Wendy's Co (WEN) 2011 Q1 法說會逐字稿

Good morning, everyone, and welcome to Wendy's/Arby's Group's first-quarter 2011 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.

Good morning, everyone.

Thanks for joining us.

This morning we issued our first-quarter 2011 earnings release and we filed our Form 10-Q.

The agenda for today's call and our webcast will begin with an introduction from our President and CEO Roland Smith, who is going to provide an update on Arby's strategic alternatives and a general overview of our recent performance.

Our Chief Financial Officer Steve Hare will then review our first-quarter 2011 results and our 2011 outlook.

Following Steve's remarks, Roland will discuss Wendy's initiatives and he will provide an update on our international expansion.

Afterwards we will open up the line for questions.

Today's conference call and our webcast is accompanied by a PowerPoint presentation which can be found on the Investor Relations page at our corporate website, which is WendysArbys.com.

For those of you who are listening by phone today make sure that you select the appropriate webcast player option from our website, that will ensure that you can sync up with the slides and the audio.

Now 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, 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 refer to our reconciliations of non-GAAP financial measures and the most directly comparable GAAP financial measures.

Now let me turn the call over to Roland.

Thanks, John.

Good morning, everyone, and thank you for joining us today.

Before I review the first-quarter results, let me give you a brief update on our strategic alternatives process for Arby's.

As you know, we announced in January that we are exploring strategic alternatives for Arby's, including a sale of the brand.

We continue to make substantial progress on a potential sale of Arby's.

We have narrowed the large initial interest to several quality bidders that have completed significant due diligence and remain active in the process.

We believe it is in the best interest of the Company to bring this process to closure as soon as possible.

As we have previously stated, a potential sale of Arby's would provide two key benefits.

It will allow us to focus all of our financial and human capital resources on growing the Wendy's brand and to deleverage the balance sheet.

In addition, proceeds from the sale would also be available for reinvestment in our Wendy's business and return of capital to shareholders.

As a result of the strategic alternatives process, 2011 will be a transition year.

Now I would like to provide you an overview of our first-quarter results.

In the first quarter we generated revenue growth of 1.2% to $848 million.

Adjusted EBITDA for the first quarter was $83.5 million, which met our expectations.

Compared to last year these results were negatively impacted by commodity increases and also reflect our investment in incremental advertising to introduce Wendy's new breakfast to additional markets.

From a sales perspective, we remain optimistic about the remainder of the year at Wendy's as we continue to focus on our real brand positioning by improving our core menu offerings and introducing exciting new products.

I will provide a more detailed update about our initiatives to drive stronger sales at Wendy's later on this call.

Now I want to comment on each brand's first-quarter results.

Wendy's North America system-wide same-store sales were flat and were negatively impacted by adverse winter weather and soft Canadian same-store sales.

Canadian company-owned restaurant same-store sales decreased 4.7% and were negatively impacted by the effects of higher sales taxes, which raised our menu prices in two provinces.

North American same-store sales for company-owned restaurants declined 0.9% and our franchise restaurants were up 0.3%.

We believe this gap between company-owned and franchised same-store sales was primarily due to higher pricing on certain menu items by franchisees.

Since implementing price increases at company restaurants at the end of March this gap has significantly narrowed.

As you can see on this slide, in January we promoted our My 99 everyday value menu.

In February we introduced our new Asiago ranch chicken club sandwich, which replaced our existing chicken club, and then in March we promoted our fish 'n chips combo which paired our natural cut sea salt fries with a premium North Pacific cod sandwich.

Wendy's company restaurant margin was 13.4% in the first quarter, reflecting a 200 basis point decrease from a year ago.

This year-over-year difference was primarily due to 110 basis points of incremental advertising to introduce Wendy's new breakfast in additional markets and 80 basis points of higher commodity costs.

At Arby's, first-quarter system-wide same-store sales increased 5.5%.

Same-store sales at company-owned restaurants were up 6.8% and franchised restaurants increased 4.8%.

In January, we added a new item to our dollar menu, the Jr.

Turkey Ranch sandwich and successfully promoted our and improved fish sandwich in February as part of a $4 combo meal.

In March we introduced our new Angus roast beef sandwich, the Angus Three Cheese and Bacon.

It features sliced, lean Angus top round roast with three kinds of cheese and bacon and is serve on a toasted Italian style roll.

Customer reaction to this new sandwich has been extremely positive, reflected by a very strong product mix of more than 11% during the promoted period.

We also introduced Arby's new brand positioning, Good Mood Food, and customer feedback has been positive.

Arby's first-quarter restaurant margin was basically flat to the prior year.

Significantly higher commodity costs were largely offset by sales leverage resulting from our strong same-store sales increases.

We are very pleased with Arby's performance in the quarter.

We believe our turnaround plan is working and that the combination of our new brand positioning, value menu, and successful new product introductions will continue to drive positive results for Arby's.

Now I will turn the call over to Steve Hare.

Steve?

Thanks, Roland.

Let's begin with a summary of our key results and the special items that were included in the first quarter.

Total revenues increased $10.4 million or 1.2% versus the prior year.

Revenue increases were primarily a result of Arby's same-store sales increases, as well as a benefit from foreign currency translation at Wendy's.

Adjusted EBITDA decreased 9.3% as compared to the 2010 first quarter.

This year-over-year decrease was primarily a result of higher commodity costs as well as incremental advertising to introduce Wendy's new breakfast in additional markets.

Our reported net loss for the first quarter was $1.4 million or zero cents per share compared to the prior year net loss of $3.4 million or $0.01 per share.

The first quarter of 2011 included total net special charges after tax of $0.01 per share and the prior-year first quarter included total net special charges after tax of $0.03 per share.

