Wendy's Co (WEN) 2011 Q2 法說會逐字稿

Good morning, everyone, and welcome to the second-quarter 2011 conference call for The Wendy's Company.

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 Mr.

John Barker.

You may begin, sir.

Thanks and good morning, everybody.

Earlier today we issued our second-quarter 2011 earnings release and we filed our Form 10-Q.

The agenda for today's conference call and webcast will begin with an introduction from our President and CEO, Roland Smith, who will discuss recent events and provide highlights about the second quarter.

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

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

Afterwards we will open up the lines for questions.

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

You can find it on our investor relations page on our corporate website, which is www.aboutwendys.com.

For those of you who are listening by phone today, make sure you select the appropriate webcast player option from our website and that will ensure that you can sync up with the slides along with our 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 measures such as earnings before interest, taxes, depreciation, and amortization.

Investors should refer to the reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measure.

Not let me turn the call over to Roland.

Thanks, John, and good morning, everyone.

Before I review the second-quarter results, let me give you a brief update on some recent developments.

As you know, we completed the sale of Arby's to Roark Capital Group effective July 4, 2011.

Following the sale of Arby's, we changed the corporation's name to The Wendy's Company and all of our human and financial capital will be focused on growing Wendy's.

However, there will be a transition period.

Based on the transition services agreement with Arby's, we will provide and be reimbursed for support services for 90 days with 30-day extensions available to Arby's through the end of the year.

We also recently announced plans to relocate our corporate headquarters to Dublin, Ohio.

The state of Ohio and city of Dublin have offered significant long-term incentives to support this move and renovate our current facility in Dublin.

Over the next two years, we are planning to transform the Dublin facility into a modern corporate office with significant upgrades to the main entrance, offices, and common areas throughout the facility as well as expanded meeting space for employees and franchisees.

We will maintain our Atlanta office but its size will be reduced by approximately 50%.

Our Atlanta-based employees will continue to provide support services for the Wendy's brand and our international operations will also remain headquartered in Atlanta.

In conjunction with this Arby's sale and our Company's name change, we also launched a new corporate website, aboutwendys.com, which we hope you have had a chance to visit.

Now I would like to review our second-quarter results.

In the second quarter, we generated revenue growth of 2.5% to $622 million.

This reflects an increase in North America Company-owned same-store sales of 2.3% and importantly this was driven by an almost 1% increase in transactions.

Adjusted EBITDA for the second quarter was $89.4 million, which met our expectations.

Compared to last year, these results were negatively impacted by significant commodity increases which affected the entire restaurant industry 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, upgrading our core menu offerings, and introducing exciting new products.

I will provide a more detailed update about the initiatives we expect to drive strong sales later on the call but first, I would like to share some additional details about the second-quarter results.

As I mentioned, North America Company-owned same-store sales increased 2.3%.

This sales increase was driven by a 1.4% increase in average check and a 0.9% increase in transactions.

Our franchisee same-store sales also increased 2.3% during the quarter.

As you can see on this slide, in April, we promoted our natural cut fries with sea salt.

In a national taste test this year, 56% of consumers 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 continue to pay dividends over the next several years.

In May, depending on the market, we promoted the bacon mushroom melt hamburger, our flavor-dipped chicken sandwiches, and our My99 Everyday Value Menu.

And in June, we introduced our new berry almond chicken salad and wild berry tea.

The seasonal salad features 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.

Wendy's Company restaurant margin was 13.9% for the second quarter, reflecting a 250 basis point decrease from a year ago.

This year-over-year difference was primarily due to 180 basis points of higher commodity costs mainly driven by significant increases in beef and 60 basis points of incremental advertising to introduce Wendy's new breakfast in additional markets.

Our competitors in the United States are also experiencing similar margin pressure due to increased commodity costs even in an environment where they have taken price increases.

Now I will turn the call over to Steve Hare to take you through our financial results and our outlook.

Steve?

Thanks, Roland, and good morning.

Before we dive into the financial results, I want to discuss some changes this quarter in the presentation of our financial information as a result of the Arby's sale.

Because the sale of Arby's occurred on the first day of the fiscal third quarter, only certain components of the transaction are reflected in our second-quarter financial statements.

For the income statement, Arby's results are accounted for as discontinued operations for all periods presented.

General and administrative costs that directly relate to Arby's are included in discontinued operations.

Shared G&A costs that indirectly relate to Arby's are included in G&A for continuing operations.

For the balance sheet, Arby's assets and liabilities as of the end of the quarter are summarized and reclassified as current and noncurrent assets and liabilities of discontinued operations.

2010 year-end balances have not been reclassified.

For the cash flow statement, Arby's is included and reported in all line items.

Now let's discuss the quarter's results.

Total revenues increased by $15.1 million or 2.5% versus the prior year.

Revenue increases were primarily a result of Wendy's same-store sales increases.

Our sales have historically included kids meal promotion items sold to franchisees.

In the first quarter, Wendy's purchasing cooperative, QSCC, began managing the operation for kid's meal promotion items.

