The Wendy's Company
Q4 2010 Earnings Call Transcript

Published: 3 Mar 2011

[Operator:]

Good morning, everyone, and welcome to Wendy's/Arby's Group's Fourth Quarter and Full Year 2010 Conference Call. Our hosts today are John Barker, Chief Communications Officer; Roland Smith, President and Executive Officer; and Steve Hare, Chief Financial Officer. [Operator Instructions] I would now like to turn the call over to John Barker. You may begin, sir.

[John Barker:]

Thanks, and good morning, everyone. This morning, we issued our fourth quarter and our full year 2010 earnings release. As you know, much of this data was released in a preliminary form on January 26, and our results released today are consistent with our preliminary release. The agenda for today's conference call and the webcast will begin with an introduction from our President and CEO, Roland Smith, who'll provide a general overview of our fourth quarter and full year results as well as an update on Arby's. Our Chief Financial Officer, Steve Hare, will then review our 2010 financial results and a 2011 outlook. Following Steve's remarks, Ron will discuss Wendy's current initiatives as well as he'll provide an update on our international expansion. Afterwards, we'll 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 on our corporate website, which is wendysarbys.com. For those of who are listening by phone today, please make sure you select the appropriate webcast player option from our website, and that will ensure that you can sync up with the slides and the audio. Now before we begin, I'd 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 compare our reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measure. Now let me turn the call over to Roland.

[Roland Smith:]

Thanks, John. Good morning, everyone, and thank you for joining us today. As you know, we reported preliminary Q4 and full year 2010 results on January 26. We were pleased to report that our fourth quarter system-wide same-store sales were positive at Wendy's and Arby's. We believe this is a sign that our initiatives are gaining traction and producing results. We were also pleased that we were able to produce margin improvement at Wendy's in 2010 in spite of rising commodity costs. Wendy's adjusted margin was 15.2%, up 40 basis points from a year ago. Our fourth quarter adjusted EBITDA decreased 6.4% from the prior year, and our full year adjusted EBITDA decreased 3.6% from the prior year, which was at the high end of our annual guidance range of down 3% to 5%. These results are consistent with the preliminary results we announced on January 26. Steve will discuss more about our 2010 results and our 2011 outlook later in the call. However, I want to comment on what we're seeing so far in the first quarter of 2011 in terms of same-store sales. At Wendy's, company-operated same-store sales in January were negative but were impacted by severe winter weather primarily in the Midwest and Northeast markets. We estimate that the weather negatively impacted our same-store sales by about 1.5% to 2%. However, Wendy's sales were positive in February, and we expect to produce flat to positive same-store sales for the first quarter. In January, we announced that we are exploring strategic alternatives for Arby's, including a possible sale of the brand, and we're pleased with the progress so far. During this process, we remain committed to business as usual. At Arby's, company-operated same-store sales in January were slightly negative and were also impacted by severe winter weather. However, Arby's sales were positive in February, and we expect to deliver strong, positive same-store sales in the first quarter. We began national ads last Sunday to relaunch the Arby's brand with our new positioning, Good Mood Food. As part of this relaunch, we introduced a new angus roast beef sandwich, the Angus Three Cheese and Bacon. It features sliced, lean angus top brown roast with three kinds of cheese and bacon and is served on a toasted Italian style role. Early customer reaction on the new angus product has been very positive. I'll review our business initiative for Wendy's and international in a few minutes, but first, I'd like to turn the call over to Steve here to highlight our Q4 and full year 2010 financial results and our outlook for 2011. Steve?

[Stephen Hare:]