Special items in the first quarter of 2011 included a reversal of the remaining accrual for our SSG purchasing co-op funding commitment.

As a result of the Arby's strategic alternatives process, the SSG Board of Directors voted in March to dissolve SSG and transfer its activities to the Wendy's purchasing cooperatives, QSCC, and the Arby's purchasing cooperative, RCOP.

Additional special items included in 2011 were impairment charges primarily related to certain underperforming Wendy's restaurants, as well as expenses related to the Arby's strategic alternatives process.

Now I would like to review our pro forma results.

As we have mentioned before, 2011 will be a transition year as we focus on completing strategic alternatives for Arby's and positioning Wendy's for accelerated growth.

As a result, in January we provided 2011 adjusted EBITDA guidance on a pro forma basis, which excludes Arby's and related G&A, as if a sale of Arby's occurred at the beginning of the 2011 fiscal year.

In order to illustrate how we are tracking with that guidance we are providing first-quarter pro forma financial results in addition to our reported numbers.

Pro forma adjusted EBITDA was $75 million for the 2011 first quarter.

Pro forma adjusted EBITDA excludes Arby's adjusted EBITDA, which includes brand G&A and Arby's portion of the allocated corporate G&A.

In Q1 corporate G&A allocated to Arby's of $8.8 million was equivalent to the expected pro forma quarterly amount of corporate G&A savings.

Now let's discuss cash flow.

One of the strengths of this company continues to be our ability to generate positive free cash flow, which we define as cash flow from operations less capital expenditures.

We generated $25 million of positive free cash flow in the first quarter, including our investments in breakfast and remodeling.

Cash flow from operations was $53.5 million, capital expenditures were $28.6 million, and were related primarily to our restaurant remodels and maintenance CapEx.

In addition, we repaid $30.2 million of our long-term debt and we returned $8.4 million of capital to our stockholders in cash dividends during the quarter.

Our net cash used in the first quarter was $12 million and at quarter end we had a cash balance of $500 million.

We continue to have a very 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 quarter we had total debt of approximately $1.5 billion and net debt of approximately $1 billion.

Based on our trailing 12-month adjusted EBITDA, including breakfast advertising expense in both 2010 and 2011, our total debt multiple is of 4.1 times and net debt multiple is 2.7 times.

On a pro forma basis, we expect to reduce our net debt by at least $200 million from the elimination of Arby's capitalized lease obligations and cash proceeds from the sale.

Next I will discuss our dividends and stock repurchases.

Our next quarterly cash dividend of $0.02 per share will be paid on June 15 to stockholders of record as of June 1.

We continue to have $250 million authorized and available for stock repurchases.

We did not buy back any stock during the first quarter because of the ongoing strategic alternatives process for Arby's.

We plan to resume our stock repurchase program after the conclusion of the strategic alternatives process subject to market conditions.

Next I would like to discuss our outlook for 2011 starting with commodities.

Like many of our competitors, we are now forecasting commodity costs for 2011 that are higher than previously expected.

We communicated to you back in March that we expected meat costs to rise approximately 10% to 15% and that we expected our total commodity costs to rise 2% to 3% in 2011.

We are now forecasting that our meat costs will rise 20% and along with increases in bacon, fry oil, dairy, and distribution costs, our total commodity basket will increase 5% to 6% in 2011.

While we believe that we will be able to use selective pricing and product mix to partially offset these rising costs, we are revising our previously issued pro forma adjusted EBITDA guidance to reflect these higher commodity costs.

We now expect our 2011 pro forma adjusted EBITDA to be in the $330 million to $340 million range compared to our previous range of $345 million to $355 million.

Our EBITDA outlook includes the following assumptions.

For 2011 we continue to expect Wendy's same-store sales to grow between 1% and 3%.

Our expectation of same-store sales is driven by the strong product introductions planned for the remainder of the year as well as strategic price increases.

Roland will review these initiatives in a moment.

Based on rising commodity costs, we are revising our margin assumption and now believe that Wendy's company-operated restaurant margin will be flat to slightly down from 14.8% in 2010.

We had previously communicated that we expected an improvement of 30 to 60 basis points in Wendy's company-operated restaurant margin.

Our restaurant margin includes the effect of incremental advertising expense for Wendy's new breakfast program in both years.

We are reiterating that we will spend approximately $145 million on capital expenditures for the Wendy's brand in 2011, which would include approximately 100 restaurant remodels as we focus on updating the Wendy's system with new designs.

Now I will turn the call back over to Roland.

Thank you, Steve.

Our strategy at Wendy's is to grow sales and margins by ensuring we deliver our Real brand positioning.

Our goal is to provide superior quality freshness and taste in every product that we offer to differentiate Wendy's from our competitors.

We have already made significant improvements to three of our core menu categories -- value with the introduction of our My 99 value menu, salads with the introduction of four premium entree salads, and fries with the introduction of natural cut fries with sea salt.

We are also currently working to significantly improve our hamburgers and chicken.

By year-end we will have revamped most of our core products and believe these improvements will drive growth in 2011 and beyond.

Now I would like to share our second-quarter marketing calendar and some of our major product improvements.

This slide shows Wendy's marketing calendar for the second quarter.

In April we promote in our new sea salt fries.

As you may have noticed in the media last month, consumers in a national taste test said that our new fries taste better than McDonald's.

56% of consumers taking the test chose Wendy's fries over McDonald's.

McDonald's fries have been considered the gold standard in QSR, so this is a huge win that we believe will pay dividends over the next several years.

North America company-owned same-store sales turned positive in April, up 0.5%, and the US was stronger at up 1.1%.

Last week we began promoting our Bacon Mushroom Melt Hamburger or Flavored-Dipped Chicken Sandwiches depending on the market.

