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Wendy's International (WEN)

Q2 2007 Earnings Call

July 26, 2007 4:00 pm ET

Executives

John Barker - Investor Relations

Kerrii B. Anderson - President, Chief Executive Officer, Director

Joseph J. Fitzsimmons - Chief Financial Officer, Executive Vice President

Jonathan F. Catherwood - Executive Vice President, Mergers, Acquisitions and Treasurer

Ian B. Rowden - Executive Vice President and Chief Marketing Officer

David J. Near - Chief Operations Officer

Tad G. Wampfler - Senior Vice President, Supply Chain Management

Analysts

Tom O’Neil - Barclay

Joseph T. Buckley - Bear Stearns

John Glass - CIBC World Markets

Andrew Barish - Banc of America Securities

Rachael Rothman - Merrill Lynch

John Ivankoe - J. P. Morgan

Glen Petraglia - Citigroup

Roger Smith - Société Générale

Scott Frost - HSBC

Steven Kron - Goldman Sachs

David Palmer - UBS

Jeff Bernstein - Lehman Brothers

Presentation

Operator

Good afternoon. My name is Kitora and I will be your conference operator today. At this time, I would like to welcome everyone to the Wendy's International second quarter results conference call. (Operator Instructions) Mr. Barker, you may begin your conference.

John Barker

Thanks. Good afternoon, everybody. The purpose of our call today and the webcast is to talk you through our second quarter results and to provide an update on some of the key initiatives we have underway. We did announce our earnings before the market opened today and you can find all the materials, the news release and the financial statements, on our website.

The agenda for today’s call -- we will begin with remarks from Wendy’s CEO and President, Kerrii Anderson, as well as J. Fitzsimmons, our CFO. He will discuss the financials for the quarter and then we will take your questions. Also on the conference call today, our Chief Marketing Officer, Ian Rowden; Chief Operations Officer, Dave Near; and other members of the management team who are here to help answer questions later.

Looking ahead, please note that we do plan to release our third quarter sales. The date for that is October the 4th, and our current plan for third quarter earnings is on October 25th. If there is any update to that, I’ll have that on the website as appropriate.

Our other dates for any disclosure are on that website, which is www.wendys-invest.com.

I would like to refer you for just a moment to the Safe Harbor statement that is attached to this morning’s news release. Certain information that we may discuss regarding future performance, such as financial goals, plans, 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 set forth in the Safe Harbor statement that is attached to the earnings release.

Some of the comments today will reference non-GAAP financial measures, such as earnings before interest, taxes, depreciation and amortization, or EBITDA, and you can find reconciliations to those non-GAAP measures to the most directly comparable GAAP financial measure either in the earnings release or on our website.

Now I would like to turn it over to Kerrii.

Kerrii B. Anderson

Thanks, John, and good afternoon, everyone. The financial results that we release early today I believe are a clear indication that we continue to make progress in our turnaround of Wendy’s.

We said back in October of ’06 when we first introduced our strategic plan to our investors and our shareholders that our overall goal were two areas -- revitalize the brand and improve our financial performance, and the great news is we are making progress on both fronts, which is good for our customers, good for our shareholders and our franchisees and our employees.

During the quarter we continued to execute our strategic plan and re-engage with our customers. Our brand proposition is improving with innovative products, a new advertising campaign, and better store operations and we are determined to fully revitalize our great brand.

Let me update you on our progress in several key areas.

Operations are absolutely our highest priority, and when you talk about operations you always talk about quality, service, and cleanliness as a focus. We continue to expand our QSC -- our quality, service and cleanliness inspections -- to fully measure our restaurant operations performance across the entire system and to level set our expectations and achieve our objectives. We are conducting unannounced operational audits in every restaurant in our system.

Over the past several months, the scores have continued to improve from our initial inspections that occurred last fall. We believe that these scores are leading indicators to improved operational performance and that we are heading in the right direction, which is all about taking care of our customer.

From a service excellence perspective, Dave and his team are in the early stages of developing the next evolution of the initiative, to improve Wendy’s in every aspect of operations.