On an annual basis, this change will reduce both our sales and cost by approximately $30 million and is therefore profit neutral.

Adjusted EBITDA of $89.4 million met our expectations but decreased 10% as compared to the 2010 second quarter.

As Roland mentioned, this year-over-year decrease was primarily a result of higher commodity cost as well as incremental advertising to introduce Wendy's new breakfast in additional markets.

Our income from continuing operations for the second quarter was $11.4 million or $0.03 per share compared to the prior year income from continuing operations of $5.4 million or $0.02 per share and our reported net income, which includes discontinued operations for the second quarter was $11.3 million or $0.03 per share compared to the prior year net income of $10.7 million or $0.03 per share.

Now I would like to talk about special items affecting this quarter's results.

Special items in the second quarter of 2011 which impacted income from continuing operations totaled $7.6 million after-tax or $0.02 per share.

These special items included the shared G&A expense indirectly related to Arby's as well as retention program and other transaction-related costs such as executive severance and professional fees.

Special items also included impairment charges related to previously impaired Wendy's restaurants.

Now let's take a closer look at our G&A expense.

Slide 14 shows an adjusted G&A expense that we believe better reflects an ongoing level of G&A for Wendy's.

Starting with our G&A as reported, we adjust for the special items that affect G&A in both periods to calculate an adjusted G&A.

We exclude indirect G&A related to Arby's because we will transfer to Arby's or eliminate these expenses as we right size our cost structure to support a single brand company.

This morning we filed a Form 8-K which contained our earnings release as well as a supplemental schedule.

The supplemental schedule gives you some historical information such as adjusted EBITDA and adjusted G&A expense for both 2010 and 2011 so that you can see the full effect of removing Arby's from our historical results.

This schedule will also be posted on our website.

Now let's discuss cash flow.

Cash flow from operations was $132.6 million for the first half of 2011.

Capital expenditures were $56 million and were related primarily to restaurant remodels, maintenance CapEx, and new restaurants.

This amount includes approximately $9 million for Arby's.

We still anticipate that our capital expenditures for the full year to support the Wendy's brand will be approximately $145 million.

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

We generated $76.6 million of positive free cash flow in the first half of 2011.

We restarted our stock repurchase program and spent $37.4 million on repurchases settled during the quarter.

And we returned $16.8 million of capital to our stockholders in cash dividends during the first half.

In addition, we repaid $34.8 million of our long-term debt.

Our net cash used was $13 million and at quarter end, we had a total cash balance of approximately $500 million including cash from discontinued operations.

Next I will discuss some programs we have recently launched to assist our franchisees with key initiatives for the brand.

We have many strategic initiatives in which to invest our cash, including toasters and grill enhancements for the new cheeseburger line, menu boards and kitchen equipment for the breakfast expansion, restaurant reimaging as we focus on modernizing our facilities and technology improvements such as the point-of-sale systems and that will help our restaurants operate more efficiently.

We are also planning to target certain underpenetrated North American markets for new restaurant development and we intend to continue expanding our international presence through potential company development and joint ventures.

For the fourth-quarter launch of our new Dave's Hot 'N Juicy cheeseburger line, all restaurants require new toasters as well as grill enhancements totaling approximately $20,000 per restaurant.

We are offering to subsidize a reduced interest rate and provide loan guarantees to help our franchisees fund their capital investment for the cheeseburger launch.

In addition, we are offering to provide loans to franchisees for the purchase and installation of equipment to support our new breakfast program.

The cost per restaurant is approximately $25,000.

This program is available to franchisees who are early adopters of the new breakfast.

To help drive trial and awareness of the new breakfast, we are also abating a portion of the royalties from their breakfast sales to allow franchisees to fund local advertising and promotions for breakfast.

In addition to these programs supporting new product initiatives, we are also offering programs for new restaurant development in the US and Canada.

In the US, we are offering reduced development fees and royalties for the first two years after opening.

And in Canada, we are offering lease guarantees for franchise financing of new restaurants.

Now let's look at our debt capitalization.

At the end of the second quarter, our total debt was $1.4 billion excluding Arby's debt, which is reported in discontinued operations.

Because we did not receive the cash proceeds from the sale of Arby's until the third quarter, the pro forma column reflects the additional cash received from the sale of Arby's net of transaction fees to better present the positive impact of the sale of Arby's on Wendy's financial leverage.

Based on our trailing 12 month adjusted EBITDA, which excludes Arby's, our current net debt multiple is 2.3 times on a pro forma basis.

Compared to year-end 2010, which still included Arby's, our net debt multiple was 2.7 times.

As a result, the effect of the sale improved our leverage by approximately half a turn.

Next I would like to give an update on our stock repurchase program and dividends.

We resumed our stock repurchases during the second quarter.

Year-to-date through August 5, 2011, we have purchased 24 million shares for $122 million at an average price of $5.18 per share.

Of our $250 million authorization for 2011, we had $128 million remaining as of August 5.

Since our repurchase program began in 2009, we have repurchased 76 million shares through August 5 for approximately $367 million at an average price of $4.84 per share.