Thanks, Roland. Now let's begin with a summary of our key results and the special items that were included in the fourth quarter and the full year. Total revenues were $840 million for the fourth quarter and $3.4 billion for the full year of 2010. Adjusted EBITDA, which was reduced by $1.8 million of net pretax special items in the fourth quarter, was $84 million. Full year 2010 adjusted EBITDA was $397 million and excluded $12.9 million of pretax net special charges. Net loss, as reported for the fourth quarter, was $10.8 million or $0.03 per share and included total net special charges after tax of $16.5 million or $0.04 per share. Net loss for 2010 was $4.3 million or $0.01 per share and included total net special charges after tax of $64.7 million or $0.15 per share. Now I'd like to review our full year cash flow. Slide 11 summarizes our cash flow for 2010. Cash flow from operations was $226.3 million. Capital expenditures were $148 million and were approximately $46 million higher than our spending in 2009 primarily to fund our restaurant remodel programs. During the year, we generated $22.9 million of proceeds from the issuance of long-term debt, net of debt repayments, which was primarily a result of our bank debt refinancing. We returned $201.1 million of capital to our stockholders in stock buybacks and cash dividends during the year. In 2010, we purchased approximately 35 million shares at an average price of $4.72 per share. We continue to have $250 million authorized for our stock repurchase program and intend to buy shares subject to market conditions and legal considerations. Our net cash used in 2010 was $79 million, including approximately $174 million for share repurchases. At year end, we had a cash balance of $512.5 million. We continue to have a strong cash position, which provides us with significant financial flexibility going forward to fund our strategic growth initiatives, dividends and share repurchases. Now let's look at our debt capitalization. At the end of the year, we had total debt of $1.6 billion and net debt of approximately $1.1 billion. Based on our trailing 12-month adjusted EBITDA, our total debt multiple is 4x, and our net debt multiple is 2.7x. You should note that our net debt includes approximately $200 million of Arby's capital leases and sale leaseback obligations. Next, I would like to discuss our outlook for 2011. We expect that 2011 will be a transition year. As Roland mentioned earlier, we are pursuing strategic alternatives at Arby's, including a potential sale of the brand. And assuming a sale is completed, we will be reducing corporate G&A to support a single brand. Now I would like to discuss the benefits to the company from a potential sale of Arby's. First, we believe it will be beneficial to focus our resources on the Wendy's brand. It will be our primary vehicle for growth going forward. Second, we believe we can substantially reduce corporate G&A to support a single brand. We are in the process of building a department-by-department model for the corporate organizational structure to deliver support services as efficiently as possible. I will give you some more insight into our G&A on the next slide. Third, we would benefit from eliminating approximately $200 million of debt related to Arby's. This debt includes both capital leases and sale leaseback obligations and would reduce our net debt to approximately $860 million. Fourth, we will significantly reduce our need for future capital expenditures as it relates to Arby's, making those additional resources available to Wendy's. And finally, we would be able to reinvest proceeds from a sale of Arby's for Wendy's growth initiatives and possibly to return additional capital to our shareholders. As a result of these benefits, we believe that a potential sale would be accretive to net income and to free cash flow. Now let me provide more detail about our G&A. In 2010, approximately 1/3 of our total G&A of $417 million was related to Arby's. Arby's G&A includes direct G&A as well as an allocation of indirect support center costs. Assuming a sale of the brand, Arby's direct G&A would transfer to the buyer. We expect indirect G&A for support center services would either transfer to the buyer or would be eliminated. Next I would like to give you some details on our outlook for 2011. For 2011, we expect pro forma company EBITDA to be in the range of $345 million to $355 million. Our pro forma guidance for 2011 assumes that the sale of Arby's, as well as related G&A reductions, occurred on the first day of 2011. Because the timing of any potential sale is uncertain and due to the fact that our main focus going forward will be Wendy's brand, we feel that this pro forma guidance is a better indicator of the future earnings power of the company. Our EBITDA outlook includes the following assumptions. For 2011, we expect Wendy's same-store sales to grow between 1% and 3%. We expect improvement of 30 to 60 basis points in Wendy's company-operated restaurant margin. This margin assumption factors in a 2% to 3% increase in total commodities for the year. Please also note that in 2011, we will be including breakfast expense in our restaurant margin and EBITDA. We expect to spend approximately $145 million on capital expenditures for the Wendy's brand in 2011. Looking ahead, there are many potential uses for the cash we have on our balance sheet. Most importantly, we are focused on organic growth and operational improvements at Wendy's. A major growth driver for us is the new breakfast program. As we expand into more markets, it will require additional investment in areas, such as kitchen equipment, the coffee program and menu boards. We are also continuing our remodeling program to modernize our facilities. We are investing in technology, such as point-of-sale systems, that will help our restaurants operate more efficiently. We are planning to target certain under penetrated North American markets for new restaurant development. And we intend to continue expanding our international presence. Additionally, we remain committed to creating value for our shareholders through our stock repurchase program and cash dividends. Now I'll turn the call back over to Roland.