In June, we will be introducing our new Berry Almond Chicken Salad and Wild Berry Tea.

This seasonal salad will feature fresh blueberries and strawberries, a premium chicken fillet, real Asiago cheese, and 100% natural fat free acai berry dressing.

As consumers continue to trend towards eating healthier foods Wendy's premium salad line provides an excellent option.

And in July we will offer a new Fresh Berry Frosty with fresh blueberries and strawberries.

According to independent third-party research, Wendy's market share of QSR entree salads exceeded both Panera and McDonald's for the second consecutive quarter, so we are particularly excited about the June launch of our Berry Almond Chicken Salad.

It's a great seasonal addition to our core salad lineup that should help us further increase our share of salad sales.

Now I would like to update you on the launch of our new hamburger line.

We remain on track to roll out our new line of Dave's Hot 'n Juicy cheeseburgers in the second half of the year.

This new cheeseburger line includes beef that is juicier and 40% thicker, quality toppings like crinkle cut pickles and red onions, melted cheese, and, importantly, a butter-toasted bun.

These new burgers are currently in 7 test markets where we continue to see significant increases in hamburger unit sales.

Accordingly, our system is very optimistic about this launch.

Now I would like to discuss another major improvement to our core menu, chicken.

In the fall of 2010 we introduced a new premium chicken fillet which included a larger, more tender filet and a change in our marinade and breading system.

Then earlier this year we introduced the Asiago Ranch Chicken Club to replace our existing chicken club.

In the fourth quarter we will introduce an entirely new line of chicken sandwiches which we refer to as power our gold chicken line.

Our new chicken sandwiches will include exciting new flavors and toppings, such as bruschetta with diced tomatoes, chopped basil, and balsamic glaze.

These sandwiches will also feature a new butter-toasted bun.

We are currently market testing these new chicken sandwiches and I look forward to sharing more details with you in the future.

Now I would like to take a moment to discuss our pricing initiatives.

As you may recall, in 2010 we developed a strategic pricing model that gave us the ability to measure the impact of price at the store level.

The model uses demographics, the competitive environment, and other drivers of product demand to project the impact of pricing on sales, transactions, and profitability.

We use this model to successfully increase prices in late 2010 and early 2011, and plan to take additional price increases this year.

We believe selective price increases can partially offset the significant commodity inflation we are experiencing this year, but we are also very sensitive to the affect pricing may have on transactions and market share.

And, therefore, our plan is to selectively take price in a way that balances our need to offset commodity increases while protecting transactions and market share.

Now I would like to discuss restaurant remodels.

Restaurant design is an important part of our Real brand positioning.

We have developed several new restaurant designs this year and our first remodeled stores using these designs will open in the third quarter.

This slide shows one of four new restaurant designs we plan to test.

In addition to the contemporary and appealing exterior, all of the new designs feature changes to the interior flow that will highlight our Real positioning and the preparation of our made-to-order sandwiches and fresh ingredients.

We are currently building these new designs in several markets and expect to have at least one of each open by late September.

We will analyze customer feedback and sales and expect an aggressive rollout program beginning in 2012.

Now I would like to update you on our breakfast program.

As you know, breakfast is a very important daypart for the QSR industry.

About 23% of traffic in the hamburger segment occurs during breakfast representing more than $13 billion in sales per year.

For the last four quarters breakfast has generated the most traffic growth and most of our hamburger competitors are benefiting from this growing daypart.

Wendy's is the only major hamburger QSR chain without a national breakfast offering.

We are making excellent progress on Wendy's new breakfast program and we are very encouraged with both sales and customer reaction to our new breakfast products.

Sales trends are growing in our six current breakfast markets, even as we significantly reduce our couponing.

And customer awareness, trial, and repeat purchase rates are all improving.

We also continue to make adjustments to menu offerings and to pricing in order to maximize profitability.

In our test markets, annualized average weekly breakfast sales are meeting our target of an incremental $150,000, which represents a sales lift of more than 10% on top of our $1.4 million AUVs.

Longer term we believe breakfast represents an opportunity for almost $1 billion in incremental system-wide sales.

Now I would like to share some encouraging customer feedback on our core breakfast sandwiches.

The core breakfast sandwiches shown on this slide were rated by customers on eight attributes -- satisfaction, appearance, taste, serving size, freshness, quality, price, and value for the money.

As you can see, the average attribute scores for each product were very high, averaging about 9.1 on a 10-point scale.

Additionally, the top two box scores on these products, which is an indicator of a customer's future intent to repurchase the product, were extremely high at 95%.

Some of the highest product scores we have ever received.

The combination of our sales results and these excellent scores gives us confidence in the future earning potential of our breakfast program.

This slide shows our breakfast expansion timeline.

In the second half of 2010 we launched our new breakfast menu in four test markets -- Kansas City, Phoenix, Pittsburgh, and Shreveport.

In the first half of 2011 we further expanded our new breakfast into two additional markets, Louisville and San Antonio.

Over the remainder of this year we will continue to add more breakfast markets and by the end of 2011 we plan to have our new breakfast menu in about 1,000 stores which will include approximately 600 franchised restaurants.

Now I would like to provide a brief update on our international plans.

We are very proud of what we have accomplished since the merger in the area of international development as we continue to expand our global footprint.

We have signed six long-term development agreements covering 23 countries, including Singapore, the Middle East and North Africa, Turkey, the Eastern Caribbean, Russia, and Argentina.

We also recently signed a joint venture agreement with Higa Industries to develop restaurants in Japan and plan to open our first Wendy's in Tokyo later this year.

We currently have 350 franchised restaurants outside of North America and a total of 700 commitments for future restaurants, totaling over 1,000 restaurants.