You may remember, some of you, that service excellence was our innovation in the mid-90s that enabled our company to distinguish itself in operations as best in the industry and to dominate speed of service and QSR. We won the fastest QSR drive-thru for more than six consecutive years but slipped in the last two years to the number two position and it is our goal to regain operational excellence not only at the drive-thru but in our dining room as well, which will translate into more transactions at the peak hours.

From a store labor perspective, we successfully reached our goal of 3.3 managers in every store, company store, down from 3.6 a year ago. In addition, effective this month, we are also reducing crew labor by about 30 hours per week, right in line with the guidance that we provided in February which was given by Dave Near, and should have a positive impact on store profitability during the third quarter and fourth quarters.

One important note about the reduction of hours is that these hours are not impacting the customer. It is areas of prep and really preparation from a store perspective in opening.

With all of this change, our store managers are just doing a great job. They remained focused on superior operations and customer service while improving store profitability. This was one of our imperatives in our strategic plan and we are on track.

From a marketing and R&D perspective, we are building momentum and we are engaging with consumers with products and a much more powerful message. In the second quarter, we rolled out several new menu offerings, including the Steakhouse Double-melt Cheeseburgers in April, Frosty Floats, and a $0.99 Buffalo Crispy Chicken Sandwich in May, a $1.99 Triple Stack Cheeseburger in June.

In May we also introduced our new coffee, Wendy’s Custom Bean, which is a proprietary blend of Folger’s gourmet selections, and we continue to expand breakfast. By the end of August, we anticipate being in 650 restaurants nationwide with breakfast.

In July, we began promoting the Baconator, and it is being advertised nationally right now. It is a hot and juicy hamburger featuring a half-pound of fresh, never frozen, beef, six strips of hickory-smoked bacon, American cheese, ketchup and mayonnaise. And if you are thinking hot and juicy, so are our customers. It is aimed at the core QSR demographic young male consumer and it meets their needs in the demand for a large premium hamburger that is unique to Wendy’s.

During this quarter, the second quarter, we also launched our That’s Right advertising campaign, which highlights Wendy’s fresh, never frozen, beef and made-to-order hamburgers.

So far, we are encouraged by the positive consumer reaction to the advertising and our red wig icon. After only six weeks, national consumer research shows that more than half of respondents can play back “I deserve a hot, juicy hamburger” line from our advertising campaign and immediately associate the red wig with Wendy’s. This is the key reason for our core hamburger business is growing and we are excited about expanding the campaign on many fronts, TV and radio advertising, but in addition we’ve also had Internet impressions on our website, YouTube and special websites. There have been more than 800,000 views on YouTube of our video and it is the sixth most viewed video on that site. We also have other public events in which the gentlemen in the red wig is showing up.

From a development standpoint, we are focused on store remodels. We recently just completed six new different exterior remodels in Ohio and we will be analyzing the impact on consumer impressions, our transactions, and our overall business results.

Each of these remodels costs less than $100,000 as we continue to focus on driving the greatest impact in getting a return on our invested capital and that of our franchisees.

From a financial results perspective, we reported improved EBITDA income and EPS results and we have now produced 13 consecutive months of positive same-store sales. We are encouraged with the positive same-store sales but we know we need to improve. Our mid-term goal is to produce same-store sales more in the 3% to 4% range and we acknowledge that near-term comps are much tougher in both the third and fourth quarters.

Most importantly, our U.S. company-operated restaurants EBITDA margins improved 100 basis points. This is very encouraging, as we focus on producing more profit at the store level for all of our company and franchised restaurants.

I would probably be remiss, coming from a financial background, if I didn’t give my perspective on the financial results from a numbers perspective. When you take out the unusual items of this quarter and you take out the unusual items of last year’s second quarter, I think the important point is that operating income grew almost 25% when you compare it to last year. J is going to give you a little more color and detail on that as he discusses the second quarter financial results in detail in just a few minutes.

But it was a very good quarter overall. As we look ahead, we are focused on improving sales through better operations and marketing to exceed our second quarter same-store sales performance in the back-half of the year.

