The Wendy's Company (WEN) Q4 2010 Earnings Report, Transcript and Summary

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.

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.

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?

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.

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: Austin, Providence, Virginia Beach, Las Vegas and Louisville. So far, customer feedback has been outstanding and repurchase levels have been very strong. As you can see from this slide, our sales of cheeseburgers have significantly increased in our test markets. The national rollout will require an investment in new equipment, such as bun toasters, grill enhancements and small wares. The cost of this equipment and enhancements will range from $13,000 to $23,000 per store. It will take several months to get the equipment built, shipped and installed in our stores, and we expect to have all of this in place in the second half of 2011 for our national introduction. Hamburgers are not the only new products in the pipeline. In March, we will be promoting a fish and chips combo, which pairs our new natural-cut sea salt fries with a premium North Pacific Cod sandwich. In the second quarter, we will offer a new outstanding seasonal salad that will be in addition to our salad line that was introduced in 2010. Our newest salad will feature fresh blueberries and strawberries, a premium chicken fillet and real Asiago cheese on a bed of 11 fresh greens with 100% natural, fat-free Acai berry dressing. We will also be featuring a new Frosty this year with the same fresh blueberries and strawberries. Also this year, we will continue to promote Wendy's My 99 Everyday Value Menu. Since the introduction of My 99, unit sales of Value Menu items have increased, and we have seen improvement in overall transaction trends as well. Another core product that we are working to improve is our line of chicken sandwiches. In 2010, we made improvements to our chicken fillet when we introduced our new Garden Sensations salads line. These included a larger, more tender fillet and a change in our marinating and breading system. These enhancements were included in the recent rollout of our new Asiago Ranch Chicken Club sandwich, which replaced our current Chicken Club. However, we're not stopping there. Just as we did with our gold hamburger project, which resulted in Dave's Hot 'n Juicy Cheeseburgers, we now have a gold chicken project underway. Now I'd like to update you on breakfast. As we have stated in the past, breakfast is a day part where we see significant opportunity. We believe that in the near term, breakfast could add $140,000 to $150,000 to our current AUVs of $1.4 million. Those of you that attended our Investor Day presentation in January, were able to sample some of our new breakfast products, and your feedback was very positive. We have a unique line of breakfast products to include an artisan egg sandwich, grilled breakfast Panini, warm oatmeal bar and seasoned homestyle potatoes. In addition, we've developed a new premium coffee blend to complement these products. In 2010, we launched breakfast in four test markets: Kansas City, Phoenix, Pittsburgh and Shreveport. In the first half of 2011, we are introducing breakfast in two additional markets, Louisville and San Antonio. And in the back half of the year, we will continue to add more breakfast markets. And by the end of 2011, we plan to have our new breakfast in about 1,000 stores. Next I'd like to review our remodeling plan. We are currently working on designs for our next generation of Wendy's restaurants. We want our restaurant designs to reflect our real brand positioning and to be much more appealing to customers. We are planning 100 remodels in 2011, and 75 will be our new restaurant design, which we plan to finalize in the second quarter. We look forward to sharing our new restaurant designs with you on a future call. The final 2011 key initiative for Wendy's is to prepare for new restaurant growth, both in North America and international. We believe we have the potential for 1,000 new stores in North America because there remain many markets with low penetration, and we have less than half the number of restaurants as our largest competitor. We plan to add more than 60 new restaurants to our system in 2011, and we plan to increase the pace of development in 2012. The second component for new restaurant growth is expanding our global footprint. We’ve signed numerous development agreements over the past two years, including Singapore, the Middle East, Russia, the Eastern Caribbean and Argentina. We see a potential to reach 8,000 international units and believe that almost 40% of our 8,000-unit potential is in three countries: China, Brazil and Japan. Now I'd like to highlight our most recent international announcements. In February, we signed a new agreement with our current franchisee in the Philippines, Wenphil. They plan to add 44 new restaurants and bring the total number of Wendy's locations in that country to 75. And yesterday, we announced our first international joint venture since the Wendy's/Arby's merger, an agreement with Higa Industries in Japan. Higa Industries is a leading food importer and distributor that previously owned and operated 180 Domino's pizza restaurants in Japan. Higa Industries is led by Ernest Higa, who is a pioneer and innovator in the restaurant industry in Japan, and we are excited about partnering with this outstanding organization. We expect the joint venture to open its first Wendy's restaurant in Central Tokyo in late 2011 and then to grow rapidly. Slide 30 shows a breakdown of the 8,000-unit potential for international growth. As you can see, we currently have approximately 340 international stores and 610 future store commitments. Our international presence would grow to almost 1,000 units when all store commitments currently on the books are fulfilled. And we expect that number to increase as we renew agreements with franchisees and sign additional development agreements that are currently under negotiation. In closing, I'd like to summarize our growth initiatives. We intend to grow sales and margins by introducing exciting new products and expanding our day parts, especially breakfast by continuing to focus on operational excellence, by modernizing our facilities with contemporary new designs and by increasing our global footprint with expansion in North American and international markets. We believe these initiatives will help us achieve our long-term goal of average annual EBITDA growth of 10% to 15% beginning in 2012. Now I'll turn the call back over to John to cover some upcoming events and the Q&A. John?