[Roland Smith:]

Thanks, Steve. At our Investor Day presentation in New York on January 27, we shared seven key initiatives for the Wendy's brand in 2011, and these are highlighted on Slide 19. We plan to continue to reinforce our real brand positioning, as we rollout exciting new products and communicate with our customers. We're launching our new Dave's Hot 'n Juicy Cheeseburgers this fall after excellent results in test markets, we plan to continue to reinforce the My 99 Value Menu strategy, we're expanding our breakfast into new markets, we plan to focus on operational excellence to heighten the customer experience, we're continuing our remodeling program, and we're preparing for new restaurant growth in North America and international. All of these initiatives will help us drive positive same-store sales both in 2011 and the future. Now I'd like to review some of these initiatives in more detail. Our real brand positioning, which we introduced in 2009, means real taste, real food, real ingredients, real service and a real experience in our restaurants. Therefore, in every product that we are currently developing, our goal is superior freshness and taste. And in our restaurants, our goal is to deliver a superior customer experience. A top priority is to dramatically improve our core products to fully deliver on our real brand positioning. Over the past year, we've significantly improved our salads, value products and fries. And I'd like to share with you what we're doing to improve some of our other core products. Nothing is more important to Wendy's than hamburgers. And while our hamburgers are already top-rated in ZAGAT surveys, we are taking our entire hamburger line to a whole new level. We're naming our new hamburger line, Dave's Hot 'n Juicy Cheeseburgers, and we plan to introduce them nationally in the second half of 2011. We've named our new hamburger line after our Founder, Dave Thomas, whose passion for serving the very best hamburgers created this brand 41 years ago. Our new cheeseburger has beef that is juicier and 40% thicker; has quality toppings like crinkle cut pickles and red onions, melted cheese and, importantly, a butter-toasted bun. Dave's Hot 'n Juicy Cheeseburgers are currently being tested in five markets

[John Barker:]

Thanks, Roland. I'd like to update you for just a minute on some of our recent and upcoming events. As we mentioned earlier, we held our Investor Day on January 27 in New York. It was a good opportunity for us to discuss in detail many of the initiatives that we've touched on today and also gave us a chance to serve some of the exciting new products that Roland mentioned. We encourage you to go on the website to see those presentations if you've not already done so. In March, we will be presenting at three investor conferences. The first is the Bank of America Merrill Lynch 2011 Consumer Conference, and that will be on March 9. The second is the Roth Capital Growth Stock Conference on March 14. And then we will also present at the JPMorgan Gaming, Lodging, Restaurant and Leisure Management Access Forum on March 28. Webcasts for each of these presentations will be available on our website. Finally, we are planning to release earnings for the 2011 first quarter on Tuesday, May 10. Now let's open up the line for Q&A. We have a large number of participants on the call today, so do we ask could you limit your questions, and we'll get you back in the queue. Operator, would you please open up the phone lines for questions?

[Operator:]

[Operator Instructions] Your first question comes from Joe Buckley, Bank of America Merrill Lynch.

[Joseph Buckley:]

Just wanted to ask a couple of questions about Arby's just to make sure we're thinking about it the right way. Looking at some of the information in the 10-K, we're calculating EBITDA number for Arby's in 2010 of just under $48 million. Just kind of curious if that's kind of the number you're thinking about and maybe if you would talk about the payments being made on the sale leasebacks and the capitalized lease obligations that obviously would be below that line just so we kind of have the financials on Arby's correct.

[Stephen Hare:]

Joe, this is Steve. I think that's the right way, I think, to come at it. If you look at the segment data footnote and you take the operating loss, plus impairment plus depreciation and amortization, you'll get about $47 million. The only thing that excludes, if you're thinking of an adjusted EBITDA for the business, would be some of the non-recurring items that we add back in the earnings release, and you could allocate some portion of that to Arby's for 2010. So roughly $50 million of adjusted EBITDA is the right way to look at that business.

[Joseph Buckley:]

Okay. And, Steve, the payments connected with the sale leasebacks and the capitalized lease obligations, what do they total on an annualized basis?

[Stephen Hare:]

They're in the $15 million range.

[Joseph Buckley:]

Okay. And just one more question, just on the Wendy's first quarter same-store sales guidance of flat to positive, what are you assuming for March in that number? How good does March have to be to get to that range?