Rising commodity prices driven by the demand for ethanol will result in higher-than-expected food costs for the balance of the year. We talked about this when we adjusted our earnings outlook in June. This situation is not unique to Wendy’s. Several other restaurant companies have mentioned commodity cost pressures. We are concerned about the forecast for our inflation increases and its potential effect on consumer spending. However, we are working on many initiatives to offset rising costs as we focus on improving margins at every Wendy’s restaurant in the system.

We are confident about our initiatives to drive sales, reduce store level management labor, and improve service will result in profit growth in the second-half.

In closing, I will tell you that I am very optimistic about the remainder of 2007. We have good momentum in our business and a solid strategic plan that we will continue to evolve to drive sales and profits. This team is focused on executing the strategies, protecting and creating value for our great brand, not speculation.

With that, I will turn it over to J.

Joseph J. Fitzsimmons

Thanks, Kerrii. The last time we did this call I had been here all of three days. Now I have been here three months, so I guess that makes me a relative expert this quarter. Seriously, from a financial perspective, I would summarize the quarter as follows: it was a quarter with solid financial performance in a difficult and competitive environment. Income from continuing operations was up almost 215% and EBITDA was up 90% over the second quarter of the prior year.

It was a quarter with continued positive same-store sales growth, as Kerrii said, 13 consecutive months of same-store sales growth.

It was a quarter with further improvements in company restaurant EBITDA margins with an increase in U.S. operations of 100 basis points and in consolidated company stores of 60 basis points over the similar period in the prior year.

We are encouraged by the results but we recognize that further improvement opportunities in sales and operating margins exist. As Kerrii alluded to, we have plans in place to generate even better results in future periods.

Now let’s look at some of the line items in the P&L. Cost of sales -- cost of sales declined from 62% in 2006 to 60.4% in 2007. The 160 basis points improvement is due to menu management, including higher menu prices geared to the market based pricing strategy we previously discussed, and an improved mix of products sold, including higher sales of frosties and premiums. Commodity costs will likely increase above first-half levels, driven by higher grain, beef, dairy and potato costs. We expect beef costs will be up between 5% and 10% in the back-half of the year.

To offset these costs, we continue to focus on product optimization, labor initiatives, selective menu price increases, and aggressive food cost management.

Company operating costs as a percent of sales increased from 26.5% in 2006 to 27.3% in 2007.

This year-over-year increase is due primarily to higher insurance charges and 30 basis points due to the impact related to the accounting charge from the change in accounting for the company’s Canadian real estate joint venture with Tim Horton’s. We went from full consolidation to the equity method of accounting. As a result of this change, the 2007 company restaurant operating cost line includes rent paid to the JV that previously was eliminated in consolidation. This increased expense on this line.

Without this accounting change, total company restaurant margins would have been 12.1% versus the reported 11.8%.

Moving on the operating costs line, the $9.5 million decline is primarily due to $10 million in incremental advertising spend incurred in the second quarter of 2006. For G&A, the 20 basis points improvement as a percent of revenue primarily reflects the impact of the 2006 cost savings initiatives related to the next chapter restructuring and lower bonus accruals. This number was offset by higher non-cash stock compensation and higher consulting fees and professional services expenses and additional breakfast advertising expense during the quarter.

A new line on your P&L is restructuring and special committee related charges. This includes $10.6 million of net expense and is due primarily to $5.5 million in pension settlement charges. You will recall that this $5.5 million represents a portion of the $60 million in pension settlement charges that we previously disclosed to you. It also includes $4.7 million in expenses related to the board’s special committee.

Last year’s number, 2006, includes $20 million in expenses relating to the next chapter restructuring costs. This included voluntary early retirement costs, severance expenses, and consulting fees.

We do expect to incur additional expenses in future periods in this category. They will come from the board’s special committee, from additional pension settlement cost, and if you remember we said $60 million, given the 5, that would be up to probably about $55 million, and possible restructuring charges.

