .

To that end, we are excited about the sales building initiatives we shared with you today.

At Arby's, our value message is connecting with consumers, as evidenced by the strong October transactions and same-store sales.

At Wendy's, we have introduced a new everyday value platform and begun the process of improving a large portion of our menu.

With the introduction of our new premium salads, Skin On Sea Salt French Fries and soon, our premium cheeseburger line, we will ensure we further extend quality advantage over the competition.

We are also excited about future growth opportunities like breakfast at Wendy's and international expansion that will increase stockholder value.

In summary, we continue to believe in the long-term earnings potential of our Company, and we look forward to seeing you at our Investor Day in January where we are going to provide you greater detail about all of our strategic plans.

Thanks again.

Have a great

This concludes today's conference.

You may now disconnect.