Q4 2008 Wendy's / Arby's Group, Inc. Earnings Conference Call - Final.(Broadcast transcript)

OPERATOR: Welcome to the Wendy's and Arby's Group Inc. fourth quarter and full year 2008 conference call. Our hosts today are John Barker, Chief Communications Officer; Roland Smith, President and Chief Executive Officer; and Steve Hare, Chief Financial Officer. (Operator Instructions)

I would like to turn the call over to John Barker. You may begin, sir.

JOHN BARKER, SVP, CHIEF COMMUNICATIONS OFFICER, WENDY'S / ARBY'S GROUP, INC.: Thanks, good morning, everybody. The agenda for today's conference call and this webcast will begin with remarks from our President and CEO, Roland Smith, who will discuss the future growth for the Company, an overview of our fourth quarter results, an update on our strategies to drive performance in our brands, the progress we are making on the merger integration and key profit drivers. Then our Chief Financial Officer Steve Hare will review financial results and several other topics. Roland will then wrap up the call with some concluding thoughts before we open the line for questions.

Our main focus on today's call is to discuss the fourth quarter, which is the period when the current management team began leading the Company, as well as our future plans to grow the business and generate shareholder value. I would like to summarize what is included in the financial statements which are attached to today's earnings release. We provide I a full P&L with consolidated fourth quarter and 2008 results. This includes nine months of pre merger results for Triarc and on quarter of post merger results for the combined Wendy's and Arby's. You need to be understand the difference when looking at the quarterly and the annual comparisons between 2008 and 2007, as they are not meaningful.

We also are providing a key balance sheet items. Also included today is a table that shows for the fourth quarter of 2008 our EBITDA, a reconciliation of EBITDA to the reported net loss and adjusted EBITDA, which, includes facilities relocation, corporate restructuring and integration costs. We are providing quarterly data only for the 2008 fourth quarter because it reflects the period in which the current management team operated the Company. We also provided selected financial highlights for each brand, and you'll find same store sales, revenues, four wall EBITDA margin, restaurant EBITDA margin, that is and the total number of restaurants. The final page of the attached tables includes selected pro forma data for the twelve months ended December 28, 2008 and Steve Hare will talk more about this later.

I would like to point out we are not providing pro forma results for the 2008 quarters with this earnings release. Our previous filings from the Company included year to date pro forma, data through the third quarter of 2008. Today's release includes 2008 pro forma adjusted EBITDA, which will help investors understand the Company's underlying operating performance and we are providing information about our outlook for 2009 through 2011, which we believe is more meaningful. Roland and Steve will both talk about our outlook information. Please note that our earnings release as well as all the financial statements, other historical investor information and filings is all available on our investor relations section of our website, at www.Wendy'sArby's.com.

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 earnings release. Certain information that we may discuss today regarding future performance such as financial goals, plans, developments 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 set forth 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 review the reconciliations of non-GAAP terms to the most directly comparable GAAP financial measure. Now let me turn it over to Roland.

ROLAND SMITH, CEO, PRESIDENT, WENDY'S / ARBY'S GROUP, INC.: Thanks, John. Good morning, everyone, and thanks for joining us on our first quarterly conference call for Wendy's/Arby's group. On our call today I plan to discuss an overview of the results we reported this morning an update of our brand strategies and the current restaurant environment, progress we are making on our merger integration and key profit drivers and our outlook for achieving EBITDA growth for the next three years. Let me start with our out look for the business.

We are beginning to revitalize the Wendy's brand and we have an excellent strategy to drive improved performance at the Arby's brand. At their foundation both brands feature high quality products and have a long history of success, excellent franchisees and very experienced management teams.

As we noted in our earnings release today we are building good momentum in the Wendy's brand with positive North American system wide same store sales in the quarter up 3.7%. We have key initiatives to improve Arby's sales built on the introduction of new product, marketing and operation strategies. And we are on track with our key profit drivers, to reduce G&A on an analyzed basis by $60 million and to generate $100 million in incremental annual EBITDA by improving Wendy's restaurant margins by 500 basis points. By executing our plans, we are confident we can deliver average annual EBITDA growth in the mid teens through 2011. We have identified seven key growth drivers.