We are also actively pursuing joint venture opportunities in China and Brazil, and look forward to sharing details of additional agreements with you later this year.

As I mentioned, we are expanding to Russia and our franchisee will open their first two stores in Moscow later this year.

These openings are part of the development agreement announced last August with franchisee, Wenrus Restaurant Group, to develop 180 restaurants in Russia over the next 10 years.

In the closing, 2011 is a transition area as we have positioned the Company for double-digit EBITDA growth in 2012 and beyond.

We are working diligently on the strategic alternatives process for Arby's, including a potential sale of the brand.

A sale would allow us to focus all of our financial and human resource capital on growing the Wendy's brand, which we believe will produce the greatest value for all of our stakeholders.

Finally, I would like to summarize our Wendy's growth initiatives.

We will deliver on Wendy's Real brand positioning by continuing to improve our core menu and ensuring that all of our products provide superior quality, freshness, and taste, and by introducing exciting new products.

We will continue to expand breakfast, which will significantly increase sales and profitability, we will continue to modernize our facilities with contemporary new designs, and we will continue to increase our global footprint with expansion in North America and international markets.

We believe these initiatives will help us deliver our long-term goal of average annual EBITDA growth of 10% to 15% in 2012 and beyond.

Now I will turn the call back over to John for Q&A.

Thanks, Roland.

Let's open up the lines for Q&A.

We have a large number of participants on the call today, so we ask that you please try to limit your questions.

If you have more, we will try to get you back in the queue.

We also have some calls lined up later today with several of the analysts.

Operator, would you please open up the phone lines for questions?

(Operator Instructions) Joe Buckley, Bank of America Merrill Lynch.

Thank you.

A question, Roland, just on your comments about the sale of Arby's or the potential sale of Arby's.

You mentioned deleveraging the balance sheet; you also mentioned returning capital to shareholders.

Given your balance sheet is not that highly leveraged, could you elaborate a little bit on how you will think about it post-Arby's?

Joe, this is Steve.

I will take a crack at that one.

The comment around deleveraging the balance sheet really refers to two items.

One is -- I think you and I have talked about in the past.

Looking at Arby's today it has almost $200 million of capitalized lease obligations on its balance sheet, so to the extent we affect a separation here that $200 million of balance sheet debt would go away.

Then, obviously, to the extent we have some cash proceeds on top of that as part of the sale that would be available.

And from a net debt standpoint, just initially going on the balance sheet would cause us to further deleverage the balance sheet.

Again, I think it just gives us increased financial flexibility overall going forward.

So, again, as Roland has talked about, we can focus all the financial resources to the Wendy's strategic growth initiatives where our priorities, as we talked about, probably shift to a fairly extensive and aggressive remodel program based on the test of the new designs that we are doing this year as well as supporting the big marketing initiatives around breakfast and the gold hamburger launch, both of which require some capital investment in both the Company stores and perhaps supporting some of our franchisees, for example, on the breakfast side in terms of some of the marketing spend that we need to do there.

So, again, it puts us in, I think, a very good position of financial flexibility to make the investments necessary to accelerate our growth on the Wendy's brand.

Okay, thank you.

Reza Vahabzadeh, Barclays Capital.

Good morning.

Just as far as the input costs that you referred to, do you have good visibility on those pressures for the balance of the year or are you still subject to market conditions for the balance of the year, especially on beef?

Reza, our forecast today are really based on the input that we get from our purchasing cooperative, so on the Wendy's side the QSCC Group and then on the Arby's side RCOP.

And I would say what has changed since our last quarter, if you may remember our last call we had said, especially on the Wendy's side, that we knew that Q2 and Q3 we would experience very high beef cost.

What we were unclear at that point was Q4 and the direction there.

At that time our forecast contemplated some easing of beef costs in Q4 based on those forecasts.

Today what we are seeing is some indication that we may see the prices staying at those very high levels or perhaps even having the chance of increasing in Q4.

And that is really the big swing, I think, in our overall commodity basket change from our previous guidance to our current guidance.

Got it.

Thank you.

Jason West, Deutsche Bank.

Just a quick clarification and then a question.

I just want to clarify that, Roland, you said that you guys have multiple quality bids for Arby's.

And then the question that I had was on the commodity inflation again.

How does the 5% to 6% compare to what you had in the first quarter?

Jason, what I did say is that we have multiple bidders that have done a significant amount of due diligence and continue to express a lot of interest and are active in the process.

From a commodity standpoint, what we had previously relayed was we expected commodities to increase 2% to 3%.

As of today what we relayed was that we expect that to rise to 5% to 6%.

I was just trying to get the number for the first quarter.

From the first-quarter standpoint what we have said is that our margins year-over-year were negatively impacted by 80 basis points of increased commodities.

So I think that is the question you are asking.

Okay, thanks.

Michael Gallo, CLK.

Good morning.

My question is on breakfast.

You have had a little more time to have that in the stores.

I was wondering if you continue to see that as a $140,000 to $150,000 per year, per store opportunity.

And if you can give us just some further color on what you see profitability-wise in that segment.

Whether, as you are getting the sales, that is a segment that you think you can get profitable fairly quickly and what kind of levels of sales, based on where commodity costs are today, do you think you need to get to get to breakeven in that segment as it rolls out.

Thank you.

Michael, I can easily confirm for you that, as I mentioned in my prepared comments, that we are experiencing in our breakfast test markets average annualized sales at $150,000.

So we are very encouraged by what we are seeing from a sales standpoint.

We are also seeing those sales grow as we significantly reduce our coupon rate.

As you can imagine, when we open up a new breakfast restaurant -- I am sorry, when we open up a breakfast market we incrementally spend against advertising and couponing to ensure that we get a significant amount of awareness and trial, because that sets us up for success in the future.