[Roland Smith:]

Well, as I mentioned, Joe, we saw a nice trend change in February with positive sales behind our value promotion. We are going into what we think is a very strong promotion in March, which is marrying our new sea salt French fries with our premium cod. And so we think that if we maintain the trends that we currently are seeing in February that we will see flat to positive sales for the quarter.

[Operator:]

Your next question comes from the line of Chris O'Cull. [SunTrust Robinson]

[Christopher O'Cull:]

Roland, my question is related to the slide that showed the gold hamburger. You said the improvement was the number -- in the number of large hamburgers sold was roughly 30%. Could you convert that measure into an overall sales list for those test markets? I'm assuming there are some sales or some mix shift there.

[Roland Smith:]

There are some mix shifts there, obviously. We're really talking about units, Chris, in that particular case, and we're talking about units of large kind of what we call our large hamburgers previous to the test period. And so we saw a very nice increase in those units, but you can't convert that directly, obviously, with sales lifts because those units represent a percentage of our mix and also represents a shift of people buying other products to those hamburgers. So I think what that number really kind of shows you is the excitement that people are seeing about this great new hamburger.

[Christopher O'Cull:]

Can you quantify what’s the lift you've seen in the markets where from the base period to the current test period in sales have been?

[Roland Smith:]

Well, what I can quantify for you is in those markets -- those five markets, where we've been testing this gold hamburger, Dave's Hot 'n Juicy Cheeseburgers. As you compare the trends and the remainder of our markets to the trends in those markets, those markets are showing improved trends in both transactions and sales. But we'll give you more information about that as we get this product in the market and launched.

[Christopher O'Cull:]

Okay. And then one last question. I may have missed this, but the price -- I know you've implemented a new pricing structure this year. Is that fully rolled out to the -- to all the company stores and what type of effective price increase do you expect this year?

[Roland Smith:]

Well, Chris, it's not really a pricing structure as it is a pricing strategy and methodology. As we have spoken over the last couple of calls, we went out and brought in some key consultants to help us look at our pricing from a zone perspective, so that we could look at it kind of product-by-product in different zones of the country based on different trends, demographics and what we were seeing in those stores. What we learned from this is that we certainly have pricing opportunity, but that pricing opportunity is not just kind of the same in every single category. As Dave Karam showed the participants in the January Investor Day, one of the specific analysis that we did had to do with a single product and whether or not we should take a price increase on that product. And after a significant analysis with this methodology, we found that if you take a look at our stores, about 70% of them could easily, I think, shoulder a price increase, and about 30% because of what was going on demographically or in that particular zone of the country that that price increase actually would probably result in reduced sales. And so in the past, without this methodology, we would've probably taken a price increase across all our stores. And while that would have been a positive kind of profitability at or for our business by not taking it up in the 30% that were going to have issue with it and taking it up only in the 70% that could shoulder it, the profitability significantly improved. And we're going to use that same methodology, Chris, as we look at product lines across our entire menu. We did take some pricing late last year, which we will continue to have the benefit of. We took a little bit of pricing earlier this year, and we are certainly looking at pricing as we go through the year based on what's happening with commodities, what's happening with our competition. But we do not kind of disclose what that pricing is specifically, obviously, for competitive reasons.

[Operator:]

Your next question comes from Michael Kelter, Goldman Sachs.

[Michael Kelter:]

I wanted to ask you about your margin guidance. I think it's really nice that you're able to grow margins this year, I think 30 to 60 basis points at Wendy's. I guess I was wondering how you think you'd be able to do it because recent trends have been negative. Food prices keep going up. Could you maybe be a little granular as to what company-specific programs are going to be coming up in the next couple of quarters and are going to flip that around?

[Roland Smith:]

Clearly, there are a number of components that we think that we can put in place that will positively impact margins, not the least of which will be same-store increases. And our guidance for the year is that Wendy's same-store sales increases at 1% to 3%. And while January was a difficult month, we've talked about the weather, I don't really want to get into that discussion any more in depth. We have seen a significant change in trend in February. We think that will continue through March. And as I look at the calendar through the rest of the year, we have some very exciting products, some of which are very premium in their nature, have tested very well. As I mentioned in my pre-comments, we have an addition to our salad line. We also have this great new Dave's Hot 'n Juicy Cheeseburgers, and we have other new products that we think will change the mix slightly, which will have a positive impact on transactions and, therefore, same-store sales. We are also, as I mentioned a moment ago, taking a hard look at pricing on a regular basis with our new pricing model and strategy. And we think the combination of new products, transactions, shift in mix and pricing will all have a positive impact and will be able to deliver the margin improvements that we have indicated in our guidance.