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

Next I would like to discuss our outlook for 2011.

We are reaffirming our 2011 adjusted EBITDA guidance to be in the $330 million to $340 million range.

This outlook only includes continuing operations and excludes items such as Arby's indirect corporate overhead, retention program, and other transaction-related costs and SSG purchasing cooperative expenses.

Our 2011 outlook includes the following assumptions, same-store sales growth of 1% to 3% at Wendy's North America Company-operated restaurants.

Wendy's Company-operated restaurant margin is now anticipated to be 50 to 100 basis points lower than prior year primarily due to higher commodity costs.

Capital expenditures for the Wendy's brand of approximately $145 and Wendy's North America unit development of approximately 20 Company stores and 45 franchise stores plus approximately 40 international franchise stores.

Now let me turn the call back to Rowland.

Thank you, Steve.

As I've previously shared with you, we are focused on seven key growth initiatives delivering on Wendy's real brand positioning by continuing to improve our core menu and ensuring all of our products provide superior quality, freshness, and taste, and by introducing exciting new products.

Expanding breakfast, which we believe will significantly increase sales and profitability; continuing to improve our customer experience with a focus on operational excellence; modernizing our facilities with contemporary new designs; and continuing to increase our global footprint with expansion in North America and international markets.

I would like to update you on our progress on each of these initiatives starting with our brand positioning and product introductions.

As we have discussed before, 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 in order to differentiate Wendy's from our competitors.

We believe this positions us with the quality of fast casual and the convenience and affordability of QSR.

We have already made significant improvements to three of our core menu categories -- value, with the introduction of our My99 Value Menu; salads, with the introduction of our new premium entree salads; and fries, with the introduction of natural cut fries with sea salt.

Some of our recent product introductions include the berry almond chicken salad in June and the berry frosty parfait and berry frosty shake which we introduced in July.

In August, we added two new items to our My99 Everyday Value Menu, the Monterey ranch crispy chicken sandwich and a new crispy chicken Caesar wrap.

We are seeing the positive results in same-store sales and transactions from these recent product introductions and core menu improvements.

July same-store sales were up 1.7% and we expect positive trends to continue in the back half of the year.

Additionally, we are expanding our beverage and snack offerings to focus on new items that can generate both incremental transactions and higher margins.

We are currently offering a caramel apple frosty parfait with real Ghirardelli caramel sauce, all-natural brown sugar granola, and fresh apples.

We also recently introduced wild berry tea and all-natural lemonade and we plan to offer a premium iced coffee as part of our updated coffee program which I will discuss with you in a moment.

As we shared with you before, we are also taking steps to improve another core area of our menu, chicken.

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

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

We are currently testing a new bruschetta chicken sandwich, which features our premium chicken fillet with diced tomatoes, chopped basil, and a balsamic glaze.

And early next year, we expect to introduce a new line of chicken sandwiches which we refer to as our gold chicken line.

However, our most important product introduction is coming this October when we will roll out our new line of Dave's Hot 'N Juicy cheeseburgers.

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.

While we have been gaining share in value, fries, and salads, our biggest opportunity is to build share in premium hamburgers.

In the markets where we have tested this new cheeseburger line, we have seen a 2% to 3% increase in same-store sales that we believe is attributable to an increase in premium hamburger sales.

Accordingly, our system is very optimistic about this national launch.

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

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

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 and we are maintaining targeted sales levels even as we reduce our couponing.

We have also recently begun to test some exciting new breakfast items.

As I mentioned earlier, we are testing a new coffee program.

This test features a new premium coffee blended especially for our restaurants that we have branded Redhead Roasters.

This program includes grinding coffee beans in store which provides excellent aroma and freshness skews.

A great coffee program is critical to any part of a successful breakfast menu and we believe Redhead Roasters will be a great complement to our high-quality breakfast menu.

We are also planning to test new bakery products and other regional items such as muffins, sweet rolls, and bagels.

Now let's talk about the breakfast 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, and we currently have approximately 300 restaurants serving the new breakfast menu.

Over the remainder of this year, we will convert about 300 restaurants from our old menu to our new menu and continue to expand our new breakfast menu into additional markets.

One of the markets that we will begin to convert later this quarter is Manhattan including our high-profile stores on West 34th Street and in Rockefeller Center.

By the end of 2011, we plan to have our new Wendy's breakfast menu in about 1000 stores which will include approximately 600 franchised locations.

Next I would like to provide a brief update on our efforts to improve operations and the customer experience.

We conduct almost 13,000 unannounced in-depth operational assessments annually in our restaurants which results in each restaurant receiving a score and letter grade.

Well operated restaurants, those that are rated A or B, produce the highest sales and profits.

As you can see in this slide, in 2008, nearly 25% of our North America Company and franchise restaurants were rated an F and only 33% were rated A or B.

Today the number of F stores is less than 1% and A and B stores have more than doubled to almost 83%.

We believe this improvement in operational excellence will further help drive increases in sales and profits.

We were pleased to receive excellent news recently about the progress we are making on delivering a great customer experience at Wendy's.