On the other income and expense line, the $8 million of net income reflects $4.5 million in insurance reimbursements for the Hurricane Katrina claims and $2.6 million of income from the 50-50 joint venture with Tim Horton’s that we previously talked about. Remember, this is partially offset by the higher rent income expense in the company operating costs. This compares last year to $0.7 million of expense in the second quarter of 2006.

Interest expense was $2.1 million higher in 2007 as a result of the sale of a portion of our royalty stream accounting for 40% for 14 months that we entered into the fourth quarter of 2006. We recorded this as debt. In 2006, the company received $94 million in return for the future royalties. In 2007, the repayment of this royalty related debt is being accounted for as a loan, comprising both repayment of debt and the recording of interest expense. As a result, interest expense is up in 2007.

For interest income, the $8.4 million decrease in the second quarter of 2007 in interest income reflects lower cash balances, which resulted from the modified Dutch auction tender offer and the accelerated share repurchase completed in the fourth quarter of 2006 and the first quarter of 2007 respectively.

Taxes -- the company’s effective tax rate was 38.2% in the second quarter of 2007. We expect the rate to average 38% for the year but it will fluctuate around that number from period to period.

Moving to shares outstanding, shares outstanding were lower this quarter due to the previously discussed share repurchases of 22.4 million shares in the Dutch auction tender offer in the fourth quarter of 2006 and 9 million shares in the accelerated share repurchase in the first quarter of 2007. This resulted in a lower share count of 88.3 million in the second quarter of 2007, which compared to 117.8 million average shares in the second quarter of 2006.

Now, we did have some unusual items in both this year’s and last year’s second quarter. Let me detail those for you. We had additional advertising contribution of $10 million in the second quarter of 2006, and that was recorded in operating costs. We had restructuring cost of $20 million, and this is recorded in restructuring and special committee related charges in the second quarter of 2006.

This year we had pension settlement costs of $5.5 million in the second quarter of 2007 recorded in restructuring and special committee related charges. This year we also had special committee expense of $4.7 million and we recorded that in restructuring and special committee related charges. We also had the reclassification of the Tim Horton’s joint venture we previously talked about to an equity investment. That resulted in $2.2 million in lower operating income and $2.7 million increase in other income.

Finally, we had insurance reimbursements from Hurricane Katrina of $4.5 million, which was recorded in other income in the second quarter of 2007.

Now, if you adjust for all those items, operating income would have been $64 million in the second quarter of 2007, compared to $51.6 million in the second quarter of 2006, which represents 24%.

Kerrii, I’m the Chief Financial Officer. You said almost 25. It’s closer to 24.

Kerrii B. Anderson

I’m rounding up.

Joseph J. Fitzsimmons

She turned into an optimist when she left the CFO’s position. So let’s talk about our revised outlook. In June we announced our revised outlook for 2007 for EBITDA and diluted EPS from continuing operations, due primarily to lower-than-planned same-store sales and higher-than-expected commodity costs. Today, based on our trends and the current cost outlook, we are reaffirming our guidance range for EBITDA of $295 million to $315 million. This is a 33% to 42% increase over 2006 adjusted EBITDA from continuing operations of $221 million.

Our guidance for EPS is $1.09 to $1.23 per share. Remember that the outlook excludes: expenses related to the board’s special committee, $4.7 million was recorded in the current quarter; pension settlement costs could approach up to $60 million in total, of which $5.5 million were recorded in the second quarter; and any potential restructuring charges.

Excluding pension settlement charges, expenses related to the board’s special committee and restructuring charges, second quarter adjusted EBITDA would have been $95.3 million.

Now, as a reminder, we have suspended our previous earnings guidance for 2008 and 2009 due to the strategic review process which is now underway.

Let me turn it back to John.

John Barker

Thanks, J. A couple of notes before we open up the phone lines for questions. First, the board approved our 118th consecutive quarterly dividend. That will be paid on August the 20th to shareholders of record as of August the 6th. The quarterly payment will be $0.125 per share and this is our second dividend payment since the board voted in February to increase our annual dividend rate by 47%, $0.34 per share to $0.50 per share on an annual basis.

One more note -- we do not intend to provide updates regarding the special committee’s action but we will report specific developments as circumstances warrant and the special committee provides those to us.