[Michael Kelter:]

And on the food costs, can you talk about what types of things you've locked in and to what degree versus what is floating with the market?

[Roland Smith:]

Yes, sure. We had Arby's hedge all of our products except for beef because you cannot hedge fresh beef. And we've gotten some real benefit already from the standpoint of things that we're doing for the year. I'll let Steve talk a little about some of those specific commodities that we already have locked in.

[Stephen Hare:]

Yes, and what, I think, you meant Wendy's. And so you'll see a -- I think, obviously, with beef costs going up significantly this year, Mike, you'll see Wendy's food costs, I think, reach a higher level in Q2 and Q3 because of the timing of when we'll recognize those market increases. Arby's will also be facing a very high beef price. We think through this year, 15% or more increase year-over-year. I think on lean beef is what we're looking at right now. The offset that we have to it right now is favorable prices on chicken for the most part for the year that we're pretty much locked in on. So that will help mitigate, I think, some of the overall commodity costs. But, I think, like everyone else, I think, we're nervous overall about the pressures we're seeing on commodity costs. And we're working very hard from a menu and a pricing strategy to help offset that, so we can achieve the kinds of margin increases that we've talked about.

[Operator:]

Your next question comes from Jeffrey Bernstein with Barclays Capital.

[Jeffrey Bernstein:]

A couple of questions. Just first on the 2011 EBITDA forecasted kind of in that $350 million range, just looking for a little bit more color. I know you mentioned the Arby's business in itself was just shy of $50 million this year. I'm just wondering what you guys view is that 2010 adjusted base all-in excluding the Arby's and the unusuals that we're kind of looking to compare against that $350 million in '11?

[Stephen Hare:]

Yes, I think we talked a little bit about that during the Investor Day. I think if you take the, say, $350 million as a midpoint for the pro forma guidance, that would represent about a 3% increase on a comparable basis when you sort through all the special items.

[Jeffrey Bernstein:]

And will you be providing the restated quarterly 2010 results without Arby's just to allow for easier modeling? Or do we have to wait for each quarter to actually get those restated results?

[Stephen Hare:]

Yes, we'll try. Well, I think we've talked a little bit about that, I think, going forward. Given the guidance is on a pro forma basis, I think what we'll try to do is go through the segment data that we’ve got. You can track it through the segment data, our progress to that, and we'll provide a summary of that to help you with that calculation.

[Jeffrey Bernstein:]

Okay. And then on the G&A side of things, I think you mentioned kind of 1/3 of the G&A that you guys were running this year with Arby's. Is there any portion of that -- I mean, if you're excluding that from the full year, just trying to reconcile that with, I think, what you guys told us was $35 million in targeted G&A reductions with the removal of Arby's. I'm just trying to reconcile those two things.

[Stephen Hare:]

Yes, the 1/3 of the $417 million represents really two buckets

[Jeffrey Bernstein:]

But that $35 million, that will be in addition to the 1/3 of the $417 million? So there's incremental savings of $35 million beyond the $140 million, I guess, would be the 1/3 of $417 million?

[Stephen Hare:]

No, the 1/3 includes both the direct and the allocation of the indirect. And that allocation of the indirect is approximately $35 million that's included in the 1/3.

[Jeffrey Bernstein:]

Got you. And just lastly on the My 99 for the core Wendy's brand, I’m just wondering, seems like it's getting a nice lift whether you can just size up what the Value Menu -- I know it wasn't called a Dollar Menu, but what that menu was pre and post the introduction and perhaps what the -- kind of the margin is on that, the impact to the blended overall margin, just kind of the mix of the My 99?