A recent study by the American Customer Satisfaction Index found Wendy's to be the highest rated QSR hamburger chain among the big three.

Our score of 77 improved 4 points since 2008.

We will continue to improve our operations and customer experience and while we have more work to do, studies like this illustrate the progress we are making on operations.

Now I would like to give you an update on our remodel program.

This slide shows renderings of the four remodel designs that we are testing.

They incorporate a more contemporary look and upgraded finishes that we believe will be more inviting to our customers.

We are building these designs in three separate markets and will analyze customer reaction, sales, and return on investment.

We are pleased to report that our first two remodels recently opened in Columbus, Ohio.

The exterior includes large windows to brighten the dining room, a mixture of natural materials and attractive landscaping, outdoor seating on a patio, and digital menu boards in the drive-through.

The interior includes a variety of seating in the dining room combining booths, tables, counters, and bar stools, a Wi-Fi bar, and comfortable lounge seating.

The interior is decorated in natural finishes such as real wood and stone and digital menu boards feature product photography and video.

Customer response has been very positive and sales for the first two weeks were up over 50%.

While we realize this is not a trend, and we don't expect this to be replicated at every store, is a great start.

Finally, I would like to update you on our international development.

We are very proud of what we have accomplished since the fourth quarter of 2008 in the area of international development as we continue to expand our global footprint.

We have signed five long-term development agreements as well as a joint venture agreement with Higa Industries in Japan and we plan to open our first Wendy's in Tokyo later this year.

We currently have 333 franchise restaurants outside of North America and more than 700 future restaurant commitments totaling over 1000 restaurants.

We are also actively pursuing JV opportunities in China and Brazil.

We opened our first two restaurants in Russia this quarter and expect to open six more this year.

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

In closing, we continue to make excellent progress on our Wendy's growth initiatives and we believe these initiatives will help us deliver on our long-term goal of average annual EBITDA growth of 10% to 15% in 2012 and beyond.

Now I will turn it back over to John.

Thanks, Roland.

Now we'll get ready to open up the line for Q&A.

We have a large group of participants on the call today.

We ask that you limit your questions if you can.

We have a long queue and we will get you back in.

Operator, if you could please open up the line for questions.

(Operator Instructions).

Joe Buckley, Bank of America Merrill Lynch.

Thank you, just a question on the $330 million, $340 million of pro forma EBITDA.

It read like you lowered your margin expectations a bit for Wendy's this year but you maintain that $330 million to $340 million number, so I'm curious what else changed to kind of keep you in that range?

And then just a clarification if that's the base you want us to think about for 2012 and would you expect to grow that base by 10% to 15% in 2012, is that kind of your message?

Good morning, Joe.

Yes, you are correct.

We maintain our outlook of $330 million to $340 million of EBITDA this year.

We took a careful look at everything from pricing to mix to sales to transactions to margins and G&A and for the second half, we are kind of very excited about what we think these new product introductions are going to be able to provide us.

So that gives us the confidence that our EBITDA outlook will remain in the $330 million to $340 million range.

You are correct, that is the base that we would start the expectation of a 10% to 15% growth for 2012 and beyond.

Thank you.

Michael Gallo, CL King.

My question just on the pricing.

Obviously you are starting to get some pricing.

You've been able to maintain positive transaction growth.

It seems that pricing within the entire industry is starting to move up.

And I was wondering as you get to the third quarter and beyond, at what point we should start to see less of an impact or better passing price through of some of the obvious commodity cost pressures.

Thank you.

Yes, good morning, Michael.

Certainly we are all experiencing the commodity cost pressures and each brand is obviously making their own decisions as to how they want to react to that.

Quite honestly, we probably could have taken more price in the second quarter and that would have positively impacted our margins, but if you remember our discussion in May, the last time we had a chance to talk, we said that we had a strategic pricing model that we were very comfortable with that allowed us to kind of price throughout the product range and throughout the geography of our system, but that we were going to be very selective and very careful about taking price increases to ensure that we did not trade price for transactions.

I am very pleased to report as I spoke about earlier, that transactions for the second quarter were up almost 1% and so the benefit of having positive sales and positive transactions I think gives us an indication that all of our programs are beginning to take hold and we are starting to see more customers in the store and our check was up slightly also, so we are also seeing them spend more money.

But, Michael, we will continue to be very careful about what we expect from a pricing standpoint and we will not strategically trade off a benefit for just one quarter for the benefit of the significant trend that we think we are seeing in consumers kind of participating in our brand more and more often.

It sounds like you feel like you still have room if need be.

Is that fair?

Yes, we think we certainly have some room and we look at this on a weekly and certainly a monthly basis, Michael.

But again depending on what's happening with the economy and what we think kind of the benefit of our product promotions are, we will take those pricings carefully so that we don't erode what has been the first time in a very long time where we can talk about positive transactions for the year.

All right, thanks very much.

Jason West, Deutsche Bank.

Thanks, just wondering, you guys had a good comp in the quarter and it sounds like you're pretty upbeat on the second half, but July did slow a little bit.