Our last statement on actions related to the special committee was in the press release that we issue on June 18th. The committee does not have a specific timeframe for its review and on this call we do not intend to discuss this matter further. We do however invite your questions regarding our second quarter results, our 2007 outlook for the rest of the year in terms of operations and marketing, and other news for Wendy’s.

Operator, we’d like you now to queue up our listeners for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jennifer Prailor with Barclay.

Tom O’Neil - Barclay

This is actually Tom O’Neil. I was hoping that -- I know you mentioned that you weren’t going to comment on the strategic review but I just had a fixed income question related to your bond indenture. If you decided to securitize your franchise fees as part of any transaction that you might do, would you have to take out your bonds? Would there be a violation in the indenture?

Jonathan F. Catherwood

As part of the review for securitization, the special committee and they haven’t come to any conclusions yet. Certainly all of the indentures in our three outstanding bonds were taken fully into account and we intend to comply with them fully. That’s as much as I can tell you because we haven’t -- the special committee hasn’t decided exactly what it wants to do but it is done in the context of our current bond indentures.

Tom O’Neil - Barclay

And just one other follow-up; certainly you must be aware of the much higher funding rates in the high yield markets. It is about 200 to 300 basis points of widening that we have had in the average high yield credit. Does this effect the company’s thinking on the amount of leverage that it might want to have as a result of your strategic review?

Joseph J. Fitzsimmons

In my opinion what you have here potentially is a slightly positive development because the bonds that we would be talking about relative to the securitization would be rated Triple A. So we don’t believe that what you are seeing in the non-investment grade market will have a significant impact upon the process that the special committee is going through.

Tom O’Neil - Barclay

Thank you very much.

Operator

Your next question comes from the line of Joe Buckley with Bear Stearns.

Joseph T. Buckley - Bear Stearns

Thank you. I just had a couple of questions. Could you talk about the pricing that you have taken in company stores -- what percent you’ve raised prices and Kerrii, I know when you gave the sales update for the June quarter you indicated that you thought that pricing was having some negative impact on sales. If you could talk a little bit about that and while on pricing, just if you think you need to take more pricing given the commodity situation and labor situation.

Kerrii B. Anderson

I guess for competitive reasons, Joe, and I know this is not the answer you want to hear, we have chosen not to disclose the amount of actual price we are taking, although I -- I mean, I have been very clear about the fact that it is a very important component of our strategy this year.

From a pricing perspective, I think we do believe that the increase in price always has an impact on your customer. While we still have value and we feel very strongly about that, certainly we have looked at the gap that exists between us and our competition on products that are similar or products in which we are actually premium and it just was a tremendous gap for us to be able to provide some opportunity.

That said, with respect to what we’ve taken so far, I know Dave, you and Ian have both looked at the current pricing structure and I think we believe there is still opportunity. I don’t know if you want to add comments here.

Ian B. Rowden

I would just say there are still some pockets, if you’d call it that, of products where Dave and I still see a gap that we can close. We want to be very judicious in how we think about that on the back of, as Kerrii said, the price increases to date.

David J. Near

Joe, the other thing and I know you are aware of it but several restaurant companies have talked about the increases. I know Starbucks, for example, gave a pretty precise number the other day in terms of increases that they are planning to take and so we are starting to see some things like that within the industry. I know McDonald’s has talked about it. I think it is just the reality with commodity increases.

Joseph T. Buckley - Bear Stearns

If you are catching up to competitors, why do you think the customers balked at the prices?

Ian B. Rowden

Joe, we’ve talked about this before. One of the other aspects that Kerrii talked about is the revitalizing of our brand and from an historical perspective in terms of recent performance in the marketplace, the brand has been relatively inelastic and we have to deal with that and that’s what we are dealing with.

Kerrii B. Anderson

Part of the challenge in marketing is to be able to, for us to articulate what we think our competitive advantages really are and that’s why the focus is on fresh beef, never frozen, made to order, fresh cut lettuce, fresh cut tomatoes, great operations -- I mean, the points of difference that really -- I don’t know if you’ve got something that would be helpful to add there, Dave but you know -- you know, to the extent someone’s been coming to Wendy’s and we have changed price, they see it and it can effect consumer behavior.