[Roland Smith:]

Well, Jeffrey, what we have seen with the My 99 is certainly an increase in the mix of what we'll call $0.99 units. And that increase has been kind of pretty significant since we launched it late last year, and we continue to read what the results are. Certainly, that has put some pressure on our check as you would expect. But it also has driven transactions, which have been positive, which we think is a better indication of the long-term health of our business. Also, and we're pretty excited about this, if you take a look at the share of value traffic in November when we launched My 99 and you compare that to the trailing 12 months, we outperformed most of our competitors on that particular kind of metric. Both Burger King, Taco Bell and Jack were down in their share value traffic, and we are up 1.6%. And while McDonald's continued to be up during that same time frame, we were up slightly more than they were. So we believe that this new value platform, which we will continue to promote and continue to add new exciting products to, so the consumer can understand and realize that we will provide them great value along with our great premium products has increased the share value traffic that has allowed our transactions to improve, and that will continue to have positive impacts on the bottom line as we go forward.

[Operator:]

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

[Mitchell Speiser:]

Can you give us any guidance on what we should expect in the first quarter for brand Wendy's EBITDA?

[Stephen Hare:]

Mitch, we don't provide quarterly guidance. We really only provide the annual target. The only thing I would say to try to be responsive would be that generally, our first quarter is our lightest quarter of the year on a -- just from a seasonal standpoint and more seasonal on the Wendy's side than typically at Arby's. So I would say that first quarter, based on everything I'm seeing, would be our lightest quarter of the year. But we don't provide any more specific guidance than that.

[Mitchell Speiser:]

Okay. And now I have to push a bit. But with the comps, I guess, maybe running slightly below full year target and perhaps some investments that you've talked about for the full year, should we expect margins to maybe be below your full year target in the first quarter?

[Stephen Hare:]

Yes, I think, again, with the lower volumes you have in the first quarter, I think that's typically what we see.

[Mitchell Speiser:]

Okay. And secondly, just on share repurchase, just unclear, are you allowed to buy back stock at this point? Is it something you are able to do or are you still as of last quarter you said you were unable to repurchase stock?

[Stephen Hare:]

Yes. What we have said in the past was that there was a Trian [ph] (50

[Mitchell Speiser:]

And if I can slip in just one last one. You have said that you expect an Arby's sale to be accretive to earnings and cash flow. Might as well ask, what value does that assume? You obviously have a proceeds or value number to say that. Can you comment at all with respect to that view?

[Stephen Hare:]

No, I think, we make that comment really without respect to a likely valuation. I think if you just look at the impact assuming that the capital lease obligations go away, and that we think it would be accretive really almost regardless of the amount of proceeds.

[Operator:]

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

[John Ivankoe:]

Just wondering what you've learned so far from your breakfast test as it's been rolled out into several markets in terms of your pricing, your product selection, opening hours, your coffee, whether you kind of think it's fully right and whether the customers have accepted it in those markets where there might be some substance of changes relative to what we see for example, in Phoenix.

[Roland Smith:]

Yes, John, I can talk a little bit more about breakfast. As I mentioned, those of you that were able to join us at our Investor Day actually got to sample our products maybe some for the first time. And I will reiterate that I think the overwhelming comments were, "Wow, this is really great food." And so I would say that the learnings from breakfast so far is that the consumer has had similar positive comments about the quality and the taste of the products. To include comments around, wow, this is worth going out of my way for or this is worth considering changing what my current habits are, which is obviously one of the tougher things at breakfast. From an hour standpoint, I don't think we've learned anything that kind of is different from what we expected, you know, kind of opening up earlier in the morning obviously to allow that consumer to be there when breakfast is an important part of their day is something we're doing. We're seeing also, like many other brands, that when you open earlier, certainly you sell breakfast. But in some of our, kind of, tests right now, we are selling hamburgers earlier in the day or we’re making them available earlier in the day and finding that, in fact, there's a fair amount of people that are really interested in that type of a product line even as early as 8

[John Ivankoe:]

And, Roland, if I may. Has your experience in Shreveport kind of shrunk in the length of time that you had expected it to take a market to be breakeven for breakfast and what might that time be?

[Roland Smith:]

Well, right now, John, I will tell you that our main focus is on making sure that we have the right products, making sure most importantly that we deliver those products the same way every single day in the store and that we get a significant amount of trial. As I think we mentioned at our Investor Day not long ago, we took Steve Hare a 25-, 28-year veteran of the Wendy's brand and one of the better operators I've ever worked with. And we put him kind of as the champion at breakfast to go in and take a look at some of the operational and breakeven improvements that we wanted to improve on as we go forward. And quite honestly, that is something that is much more easily done after you have the right product and the right reaction from the consumer. If you start with, in my experience, focusing on the profitability and the breakeven, you are likely never to get kind of the product and the consumer reaction that you need for a sustainable business. And breakfast is really opening a new restaurant. It's not just a product, it's a complete line of products. And so that is not something that we're concerned about, although we are certainly focused on it. But to answer your question a little bit more specifically, certainly, because we saw increased volume in Shreveport from the standpoint of the weekly volumes versus what we saw in the other test markets, that certainly kind of provide for a quicker breakeven and more profitability.