Just wondering if you had any color in terms of why July was a little softer and the confidence that you have that things will pick back up.

Good morning, Jason.

We continue to be very confident about the third and the fourth quarters as I've mentioned not only in this call but in our previous call.

We think we have an excellent line of new product introductions, certainly the launch of Dave's Hot 'N Juicy is kind of the key that we are focusing on now.

We also have a couple of introductions that we are excited about that we are not ready to talk about at this time for competitive reasons.

July was up 1.7%.

Transactions were still positive.

It was a month where quite honestly we were not advertising a center of the plate offering.

We were talking about some different dessert items and what have you.

And so that has given us no indication to believe that in fact the expectation of the third and the fourth quarter same-store sales increases are in jeopardy.

Okay, thank you.

John Glass, Morgan Stanley.

Thanks, two if I could.

First is on the breakfast mix.

You are talking about the 10% mix in sales.

I just want to clarify so we understand as they fold in in a greater number, are you actually seeing a 10% lift in sales to those restaurants?

Is it incremental or is the mix 10% and consumers are trading a breakfast occasion for a lunch?

So could you just clarify what you are actually seeing in those test markets in terms of the breakfast?

Sure, John, I will answer that one and then if you have one more, we will take that.

Clearly we are seeing an incremental 10% and in some cases slightly more than that.

Okay, in my experience that's unusual, so that's terrific.

On top of that, you talked about a number of franchisee programs, if you will, financing programs, some royalty abatements.

Can you maybe just provide why that was the case that you needed to do that?

Did you reach an agreement with large franchisee groups that if you were to provide those programs they would go ahead with launches of certain products, whether it's agreeing to do breakfast or agreeing to do the cheeseburger, whatever it was.

Is there any P&L impact that is of note because of those programs?

Let me start off with the first part of your question, John.

Having been around the franchise industry for years and years, these are not unusual programs.

Part of our responsibility as a franchisor is to ensure that we strategically provide the direction for the brand and as we decide how we are going to execute that strategy, go out and verify through testing different programs, different products, different ideas that actually will benefit us and our franchisees in the marketplace.

Because this is a heavily franchised system, although we do have 1400 or so Company stores, they are not just all in individual markets.

We need franchisees to participate with us in tests so that we can have a complete market participating.

And in that regard, we think it's only reasonable and fair that we assume some of the risk on some of these tests because not every test works.

And so this is a very normal program.

It's a program that encourages our franchisees to participate but not something that we think that we would have to do for the benefit of the idea.

At the end of the day as you know, these ideas will either be accepted or not accepted by our system based on the results that they produce and that's why we provide these incentives typically to the early adopters as we go and we test these programs.

We just wanted to give you a sense today of some of the things that we are in fact doing to ensure that we have a continued line of items coming out of our test markets so that we have a strong calendar.

From a P&L standpoint, I will turn that over to Steve.

John, in terms of the P&L impact, we do not anticipate these programs to have a significant financial impact.

They would run through our G&A expense as any franchise incentive program would.

But what we are looking at is really I think the driver for this program from a financial standpoint is just to make sure that our franchisees have access to financing sources for these programs.

I think there's a high level of excitement around these programs that we just wanted to make sure that that obstacle sometimes even in today's market where availability of financing to especially the smaller franchisees is spotty.

So we wanted to make sure that financing was available to them.

Jeffrey Bernstein, Barclays Capital.

Great, thank you.

Two questions as well.

The first one kind of continuing the breakfast focus.

I know you reiterated 1000 units by the end of this year and it seems like the sales component is there and you are getting the lift that you promised or at least that lift.

I'm just wondering if you could talk about the breakeven component of it, whether that component has been reduced or any kind of profit color on breakfast versus the other dayparts?

And whether you are getting -- whether there's a theme in terms of any kind of franchisee pushback if there is any?

Or how you think 2012 rollout will progress from the 1000 units at the end of this year?

And then I had a follow-up.

Okay.

Well, let me first Jeffrey, address your earlier questions.

I will reiterate that we are very pleased with the results and the customer reaction of our breakfast program to date.

The products are fantastic.

Many of you have had a chance to taste those at our investor day earlier this year and I have also heard from some of you that you've been able to actually participate in the market, which is a great thing.

And for those of you that are based in New York, later on this quarter you are going to be able to go to a couple of the stores right down there in Manhattan and kind of see it, touch it, eat it kind of yourselves.

So again, we are excited and we are encouraged by the results that we are seeing to date.

I will also reiterate that our test market average is $150,000 of annualized sales on an annualized basis.

And to get specific to your question, here is what really we expect from breakfast as we kind of look to taking this national.

We believe based on what we know so far that EBITDA will be accretive at $150,000 of sales, which is our initial target, and that margins will be accretive at a little over $200,000 of sales, which we think we can reach over a period of time based on the quality of the products, some of our test market results, and some of the new items that I mentioned today that we are continuing to test like Redhead Roasters.