We have always intended to bring both of those concepts of advertising and couponing down over a period of time.

We have begun to do that in our more established breakfast markets, yet we still continue to see our breakfast sales increase.

And so that is encouraging from the standpoint of overall profitability.

At $150,000 of annualized sales, which is our initial goal, our stores are profitable and making money.

So that is the good news there.

The better news is that I think our sales will continue to grow from this $150,000 goal and that will certainly allow us to increase the profitability and expand margins in the longer term.

Okay, great.

And then just a follow-up for Steve.

It sounds like you have made a significant amount of progress on the Arby's alternatives process.

Would you expect that that will -- that Arby's will end up in discontinued ops in the second quarter or do you think you will continue to report it as you did the first quarter?

I can't really speculate on timing of a transaction, but to the extent that the process ends up in a sale transaction, I would anticipate that we would qualify them for disc op treatment.

Okay, thank you.

Sara Senatore, Sanford Bernstein.

Thanks.

I just wanted to go back to the question of new product introductions and the success you are seeing.

I am trying to reconcile -- I know what we know has been very good growth, like you were talking about entree salads with comps that have essentially been flattish sequentially and year-over-year.

Can you maybe just talk about, even just in broad terms, the proportionality of some of these initiatives you are talking about, whether it's the hamburgers or the chicken?

Like I said, just trying to figure out how to translate what seemed to be very good reads or initial reads on product growth with comps that are more in line with the industry or essentially flat.

Sara, let me start off with talking a little bit about the industry.

I believe that Wendy's compared to the industry, when we start to look at the daypart of lunch where we do the majority of our sales, is performing quite well.

Clearly, McDonald's is outpacing the industry in most of the categories.

But when you take a look at Wendy's, we don't participate, as I mentioned earlier, in any sizable way in the breakfast daypart, which as you take a look at some of the data that is being reported is the only daypart that is really growing in transactions for quite some time.

As a matter of fact, the lunch daypart has been negative for a number of quarters and have just recently become at least flat year-over-year.

So if you are going to grow your lunch daypart, both from a transactions and a sales standpoint, you have to grow it by taking care which obviously is much more difficult and is slower than just expanding along with an expanding market.

So when you look at Wendy's over the last couple of quarters what we have done is something that we are very excited about that I don't think we have gotten to this point all of the dividends that our actions will ultimately kind of deliver.

We, as you know, sometime ago went back and talked to consumers and did a significant amount of research to really understand what could differentiate Wendy's from the remainder of our competitors for the long term.

Not for just a month or a quarter, but for the long-term based on what consumers really want and need.

Fortunately, what we learned was something that was really part of Wendy's equity, which is that, quite honestly, our food is seen as higher quality.

It's seen as fresher and we relay that to consumers from the standpoint of Real; You Know When It's Real.

I have talked about that quite a bit today; we will continue to talk about that.

Certainly we will need to, as we go forward, certainly kind of match other competitors from the quality of facilities, from the friendliness and speed of our service.

We certainly work on those categories also, but a differentiator is something that allows a brand to grow longer term.

Our differentiator is great, quality, fresh food that consumers consider real.

And quite honestly, think it fits very well within the trends, as I mentioned, of where consumers are going, which is healthier, fresher, higher-quality food.

So we established that and then we began to look at our entire core menu to ensure that our menu delivered against it.

And quite honestly, as I have relayed to you before, it didn't.

Which was a huge undertaking to go and look at each of our core menu items that we thought we really needed to revamp so that it was -- it actually was kind of -- it matched what our Real positioning was really all about.

We started with value with our My 99, which has worked incredibly well.

And quite honestly that has allowed us to weed through the current issues as the consumers have been a little bit careful as to what they spend based on what is going on in the economy and gas prices.

Fortunately, we have seen over the last couple of days that the newest forecast is for gas prices to come down later this year, which obviously we think that will have a good impact on transactions.

Then we kind of looked after salads, which was a category that clearly Wendy's had owned years ago but it lost share in.

As I have talked to you over the last couple of months, we launch four new entree salads last year, very high-quality, very fresh ingredients.

And as I mentioned today, the benefit of that has been that we now are leading in salad share for both -- compared to McDonald's and to Panera.

Then we went after our french fries, which was, quite honestly, kind of a major undertaking and something that few QSRs are willing to do even over their lifetime.

We did our research and we launched a brand-new russet potato, natural cut, skin on, sea salt fry which performed very well and we have began to take fry share also as we have gone forward.

Then what we are working on now is the complete of our core menu improvement, which is really about two very important categories.

Burgers, which obviously is the predominance of what we sell in sandwiches.

And I think burgers, John, run about 20% or so of our sales, so it's a huge portion of our revenue.

Later on this year, as you know, we are revamping the entire hamburger line.

Not just one new product with a different type of cheese or some new flavor -- a brand-new line that will replace our current line which we are very excited about based on the significant improvement in hamburger sales that we have seen in some of our test markets.

Juicier, thicker patty, better condiments, melted cheese, and probably the most significant improvement along with the hamburger is a butter-toasted bun, which really puts it not only on par but directionally better than both Five Guys and In and Out.

Then we kind of finish off our core menu improvements with a significant improvement to our chicken line, which we have already mentioned.

We have already begun to get some of those improvements with a better fillet, a change to our breading and our marinade.

We will pay that off later this year with the introduction of some exciting new flavors.

And probably as importantly include a new bun that is also butter-toasted, which really significantly improves the quality and the flavor of that line.

So what I think you will see as we complete this year is a total revamping of our entire core menu, which will establish I think the positioning that we really are the highest quality and the freshest food in the category.

It differentiates us as we go forward.

It matches with the trends of where consumers are going, and we will begin to see our sales grow month over month over month based on these improvements.