[Operator:]

Your next question comes from Matthew DiFrisco, Op Co.

[Matthew DiFrisco:]

If you could talk about the international market and potentially what we should look for over the next couple of year as if -- where do you stand as far as the infrastructure for all this -- for the longer term growth? And is there a year where there might be a year of investment or an inflection point where you might need to build out some of the infrastructure as international becomes maybe a larger part of the overall growth strategy and vertical?

[Roland Smith:]

As I mentioned today, we are very excited about the progress that we've made in international over the last couple of years. I won't reiterate the development agreements we signed, but I will reiterate some of the numbers to include having around 341 stores now and an additional 610 development agreements that are on the books. And so when those come to fruition, that puts us at a little over 1,000 stores, and that doesn't include additional development agreements with current franchisees or new agreements or JV kind of partnerships that we sign up over that time. We have evolved our infrastructure fairly regularly over the last two years, reorganizing it significantly right after the merger, so that is was relocated here in Atlanta, which is a very easy place to kind of move around the world internationally. Put Gerald [indiscernible] in-charge, brought in some new [indiscernible] (58

[Matthew DiFrisco:]

Great. And then just a question regarding your comp in February and how that factors into setting up sort of the pace you think you can maintain? I mean, are you looking at this though also sort of washing out maybe some of the benefits that you're also getting from weather from, I mean, last year, obviously, February was a pretty hard hit month especially on the weekends where January this year was the bad month. So are we not -- I just want to make sure we're not overestimating the benefit that we're getting from lapping probably a weak February that was impacted from weather of the year ago as well.

[Roland Smith:]

Yes, Matthew, I think that's a fair comment. One of the reasons why we haven't gotten into kind of specifics about the first couple of months is that, in my experience, to actually come up with a detailed kind of formula that really kind of lays out exactly the benefit of the negative weather is very difficult to do even on the best of days. As I mentioned in my pre-comments, we think weather in the January time frame was 1.5 to two negative. We try to also put into that estimate maybe some of the positive impacts that we got on a couple of weather days that's were kind of positive for us this year. I believe that what we have seen in February kind of when you take out the fact that there were a couple of positive weather days is a significant trend shift, and we would still be positive, but I think the most important metric to think about is that we continue to be kind of sure of our guidance from the standpoint of same-store sales being up 1% to 3% for the year.

[Operator:]

Your next question comes from Michael Gallo with CLK.

[Michael Gallo:]

Good morning. Most of my questions have been answered. Just a couple of questions. First, on the purchasing co-op. Any benefits you expect to start to see from that this year? And then just in terms of timing of contracts and other things coming up, when should we expect to see some of the benefits that might mitigate some of the higher commodity costs that we're obviously seeing?

[Roland Smith:]

As you know, we previously talked about the fact that we had funded third co-op, which we call SSG, which was a combination of board members from both QSCC and the ARCOP, which was the Wendy's and the Arby's cooperatives. That co-op has been doing a nice job of looking at contracts and in a number of cases, signing contracts with vendors that have products that we can buy for 10,000 stores rather than 6,700 or 3,500. And we will continue to do that throughout this strategic analysis process with Arby's. Assuming, however, that Arby's does get sold, that SSG co-op will then split and go back to QSCC and to ARCOP. And so those types of products that SSG would buy would now be the responsibility of QSCC and ARCOP. But I can tell you that from Wendy's standpoint, our QSCC co-op has been incredibly well-run under the leadership of John. He has done a really fine job of looking at ways so that we can better purchase and hedge against our products, so that the commodities have the minimal amount of impact even though they are increasing. And I think we can continue to look at some positive things from QSCC as we go forward.

[Michael Gallo:]

And then just a final question. Assuming Arby's is divested, will that affect at all the dual-branded development agreements that are on the books? And will there still be the ability to dual brand at all going forward or will that be essentially resolved when the companies are ultimately split?