And some of the bakery items and some of the regional items that we know we will need as we expand into different geographies like bagels in the Northeast and tortillas kind of in the Southwest.

So that's what we are expecting from breakfast as we go forward.

Is there any franchise push back or do you think 2012 we will ramp up meaningfully from 1000 in 2011?

I would say that the overall perception of breakfast in the franchise community is positive.

We clearly need that positive perception to get to our 1000 restaurants because I mentioned earlier, of those 1000, fully 600 will be franchise restaurants.

The franchisees clearly intellectually understand that breakfast is a growing daypart in the QSR business, that we have not participated in that, and that's a big opportunity for us.

And also as we get into breakfast, it expands the ability for us to get into other dayparts like 24 hours, which some of our competitors have done significant kind of openings in.

And we don't get to participate in at this point.

Clearly like any franchise system, they want to see a combination of what it costs to get into the daypart and what that return is and so there are some franchisees that are skeptical clearly, but that is not unusual.

And that is why as I mentioned earlier, our job as the franchisor is to vet and prove that these ideas are accretive to kind of both sales and profits in the long term.

What I have promised our franchisees as a matter of fact as I stood up and talked to them in September of 2008, when they were very unhappy with the concept of breakfast because obviously the previous breakfast program was ill-conceived, I made a commitment at that point which hasn't changed.

Which is I will not require you to put into breakfast until I can prove to you that breakfast is going to be accretive to your sales and profits, and we believe that that is exactly what these 1000 stores are going to show.

And that we are going to get our system behind us and be participants in the breakfast daypart in the not too distant future.

Okay.

Then just, Steve, should we expect with that $600 million in cash I guess the pro forma after Arby's other than the organic growth, seems like you finally started the repurchase with $120 million-some-odd this quarter.

Should we assume that that's the first use of cash beyond that organic growth and therefore use up that authorization in the near term and is that the priority from the excess cash position?

Jeffery, the priority for us in terms of using that cash that's on the balance sheet is to go into these reinvestments into the Wendy's brand.

So I would say, as Roland talked about, I think we're looking at obviously a significant remodel program based on these new prototypes that are out there so I think investing in that presents some very interesting opportunities for return on that investment.

I think as we talked about putting in capital to support these new marketing initiatives around breakfast, the gold hamburger, including some support of franchisees as needed, are good investments for us to make.

The international opportunities to the extent they go towards Company development or joint ventures, I think that's an attractive use of our capital as well.

And again, new units.

We will open about 20 new Company stores this year.

Our track record on new units has been quite favorable.

And again, I would be hopeful that we would be able to accelerate that pace a little bit depending on market conditions.

So those are the priorities.

It's first on the operational side and then to the extent that as we generate additional positive cash flow, we have some additional cash resources, then I would expect that opportunistically the stock buyback program is something that still is of interest in maintaining our cash dividend.

Thank you.

Sara Senatore, Sanford Bernstein.

Thank you.

Just a quick question since you've talked a lot about the existing stores and the programs that you are doing.

You mentioned growing an underdeveloped North American market.

I think in the past you talked about unit growth, one of the challenges being that real estate in some of the markets in which you are not currently penetrated is higher and you need more unit volumes.

I think that was one of the explanations for possible multi-branding with Arby's.

Can you just talk a little bit about whether or not that hurdle is still there and whether maybe the inclusion of breakfast, is that what you're counting on to allow you to get into some of these other markets?

Good morning, Sara.

I think you've probably hit the nail on the head.

Certainly in order to expand rapidly in the United States, we are going to need to have a return on that investment that makes sense for us.

Clearly we have underpenetrated markets.

I would say most of our large urban kind of centers, our competitors have more units than we do and so we're looking at those as possible opportunities to obviously expand our brand.

And as we expand our brand in gross sales obviously there's kind of a multiplying effect that it helps overall brand awareness kind of increase significantly.

But clearly as we look at those returns, two of the things that we think are going to be instrumental in kind of improving our same-store sales or AUVs so that those returns are strong are breakfast and also the renovation program that we mentioned earlier.

We are very excited about the new designs.

We know that in order for your customer experience to be as positive as it needs to be, especially for us serving kind of a high-quality food that consumers are coming in to participate with, we're going to need to have a physical plant that is equal to that.

We are very excited about the new designs.

I mentioned we opened two in Columbus, Ohio, the Dublin, Ohio area over the last couple of weeks.

Our sales have quite honestly quite surprised us.

The consumers love the design.

They love the interior and while I mention that's not a trend or something we think will replicate in every store, we think we have really hit upon something from the standpoint of putting a great new contemporary design along with our great new menu which we've almost totally revamped together which are going to grow sales.

When you add breakfast on top of that, obviously it starts to get us into an AUV area that is pretty significant and allows us we believe to provide return on investment that really makes sense from the standpoint of ongoing development in North America.

I might add that kind of the current economic situation which has certainly kind of allowed real estate prices not to climb to in fact in many cases, decline is certainly not hurting that overall kind of return on investment.

Great, thank you.

Can I just ask one other follow-up and that's actually on G&A.