None of these improvements, quite honestly, are kind of intended to be very quick fixes that are just in the market for a month or so.

Again, we began to see, kind of based on external and internal information, share gains in both our value offering, our fries, our salads, and, certainly in the markets that are testing hamburgers, our hamburgers.

And I think those share gains will begin to take share from our competitors and allow us to grow our sales this year.

We continue to be very optimistic about our ability to grow same-store sales this year 1% to 3%, and we think that as we complete these new product core improvements and begin to introduce some additional exciting new products we will continue to be able to grow our sales over the long term.

Thanks.

John Glass, Morgan Stanley.

Thanks.

Two questions.

One is just a follow-up to that which is is there a barrier?

It seems like there is still that disconnect; you are not generating incremental visits to your business with all these good products.

And so have you asked people who haven't come or lapsed users what is their barrier to not coming back or preferring some other brands?

If you could maybe answer it that way.

Then secondarily, can you talk about the pacing of pricing this year?

What was the pricing in the first quarter?

Is the remainder of the year pricing a function more of product rollouts where you can take more pricing, like with the burgers, or do you plan it more discreetly and sort of layering pricing on that four corners model where you just price as you go through each market and find opportunities?

John, let me talk about your concept of barrier first.

We don't believe there are barriers based on our brand or our offering that would keep consumers from coming into our store.

The major barrier that we are all experiencing right now is what is going on in the economy and what is going on with gas prices and what is going on with jobs.

And all brands certainly are feeling kind of some of that effect.

As I mentioned earlier, the breakfast daypart has been growing and that is where I think the majority of our competitors that are showing some growth are experiencing that growth.

From the standpoint of our transactions, if you go back three or four years, we were certainly suffering with transaction losses based on the fact that what had happened with everything from our advertising to our core product line.

We have seen in 2010 significant improvement in those transaction trends, many of those transactions being positive.

In the first quarter of this year, as you know based on my previous comments, based on winter weather and some issues obviously in Canada, we saw our company-operated sales down about 0.9% and we saw transactions down about the same level.

And I think that was driven by the same factors.

As we go forward, as we look at 1% to 3% same-store sales growth this year, we fully expect that that growth will be a combination of transaction improvements and also selected price increases.

Speaking of price increases, let me address your question in both of the categories.

First of all, yes, we are introducing higher quality, fresher, Real products and in that regard we have the ability to price them at a level that is slightly above what we are pricing some of those products now.

Clearly that will allow us to maintain as much as possible our margins.

Our testing with these products has allowed us to have fair elasticity in these products because of their great quality and the demand.

But from the standpoint of what we have done and what we plan to do, clearly we are using our strategic pricing model to carefully look at all of our product line, based on geography, as to where we will be able to take price increases as we go forward.

We will do that selectively, based on what the data tells us.

We have explained a lengthy example of how we used it in 2010, specifically around the Jr.

Bacon Cheeseburger taking it up in some stores but not in other stores based on demographics and competition and other factors.

And so we will continue to be selective as we take price increases.

We know that we have some room to do it and we certainly have plans to do it as we go forward.

As I mentioned, same-store sales will be a combination of growing traffic and price increases, but we will do it in such a way, as I mentioned also in my prepared comments, that we don't suffer from traffic losses or share losses just for a short-term gain in sales, because we think that the long-term benefit of our core product improvements and how we will price this as we go forward to the consumer will allow us to continue to grow sales for the future.

I am sorry, what was the pricing in the first quarter, nothing?

No, no.

We took some price in the first quarter late in March.

We don't talk about the exact pricing, obviously, from a competitive standpoint.

Thank you.

Howard Penney, Hedgeye Risk Management.

Thanks very much.

Roland, I guess I generally basically agree with the direction that you are going, but if you would allow me just to push back a little bit.

It just sort of strikes me as everything -- you talked about breakfast and the new products that will be rolling out in the back half of the year.

Is that basically a defensive move that you are having to react to the fact that the industry has breakfast and now you are adding it?

A lot of your competitors have already improved their menus and upgraded it, and now you are having to upgrade your menu.

Is there something in what you are doing that we don't know or are not seeing that is an offensive move?

And I say that in light of sort of what McDonald's has been highlighting in the last couple days and the balance of this week, some of the new stores and how they are focusing on the dine-in business and another sort of offensive move.

So thank you.

Thanks, Howard.

I quite honestly see it somewhat differently than you do.

I see the actions that we are taking as very offensive from the standpoint of what we are doing to grow our sales.

Let's start with our core menu, which you have written about kind of extensively.

I can't find another competitor that has taken the actions that we have taken over the last year and we'll finish this year to improve almost every core product on our menu.

That is a huge undertaking, and I think that is something that will pay dividends over the long term and pay some significant benefits over the long term.

From a breakfast standpoint, certainly we have not participated in the breakfast daypart up until now, except for a failed launch attempt four or five years ago.

And I quite honestly think that that didn't succeed for a couple of reasons.

One, the products were not consistent with our brand positioning; and two, it wasn't rolled out in a careful thought-through methodology that would allow us to drive trial and awareness upfront so that consumers could come back in.

But from the standpoint of our products, quite honestly, I don't see our breakfast as defensive.

I see it as taking advantage of a $13 billion category that we currently don't participate in.

And quite honestly, I don't believe that any of our competitors have top-two box or attribute scores anywhere close to the quality of the products that we have and that I have shared with you today.

As I mentioned, I believe the trial and repeat numbers are based on the high quality of these products.

And certainly I think some of our competitors have gone out and eaten these products and have said in their own defensive way, wow, we better do something to our products or we are going to get share taken in a hurry.

