Wendy's/Arby's Group, Inc. Q2 2010 Earnings Call Transcript

Wendyâ¿¿s/Arbyâ¿¿s Group, Inc. Q2 2010 Earnings Call Transcript
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Wendy’s/Arby’s Group, Inc. (WEN)

Q2 2010 Earnings Call Transcript

August 12, 2010 12:00 pm ET

Executives

John Barker – SVP & Chief Communications Officer

Roland Smith – President & CEO

Steve Hare – SVP & CFO

Analysts

Jeffrey Bernstein – Barclays Capital

Jason West – Deutsche Bank

John Glass – Morgan Stanley

Joe Buckley – Bank of America/Merrill Lynch

Michael Gallo – CL King

Jake Bartlett – Susquehanna

John Ivankoe – JPMorgan

Sara Senatore – Sanford Bernstein

David Palmer – UBS

Presentation

Operator

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Good afternoon everyone and welcome to Wendy's/Arby's Group second quarter 2010 conference call. Our hosts today are John Barker, Chief Communications Officer; Roland Smith, President and Chief Executive Officer; and Steve Hare, Chief Financial Officer. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions-and-comments following the presentation.

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

John Barker

Thanks, Melissa. Good afternoon, everyone. Today’s conference call and our webcast is accompanied by a PowerPoint presentation, which can be found on the Investor Relations page, at our corporate Web site, and that’s wendysarbys.com. For those of you who are listening by phone today make sure to select the appropriate webcast player option from our Web site, and that will ensure that you can sync up slides with the audio.

The agenda for today’s conference call and the webcast will begin with remarks from our President and CEO, Roland Smith, who will discuss our second quarter highlights and some recent international developments. Our Chief Financial Officer, Steve Hare, will then review our financial results in greater detail, and discuss our 2010 outlook. Following Steve’s discussion, Roland will update you on our Wendy’s and Arby’s brands, and then we will open up the line for questions.

I’d like to take a minute to summarize what is included in the financial statements, which are attached to today’s earnings release. There is a P&L that has consolidated second quarter 2010 results. We also provided an update to our 2010 financial outlook.

Also, included with today’s release are key balance sheet items, and a table that shows for the first quarter of 2010 EBITDA, a reconciliation of EBITDA to the reported net income, and to adjusted EBITDA, which excludes integration-related cost. We also provided selected financial highlights today for each brand and that has same-store sales, revenues, four-wall EBITDA, margin percent, and the total number of restaurants at quarter end.

In addition, we filed our Form 10-Q for the Wendy’s/Arby’s Group this morning, and later today we will file our Form 10-Q for Wendy’s/Arby’s Restaurants, a subsidiary of Wendy’s/Arby’s Group. Our Wendy’s/Arby’s Group 10-Q is filed in accordance with the SEC’s XBRL mandate and as such you will be able to access the interactive data this time using the viewer that is included on our Web site.

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. Investor should compare our reconciliation 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 afternoon, everyone, and thanks for joining us today. As you all know, we are operating in a very challenging economic and competitive environment. Unemployment which remains high is having a significant negative impact on the restaurant industry. The unemployment rate is the U.S. was 9.5% in July, and it’s actually in the high-teens for one of our key demographic targets, 18 to 24 year olds.

Consumer confidence which also has a strong correlation to restaurant sales dropped in June and July and is now at 50, which is no better than the rating for July 2009.

In addition to these two key factors, there are a number of other weak economic metrics, such as retail sales, housing starts, and the trade deficit which indicate that our economic recovery is going to be a slow process.

In addition to the troubling economic environment, we are also continuing to operate in a very competitive industry. In today’s marketplace, value messaging is proliferating. As you can see from this slide, the restaurant industry is full a value proposition aimed at attracting today’s price-sensitive customers.

According to industry data, while overall QSR traffic is down for the sixth consecutive quarter, the only positive traffic gains have come from low priced deals, indicating that customers are allocating more of their dollars to value offers. This value focus puts pressure on margins and limits price increases.

Even in this challenging environment, we produced positive adjusted EBITDA growth in the second quarter.

Now let me review the highlights of our second quarter results. We are pleased to have produced adjusted EBITDA growth of 3.2% to almost a $121 million for the second quarter.

At Wendy’s, we improved company-operated restaurant margins by 50 basis points compared to the same quarter a year ago. At Arby’s, we continued to focus our turnaround plan and emphasize our new everyday value menu.

For our same-store sales and average check declined in the second quarter, we achieved flat comparable transactions versus a year ago, which is very encouraging compared to trends over the past year. We also effectively controlled G&A as cost decreased 13.5% to $97.5 million in the quarter.

Next, I would like to share further details about Wendy’s second quarter results. In April, we promoted our $2.99 Deluxe Value Meal to attract customers focused on both quality and value. In May, we expanded our successful Boneless Wings line by adding a new Spicy Chipotle flavor and in June, we returned to a value focused by introducing two new Barbeque Bacon sandwiches to our $2.99 Deluxe Value Meal’s lineup.

Our second quarter system-wide same-store sales decreased 1.7% and while sales were down, we believe that this performance continued to rank among the best in the QSR industry. Our franchise restaurants outperformed company restaurants for the quarter, as many franchisees have implemented more aggressive price increases on certain products.

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