Same store sales growth at Wendy's and Arby's, margin growth at both brands, excellent control of G&A, the addition of breakfast at Wendy's and Arby's, new restaurant development at both brands, dual branding and international expansion. I'll talk more about long-term growth opportunities later on the call, but I would like to begin with a brief review of the results for the fourth quarter, which occurred after we closed the merger on September 29. Our adjusted EBITDA for the fourth quarter was $74.4 million.

Our quarterly results reflect good controls of G&A expenses and positive same store sales at Wendy's. But were negatively impacted by negative same store sales at Arby's and significant food cost pressure at both brands. I'll talk more about the brands in a few minutes. As stated in our earnings release, we recorded after tax special charges totaling about $418 million in the fourth quarter related primarily to goodwill impairment. Steve will discuss the financial details of the special charges later.

Now I would like to talk about our Wendy's and Arby's businesses. At Wendy's, we produced strong North America same store sales in the fourth quarter of 3.6% at Company restaurants and up 3.8% at franchise restaurants. This was among the best performance in the restaurant industry. We launched initiatives during the fourth quarter begin improving transaction trends, enhance our marketing and reestablish operational excellence in our restaurants. To compete for the value oriented customer and drive traffic during this very challenging economic environment, we launched a new campaign anchored in what we call our value trio.

The value trio offers a double stack, a junior bacon cheeseburger and crispy chicken sandwich for $0.99 each. We advertise this as Freakonomics and I hope you've seen it on TV. The ads are resonating with consumers and scored highly in awareness and persuasion. Additionally the good news is that even with our value trio the percentage of sales from our $0.99 products is now only about 15% which is down from close to 20% a year ago and more in line with our peers. Last year, we moved certain menu items such as chili, baked potato and chicken nuggets off our $0.99 value menu and they are now priced higher at $1.19 to $1.39 in Company stores. Today our value menu at Company stores has only five items priced at $0.99, including the value trio sandwiches. This strategy allows us to continuing offering compelling value to our customers with some core $0.99 items but also begin to lower our food costs and contribute to our margin recovery. Excuse me.

We are also focused on improving several of our core products, including our sandwich buns, french fries and bacon as we commit to reestablishing Wendy's as the clear quality leaders in the QSR hamburger segment. Customers knows Wendy's offers fresh food, quality ingredients and made to order sandwiches. We started to talk about these benefits in our advertising and will focus even more in the future on messages about our fresh, never frozen beef and premium chicken. In February, we begin featuring our premium fish sandwich, which is a great tasting product. We will offer the product through our Lenten season and we are aggressively advertising the quality of this product. It's hand cut, (inaudible) breaded North Pacific Cod which, as you know, is very unique to the QSR space and confirms to the customer Wendy's quality position. Later this year, we plan to introduce new premium chicken products and a signature premium hamburger to mark Wendy's 40th anniversary.

Overall we are beginning to fill our new product pipeline and I am confident about the work under way by our marketing and R&D teams. We have installed a very disciplined product developing and testing process and we are excited about this area of our business. As you already know, breakfast is a huge opportunity in our industry. And it is the fastest growing day part. Wendy's launched breakfast more than a year ago, but unfortunately the products did not resonate with customers. They just weren't very good. A few months ago we announced plans to retool breakfast and focus on three key markets, Pittsburgh, Kansas City and Phoenix. And therefore, we further reduced the number of Company-owned Wendy's restaurants that served breakfast. This reduction of the number of stores offering breakfast in the fourth quarter negatively impacted our Company same store sales by 7/10 of percent. Therefore our Company same store sales would have been 4.3% without the impact of offering breakfast in fewer locations.

Going forward as we report our comps in the first second and third quarters, we believe the negative impact from not having breakfast in as many Company stores will be about 1.5 percentage points. Our plan to restage breakfast will be centered on differentiating our Wendy's breakfast products and making sure they are high quality, great tasting and easy to execute. Also by streamlining the breakfast operations, we expect to lower the …