And quite honestly, I don't think they are capable of doing it quick enough and having an entire line that is as high quality of the products as we currently have.

So that is why I think we are experiencing significant sales in our test markets of $150,000.

That is why I think they are going to grow.

And then also from an offensive standpoint if you take a look at our share gains, specifically in salads, that is pretty impressive.

We are selling more salads in kind of our little over 6000 stores than McDonald's is selling in their stores that are almost double those.

I think that is a pretty significant indicator that the consumer has voted for better quality, fresher kind of higher quality products.

Thank you.

Chris O'Cull, SunTrust Bank.

Good morning.

Roland, I was wondering what the Company has learned so far from the premium cheeseburger test, maybe in terms repeat usage, pricing, mix shift, and whether you need to make any additional changes before it's rolled out system-wide.

I think, Chris, our learnings so far has been very exciting in that, as we shared with you on our last call when we were tracking only several markets, our large hamburger sales were up -- someone will have to correct me -- about 38% or so, which is pretty exciting from the standpoint of consumers coming in and choosing this new sandwich.

In our test markets that we are rolling out we continue to see a significant improvement in large hamburger sales.

We don't see any negative feedback from the standpoint that the product is juicier and thicker.

It has melted cheese and a butter-toasted bun.

They are all positives.

In fact, what we are hearing from consumers, kind of some anecdotally and certainly some in the tests that we have done from a research standpoint, is that this hamburger line kind of is better than both In and Out and Five Guys, which is pretty exciting.

Which is why we are very excited about this launch this year and, quite honestly, would love to do it much earlier.

But to do it right, you need to do it in a thoughtful and disciplined way.

We wanted to make sure that we understood from an operations standpoint how this was going to work.

We have to adjust all of our grills because the beef is thicker.

We have to install bun toasters to toast the buns.

We have to train our customer service workers to be able to deliver this product in the same fast speed of service that Wendy's own -- as we have.

And so we are doing it in a systematic and thoughtful way, and we will have it in all of our stores later on this year.

Could you help us understand the potential of the new line?

And by that I mean what is Wendy's current share of the burger market, what was it at the peak?

And maybe what does a percentage point change in market share equate to in sales?

All great questions, Chris.

I can't tell you that off the top of my head.

I can tell you from our internal standpoint, even based on our current products, we believe that in the first quarter we now exceed Burger King in share of hamburgers even with less stores.

So we think we are making great progress across our system.

Certainly we can follow up on some of those details later on today.

Chris, we have all that detail, we just don't have it here right with us.

Okay.

Great, thanks, guys.

But certainly it is a large opportunity for us.

We are, first and foremost, a hamburger chain, as I mentioned earlier.

Phillip Juhan, BMO Capital Markets.

Hi, guys.

You mentioned in the past or you noted a 30% to 40% traffic lift for breakfast in test markets.

And I am just curious to know as you back away from discounting promotions in some of those test stores, how is that traffic trending?

How much of it are you keeping?

And maybe what is the offset to average check during this period?

Phillip, I don't remember exactly providing those numbers.

What I can tell you is this.

As I mentioned earlier, our sales are improving.

We are running from the standpoint of average annualized sales of about $150,000.

That continues to grow in each of our markets, kind of month to month.

I will say that we have significantly reduced couponing, as I mentioned earlier, and we have not seen our sales decline based on that.

And we have also begun to kind of, as I mentioned, manage our pricing.

In some cases we have taken our pricing down slightly because we have added a value menu or we have learned some information about what the consumer is willing to pay at the breakfast daypart.

But certainly those sales are driven by significant increased traffic in the morning daypart.

I mean, to give you a percentage it's a little silly because we have gone from zero to a pretty big number.

We could take that traffic and divide it into our overall restaurants, but I think probably what is as important is are our sales growing, can we maintain them, and can become -- can we generate profitable kind of EBITDA based on $150,000?

And the answer to all three of those is yes.

Okay.

Thanks, guys.

I think maybe Phillip what you were referencing is in our original test markets, if you take a look at where breakfast was a year or so ago and you take a look at where it is today with the brand-new menu that we have in place, the growth over what we were doing previously in breakfast sales versus where we are trending today is a little over 40%.

So I think that is the 40% number, which is also pretty encouraging because those restaurants already had breakfast.

It was in place.

I think it's an indicator that this new breakfast menu is a significant driver of our ability to go forward with this, because if there weren't a significant improvement in sales based on the new menu you would start to wonder if in fact this has the staying power and the growing power that we suggest.

But a 40% increase over the old menu is a pretty significant improvement.

All right.

Thanks, Roland.

Joscelyn MacKay, Morningstar.

Hi, guys.

Thanks so much for taking my call.

Had just a quick question; if you can quantify the effect on Wendy's of that inclement weather.

I know in your Q that you filed you were able to quantify the Canadian tax issue at just under $2 million.

Wondering more detail there.

When we talked last March we said that certainly the significant impact of weather was in the early part of the quarter and we said it was roughly about 1.5 points of same-store sales for that particular time frame.

We haven't quantified what that means in bottom-line EBITDA.

Okay.

And then just a quick follow-up, do you have any details on traffic and pricing and how that affected same-restaurant sales at Wendy's over the quarter?

For what period, Joscelyn?

For the first quarter.

Yes.

Sales, as you know, for company-owned stores in North America was down 0.9%.

Impacted obviously by the weather and also impacted by what I mentioned in my comments earlier, which was a very soft business in Canada based on an increased sales tax which raised our menu prices in a couple of provinces.

When you take out Canada we were close to flat in the US.

I think what is more important is in April we have now started trending positive and in the US we are a little over a point.

I also mentioned that transactions pretty much mirrored same-store sales in the first quarter for North America, down about 0.8.

Okay, thank you.