Obviously you are going to get some -- the service contract for which you will be reimbursed.

Is it fair to assume that not all of that, not all of what you call that is sort of one-time and allocated Arby's G&A will be reimbursed such that you still have to figure out ways to cut some of the things that may have been shared costs before?

Sera, this is Steve.

I think that's the right way to characterize it.

I think the transition services agreement which will run for a minimum of 90 days and parts of that may run to year-end, will be a substantially reimbursed for the costs of that effort.

But then I think when the dust settles and we are completed with the transition services, I think we'll have to look again at our cost structure and make some cuts I think to get down to the run rate of G&A that we think is appropriate for a single brand company.

Thank you.

Philip Juhan, BMO Capital Markets.

I just want to revisit the capital allocation question and particularly share repurchase.

You mentioned you are improving leverage metrics but your fixed-charge coverage remains fairly thin and you are below investment grade credit metrics.

And I wonder if you could just sort of revisit the capital allocation decision in the context of a weakening global economy today and sort of frame your comments in that respect?

Thank you.

Philip, I think from a capital structure standpoint, I think we are quite comfortable with our current leverage.

As I said, the net debt multiple with the proceeds that we received on the Arby's sales were down to a 2.2 net debt multiple and I think that gives us substantial flexibility I think to do what we need to do in terms of growing the Wendy's brand.

I think at this point with the cash on the balance sheet that we have, the fact that we don't have any significant debt maturities in the next couple years allows us really to look aggressively at what we can do to grow this business.

As you mentioned, obviously the economy is an overall concern for us as we look at what kinds of returns we will get on this investment.

But I think the growth initiatives that Rowland has talked about I am very comfortable where we sit today that we have the capital available today to make that happen.

And that really looks at some of these key marketing initiatives where there's a capital component to it.

I think the remodel program is a very exciting opportunity for us and I'm interested to see the kinds of returns we get from these prototype that we are testing.

And I think we are fully prepared to reinvest in that program.

As I said, new units is another opportunity for us and I think based on the results we've seen so far and with the idea that we can add and improve the unit economics with a successful breakfast program, I would look forward into investing more money into the unit growth in North America.

And as we talked about, international as well.

So I think we're in good shape to handle those programs and to the extent we have excess liquidity above that, I think continuing to be opportunistic in terms of stock buyback is still something that makes sense for us.

We have a $250 million program authorized and so we've used up about half of that.

John Ivankoe, JPMorgan.

Thanks, a couple of short ones I think.

Firstly, in terms of your notes that are outstanding I think the approximate $500 million, do you have any point of view on beginning to repay some of that?

I think you can do 35% now but it can be up to 100% if my notes are right in July of 2012 just in terms of reducing your book interest expense.

John, this is Steve.

We have got an opportunity there I think to look at a refinancing at some point in time.

There's a call on that which begins next year.

Obviously with the volatility in the markets, we are going to have to look at that.

But we will begin to look at alternatives I think and if something makes sense from a balance sheet standpoint to refinance that either next year or earlier, we would certainly be prepared to do that.

So I think that is a possible opportunity for us.

But the next thing as I just said though, we are sitting in a very flexible position today in terms of financing and available cash to reinvest in the business.

But I think on top of that, I think a refinancing opportunity is something that we certainly will be evaluating.

Okay.

And in terms of -- this will be my last one.

In terms of the guidance for 2012, how much -- I guess I will figure this out in a minute I guess -- but how much restaurant margin expansion are you assuming in that number?

And this restaurant margin expansion, do you necessitate a significantly easing commodity environment from where we are now?

John, this is Rowland.

Obviously as we look to 2012 and we look at significant EBITDA growth, it is a combination of all the factors obviously that drives that from same-store sales to margin expansion, as you mentioned, to what we ultimately spend from a G&A standpoint.

And we are beginning to look right now at what we think is going to happen from a commodity standpoint in 2012.

And while we are not prepared yet to kind of give you guidance on that, we believe that the rate of commodity increase that we have seen this year will begin to decline in next year so we do certainly think that there is opportunity for margin expansion in 2012 and beyond, a combination of what happens in commodities and also as we grow sales and kind of can take advantage of expanding margins through kind of sales growth.

So as we put together our outlook for 2012, we will come back to you with a much more clear expectation of what we expect from both same-store sales and margin expansion.

Thank you.

Mitch Speiser, Buckingham Research.

Great.

Thanks very much.

On the comps results for the second quarter, I believe the breakfast test is within the comps results and just because it is -- can you give us a sense, is it about 10% of the Company stores the breakfast and maybe -- can you maybe strip out what the breakfast comp was or how much breakfast contributed to the comps growth in the second quarter?

Thanks.

Mitch, I don't have a number to break out for you but it's a relatively small component of that 2.3.

Okay, thanks.

Joscelyn MacKay, Morningstar.

Thanks for taking my call.

I just had a quick question on capital expenditures related to the remodeling of the Ohio headquarters.

About how much do you expect those to be in and is that counted within your $145 million for 2011?

Good morning.