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

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.

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.

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

They're in the $15 million range.

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?

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.

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

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.

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.

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?

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.

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?

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.

Your next question comes from Michael Kelter, Goldman Sachs.

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?

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.

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?

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.

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.

Your next question comes from Jeffrey Bernstein with Barclays Capital.

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?

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.

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?

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.

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.

Yes, the 1/3 of the $417 million represents really two buckets: direct G&A of the brand itself, people that are working full-time for Arby's; and then an allocation of indirect shared services center, people and programs that support both brands. That $35 million is roughly what that allocation is, and that also, I think, coincidentally will be about the target, I think, was we look at reducing overall G&A. We think that will be a good target for us to try to achieve if there is a sale transaction.

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?

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.

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?

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.

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

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

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.

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?

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

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?

Yes. What we have said in the past was that there was a Trian [ph] (50:02) 13D filing that we felt precluded us from going back into the market. There's been a subsequent amendment to that filing, and so that impediment is out of the way. What we've said really going forward is we've got the authorized program. We don't comment in the current quarter about our activity in the open market. So we'll give you a report at the end of the first quarter. But there's both legal considerations as we look at the buyback program and also market considerations. And so we'll give you an update on that at the end of the first quarter.

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?

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.

Your next question comes from line of John Ivankoe, JPMorgan. John Ivankoe - JP Morgan Chase & Co: 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.

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 8:00, 9:00 in the morning. And so one of the learnings might be, John, that we provide an expanded menu, maybe earlier in the day, because that seems to be driving an expanded breakfast. Very good, very good feedback on our coffee. It's a high-quality blended coffee that has tested incredibly well against even some of the significant competitors, like Seattle's Best and others, that we wanted to at least match or possibly beat. I will say that in several of our stores, we have begun to expand that coffee test with a different coffee machine, which actually brings in fresh beans with a similar blend and we grind it in-store because of the positive benefit that that connotes to consumers from the standpoint of freshness and quality. And we have yet to read the results on that, but I would be surprised if they're not positive. And so, overall, I think, what we're learning is that we have the right product line. The consumers are reacting very well to it. We're learning more about how we need to represent that line in an advertising standpoint and also in a promotional standpoint. Certainly, pricing is something we continue to test in a number of our markets because breakfast is a fairly price competitive kind of day part, and we are testing our way into kind of what the right mix of premium and value products are. We would expect that we would have a similar execution of My 99 at breakfast as we go forward. And I would say the last probably big learning is that as we look at our first four test markets, three of which had been really kind of converted from the previous breakfast. And so to put it bluntly, many of those consumers, I think, were negatively impacted by the previous breakfast products, which were certainly not consistent with the Wendy's brand positioning of freshness and quality and taste. And you compare those three markets to Shreveport, which was the market that had not had the previous breakfast, we are seeing significantly better results in Shreveport, than we are in the other three markets from the standpoint of the initial results of sales and feedback. And I think that's just because it takes a longer time to convert some of those consumers that have been in and aren’t as interested to go back in and kind of retry the products. And so that's an exciting and an encouraging finding because most of the markets we will open from now on are markets that are kind of virgin to the breakfast kind of opportunity. And we would expect that they would be more in line with what we're seeing in Shreveport. John Ivankoe - JP Morgan Chase & Co: 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?

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.

Your next question comes from Matthew DiFrisco, Op Co. Matthew DiFrisco - Oppenheimer & Co. Inc.: 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?

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] (58:40) and others, some marketing talent, and we've began to kind of reorganize the way that we are structured internationally out of the marketplace. We have another kind of a regional office down in Miami. We have one in Hong Kong. And as we sign new franchisees and we look at new development agreements, we are flexing that structure to ensure that we can support our franchisees as best possible. As we look specifically at our deal in Russia and maybe some expanding deals in Eastern Europe, that will be an area that we also expand our infrastructure. From an investment standpoint, Matthew, I'd say, that we have been investing, and we will continue to invest to ensure that our international business can be a significant contributor to our long-term profitability and shareholder value. We are trying to do that in a very thoughtful way, so that we don't have a single year that is really out of balance from the standpoint of a huge kind of capital investment that would be required in order to continue to grow our EBITDA. I would say that the joint JV venture that we just signed with Higa Industries in Japan is a significant step. That's going to be kind of a big profit driver, we think, over the next couple of years, and we are making that investment kind of 51% to 49% with our new partner and expect, as I mentioned, that our first Central Tokyo restaurant will open later this year. And then we will expand significantly from that point. And so we are investing kind of this year and the next couple of years. We do expect to kind of continue to be EBITDA positive with that investment, but I think this is a little bit like compound interest in that over the kind of the five-year period and beyond, we believe that that will begin to pay some pretty significant kind of returns for that investment. Matthew DiFrisco - Oppenheimer & Co. Inc.: 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.

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.

Your next question comes from Michael Gallo with CLK. Michael Gallo - CL King & Associates, Inc: 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?

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 - CL King & Associates, Inc: 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?

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.

Your next question comes from Jason West, Deutsche Bank.

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?

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.

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?

The reported number.

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.

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