John Invankoe, JPMorgan.

This is (inaudible) on for John.

It seems like a good amount of the margin compression for the quarter was driven by investment in breakfast expense rather than solely commodity pressure.

I wanted to know if you could give us a sense for whether the 110 basis points is a fair assumption for each quarter for the rest of the year.

I am just trying to get a sense for kind of the pacing of the breakfast headwind and for how long you guys will experience it.

Thanks.

Clearly, as I mentioned earlier, in order to ensure that we see the breakfast market with awareness in trial we -- investment spend in both advertising and couponing.

You saw what that cost us in the first quarter.

I think the biggest impact will be in the first and the second quarter because starting in the third quarter we were rolling over what we had done last year and so the instrumentality is significantly less.

Certainly as we get into a more mature situation in our breakfast markets that begins to come down.

So I think you are going to see for the next quarter some continued investment as a comparison to year-over-year margins and then that will start to significantly be reduced in the third and fourth quarter.

Thanks.

Operator, we will take one more question, please.

Michael Kelter, Goldman Sachs.

I wanted to ask you a little more about Canada and what went on there.

I guess I am curious how much the sales tax raised your prices effectively in the market that would cause a negative 4.7% same-store sales decline, and maybe what that tells you about your elasticity to price and how that might impact the United States later in the year.

Mike, I can't tell you exactly how much it raised the price.

I can tell you that it was a significant value-added tax called HST that happened in a couple of provinces that is already baked in your menu price when the consumer comes in and looks up on your menu board.

We clearly understand that there is a real relationship between the pricing of your products and transactions as you go forward.

If you take a look at some of our competitors in Canada, they have also talked about the negative impact of this particular tax increase in Canada.

The good news is that we will roll over this relatively soon and so on that impact I think we will be a lot less measurable as we get into the later quarters of the year.

One of the reasons we have carefully talked about what we would do in pricing in the US as we go forward this year is because we understand that if you are not careful, if you are not strategic, it will have or could have a negative impact on transactions which ultimately might have a negative impact on market share.

So we are being cautious about that.

The Canadian market, as I think you are well aware of, is a market that is already much higher priced than the US based on what the commodities are there.

I think maybe this increase had a little bit more sensitivity to those Canadian consumers.

As an example, our My 99 value menu in the US is translated to CAD1.89 value menu in Canada, so there is a fair amount of nuances that go on there.

But clearly with Canada down almost 5% in the first quarter it had a measurable impact on our North American results.

I guess with that amount of elasticity I guess I am just trying to get my head around how the back half of the year might play out.

Because the first four months now you are below the 1% to 3% guidance range, and I am curious what gives you the confidence that the back half will turn around.

I know there are a lot of new products coming, but we just had a bunch of new products too, right, with the new salads and new fries.

So I just want to understand your level of confidence and what you think the biggest drivers will be.

We are very confident, first of all, that we will be able to meet our guidance of 1% to 3%.

We have begun to see the trends change in April, as I have mentioned, and as we have looked at early May that trend is continuing to improve.

We have very strong product introductions.

Currently we are going into the salads.

We are going into additional value.

I don't really want to get into too much of the third and fourth quarter, other than what I had told you, for competitive reasons.

But clearly the last two core product improvements of our new hamburger line and our chicken line are going to have a significant impact on our ability to grow sales.

We think that those will be a combination of transaction improvements and also price increases that we will take selectively.

And while we were confident about this a week ago, a little more confident about it as of the last couple of days as we have seen the forecast of gas prices starting to come down which will also have a positive impact on our sales going forward.

So I guess I would leave you with the comment that we are very confident that we are going to be able to significantly improve our sales trends so that we can continue to meet our guidance of 1% to 3% for the year.

Thank you very much.

You are welcome.

Thank you all for participating today.

I would just like to close by leaving you with a few thoughts.

First, as we have mentioned a couple of times, 2011 is a transition year for us.

We will be working hard to complete the strategic alternatives process for Arby's and do that as quickly as possible.

As I have also mentioned, a sale of Arby's would clearly allow us to focus all of our resources on growing the Wendy's brand which we think will be in the best interest of our shareholders.

Second, while we have lowered 2010 guidance to reflect commodity increases, we are -- continue to be very excited and optimistic about our Wendy's growth initiatives that I shared with you today.

We will continue to focus on our Real brand positioning which we think really differentiates us from our competitors.

We will ensure all our products provide superior quality, freshness, and taste.

We are improving our core menu as I have talked about extensively today.

We have already kind of revamped value salads and fries.

We are growing share in each of these, and we have got some exciting new products starting with some core product improvements later this year with our new cheeseburger line and our gold chicken line.

We are expanding breakfast.

We are growing sales.

We are meeting our expectations of $150,000 AUV target and we are on track to open or have 1,000 stores serving breakfast by the end of this year.

We did talk about modernizing our facilities.

We have four new designs which we are very excited about.

Not only are the contemporary and inviting from the outside, but the changes we are making to the inside are very significant from the standpoint of relaying to the consumer why Wendy's is different, why our food is fresh and higher quality, which is certainly in line with our Real brand positioning.

And as you know, we continue to work very aggressively on expanding our global footprint.

We have 350 restaurants internationally today.

We have another 700 commitments.

When those are built that will be a total of 1,000 stores and we have continued to work on a joint venture opportunity in both China and Brazil.

Finally, as I mentioned, we are excited about the future of the brand for all the reasons I have relayed and continue to think that we can deliver 10% to 15% average annual EBITDA growth beginning in 2012.

Thank you so much for your time and attention today.

We will be looking to talking to you today and tomorrow, over the next couple of days to answer the remainder of your questions.

Thank you for joining today's conference call.

You may now disconnect.