[Roland Smith:]

Well, Michael, as I think as you know, we have a single-dual branded store in Atlanta, which is our international training store. Outside of that, we've signed a significant development agreement in the Middle East for dual branded Wendy's and Arby's. And we’ve begun to open those with our partner there, Al Jammaz. We certainly will continue to honor those commitments that we've made in the past. I would say going forward in the future, assuming a divestiture of Arby's, what happens to the international marketplace, I think, will be largely determined by kind of how the deal is structured as we go forward. I think it'd be a little early to kind of hypothesize what that might look like, but I would say that whether or not we choose to go forward with the dual branding strategy, we believe that the Wendy's brand is strong enough to continue to grow our international business, and I think the best example the recent joint venture into Japan is for the single brand of Wendy's.

[Operator:]

Your next question comes from Jason West, Deutsche Bank.

[Jason West:]

Just a couple. One, can you guys talk a bit about longer term CapEx? You're talking about a lot of investment initiatives, and hopefully, you’ll have a lot of excess cash once the Arby's deal is completed. The level of CapEx we see in '11, is that sort of the level that allows you to get these things done around breakfast and growth and operational improvements? Or is there like another step up that needs to happen to get things executed, particularly breakfast?

[Stephen Hare:]

You know, I think, we've stepped up the CapEx for Wendy's, as we said, to $145 million this year. I think looking ahead, I think we will see that number trend up and is frankly something I want to see because I think as we -- especially as we complete the new design work on the Wendy's side, I think that gives us a good, new model that we can both remodel up to that standard as well as then incorporate that in our new unit opportunities. And as we're looking at the markets out there, we believe that especially when you start incorporating breakfast sales into the new units that the returns there are looking attractive. So we are both looking ahead to ramping up our new unit development, both in North America and internationally. I think you'll see some capital used internationally, as Roland talked about with the Japan joint venture. We're sort of making our first foray from just pure franchise operations internationally to equity. And so that will be, I think, a nice opportunity for us to invest some more money back into the business. And then as we've talked about the roll out of breakfast, there's a capital component to that. And as I look at the flexibility we have with the excess cash on the balance sheet, I think our first priority is to be able to fund easily the growth initiatives that Arby's is tackling both here in the U.S. and internationally as well.

[Jason West:]

And then one quick clarification. The margin guidance, the 30 to 60 basis points, what is the base you, guys, are using for the Wendy's brand? Is it the adjusted number or the reported number there?

[Stephen Hare:]

The reported number.

[Roland Smith:]

Thanks, everyone, for participating on our call this morning. Just a couple of quick comments from me. Again, thank you for those of you that were able to join us in January at our Investor Day. We were very excited about the opportunity to share with you, specifically our strategies around Wendy's and also some of our great new products. Notwithstanding that this is a transitional year, which we've talked about, we are very bullish on the Wendy's brand. And you know what, I think we've really started to reach what I'm going to call the tipping point, and I think we’re going to see the benefit of that as we go forward. A couple of quick examples of that are I think some of the recent product launches and what that has really done to kind of our share of those products in the market. For example, we launched salads kind of late last year. And in the fourth quarter, we grew our salad shares 7.6% up to almost 16% of the market versus year ago. We now lead all of our key competitors in share of salads to include Panera and McDonald's. I mentioned My 99 a few moments ago. Our share value traffic was up 1.6% in the fourth quarter versus trailing 12 months, and I think that continues to be a very important factor in our ability to bring in consumers that are not only value-minded, but also that are looking for great products. Our new fry lunch was a year success for us. It's not often that companies like ours take a core product like fries and actually make a significant change and how that change be as positive as it was. Fry units were up 17% during our December media launch, and maybe more importantly to us, our fry incident for 100 transactions was up almost 10%, and that's almost equal to McDonald's. So we think we're making great in-roads there also. And as I mentioned on the call earlier today, we are very excited about the significant improvement and relaunch of our primary product line, which is hamburgers and cheeseburgers with the launch of Dave's Hot 'n Juicy. So I think we have significant positive kind of opportunities ahead of us, and I look forward to sharing the results of some of those as they come to fruition. I’ll see you -- many of you at the different conferences that John mentioned earlier today, and I look forward to talking to you again in early May. Thanks a lot.

[Operator:]

This concludes today's conference. You may now disconnect.