First of all, over a period of two years, we will expect to invest in capital about $11 million to bring our facility up to the standard that we think it needs to be.

We have a beautiful campus.

Some of you have probably visited it but unfortunately, the facility is 35 or so maybe 40 years old and unfortunately really haven't put any money into it in quite some time.

So in order to provide the environment necessary to kind of recruit and maintain high-quality talent as we move our headquarters there, certainly we think that's the right thing to do not only from an office-based standpoint but we are adding meeting space so we can be much more efficient from the standpoint of getting our teams together.

And we are also putting in as you can imagine a fitness center so that our employees can think about health and wellness.

The great news is that by moving our headquarters back to the Dublin Ohio area, the combination of the state and the city have really anted up a significant amount of incentives and tax breaks over a period of time.

And so quite honestly, this will be kind of better than cash flow neutral over the period of time where we actually kind of receive those incentives.

Great.

Thanks.

And just really quick also on capital expenditures with your new store remodel plans, I know you gave quite a bit of detail earlier this year on your store remodel plans and what -- and capital expenditures related to that.

How do these new plans kind of impact that and do you have any new targets on how many stores, how much you're going to spend?

As I mentioned earlier, Joscelyn, clearly we know that the quality of our physical plant has a big impact on the overall perception of the experience for the consumer.

And what I am very pleased about is our ability over the last 18 months or so to kind of revamp almost our entire menu.

As a matter of fact as we complete the rollout of our new hamburger line and then our chicken line and then start to focus on beverages, there will be hardly an area of our menu that we haven't made significant improvement to.

And so now is the time where significant improvement to the design of the building really make sense.

If you do that before you really have a great proposition in food, you typically don't get the return.

I did mention that we have seen some very good results from the first two stores that we've opened in Ohio.

We have a number of additional stores that we will open this year that we will continue to monitor the consumer reaction and what the overall costs are going to be.

We know that we need to touch our stores on a basis of about every seven years to make sure that they are contemporary and they fit the image of what the consumer is expecting.

And as we kind of see the benefit from these remodels, we will I think adapt our program accordingly based on the returns that we expect to get.

And I would expect that as we get into 2012, that we will begin to ramp up the number of remodels that we do year by year to make sure that our facilities are consistent with our great menu.

Okay, great.

Thank you.

Larry Miller, RBC.

I'm sorry if I missed this.

I just wanted to get your thoughts on acquisitions.

I think initially you took on all that debt to build up a war chest to buy other brands and how might that have changed as you start to unwind Arby's acquisition?

Larry, I think for now, as Roland had mentioned, really the opportunity here is to focus all of our financial resources and people resources on the Wendy's brand.

I think as you talk about the growth initiatives that we have on the plate for Wendy's both here in North America and internationally, I think we think we've got enough opportunities to realize this growth goal of 10% to 15% on EBITDA going forward by just focusing on the Wendy's brand.

So at this point, I would say there is not a strategic focus on additional acquisitions.

I think first priority is to get our cost structure down to what is necessary to support a single brand and then to reinvest the cash that we've got on the balance sheet into these growth initiatives for Wendy's that will allow us to have that kind of EBITDA growth that I think will be -- I think provide very attractive returns here.

Okay, thanks, that's very helpful.

Reza Vahabzadeh, Barclays Capital.

Good morning.

On the food costs, I know you expect them to come off but is it fair to assume that at least on the beef side of it you are on the spot market as it goes up and down?

And can you give us any other thoughts on whether you are locked and have visibility on other food costs?

We are through our purchasing co-op, we are able to hedge most of our food costs other than beef, and though -- but we are looking at some programs there.

We are hopeful that as we go into next year, we will also be able to reduce some of the volatility.

But as you mentioned, we are exposed on about a quarter lag to spot market pricing.

And so that's one of the reasons why as we talked about our margin guidance, we do not expect to see much relief on beef costs this year.

And so the impact of food costs and margins this quarter was 180 basis points.

Does your guidance assume a lower degree of impact in the coming second half?

No, I'd say -- I think right now we were originally I think in terms of our guidance, we were hopeful that we would see some relief in Q4 on beef, but right now we are not seeing that materialize.

We are being conservative and not taking an expectation that that will come down really any time this year, which is why we have revised slightly what we think margins to be.

So I know we're at the end of our time here so I want to thank you all for taking the time to kind of talk about our results and ask questions today.

We are very pleased with our results for the second quarter especially what we were able to do on same-store sales and transactions because we believe this clearly indicates that the initiatives that we have put in place over the past 18 months are really starting to work.

We think we have a very clear focus on what we should focus our time and attention on over the next couple of years to include improving our core menu, continuing to launch exciting new products, expanding breakfast, continuing to improve the customer experience, modernizing our facilities, and obviously expanding our global footprint.

So all in all we think we are very well positioned to deliver our $330 million to $340 million of EBITDA this year and EBITDA growth of 10% to 15% in 2012 and beyond.

We look forward to seeing you out in the markets and thank you again.

Thank you for joining today's conference call.

You may now disconnect.