David J. Near

I think anytime you raise prices, even given the fact that we are in catch-up mode with a lot of our competitors right now, you still go through a period where it could potentially affect some transactions as you raise price. So even though we are trying to catch up to our competition, there is still that risk of losing some transactions along the way.

Joseph T. Buckley - Bear Stearns

One last question and I will turn it over to someone else -- with the special committee, the $4.7 million, I guess two questions; what are they spending that kind of money on when there’s been no decisions, it seems? I think you indicated that that spending might continue. You didn’t indicate a level but I think you did indicate there will be more expense related to the special committee.

Joseph J. Fitzsimmons

It is good that the analysts are no longer related to the [banksters] that are out there but obviously the advisory fees that we are paying, we are taking into account as we go along and whether or not there is a sale, there will be advisory fees, there’s legal fees and other fees. Those fees are not controlled by the management of the company. They are controlled by the special committee.

Joseph T. Buckley - Bear Stearns

That much I understand, but -- will it continue at that level do you think, or do you have any idea?

Joseph J. Fitzsimmons

I think it will continue at at least that level. As long as the process goes forward, you know, and any point in time the process stops, obviously this figure will slow down.

Joseph T. Buckley - Bear Stearns

Okay, thanks.

Operator

Your next question comes from the line of John Glass with CIBC.

John Glass - CIBC World Markets

Thanks. I wanted to see if I could get at that pricing question maybe a little differently. If you don’t want to talk about the absolute magnitude, how much do you think your increased prices has hurt your traffic? If you raise prices by a percent, do you lose a half a percent of traffic? What is the relationship, do you think?

David J. Near

I think it is very difficult to quantify. We don’t have an exact number for you but without a doubt, when you raise prices you do run the risk of transaction loss. I think we are seeing a little bit of that but again, I think it is the right thing for us to do in terms of looking to be competitive with our competitors from a pricing perspective. So I can’t give you a number exactly.

John Glass - CIBC World Markets

You don’t think it is anything in the way you are doing the pricing, that market-based approach versus an all-out approach, do you?

David J. Near

We don’t.

John Glass - CIBC World Markets

Okay. And then, on the breakfast rollout, the 650 units you are going to have done by August, are those all company units? Secondly, can you talk a little bit about the impact it is having on your business, either a percentage of sales run-rate or the impact it is having on comps -- something to gauge the success of it?

David J. Near

John, the 650 stores, it is a mix of company and franchise stores. From a same-store sales perspective, I don’t think that we have broken out that number.

Kerrii B. Anderson

Very little impact on same-store sales -- some, but little. On the company -- it is certainly more company stores than franchise stores. I don’t know if, Ian, you have relative, the percentage --

Ian B. Rowden

I don’t have the percentage in front of me but predominantly it is company stores at this stage as we create the base for the franchisee community to get engaged.

Kerrii B. Anderson

And really, that’s generally been our -- we try to take a leadership role. We believe we’ve identified four or five characteristics that make what is a great opportunity for a breakfast store and we are using that criteria to determine which of the company stores we go forward with.

John Glass - CIBC World Markets

So it could be in as many a third of the company stores by August then, if it is say 400 stores are company stores.

David J. Near

That’s fair to say.

John Glass - CIBC World Markets

And you are not willing at this point to talk about what the percentage mix breakfast is coming out at?

David J. Near

Not yet.

Kerrii B. Anderson

Really, for 160 stores, which is what it has been testing this quarter, it is really pretty small.

John Glass - CIBC World Markets

So the incremental 300 or 400 stores are all coming in the next six weeks?

Kerrii B. Anderson

That’s right.

David J. Near

John, just to tag on that, we are pleased with how breakfast is going to date. I think with the launches that we’ve had over the past 30 to 60 days, I think we feel good about how we have launched breakfast in the additional stores.

Kerrii B. Anderson

And as we roll out these new breakfast stores, we are rolling them out with the complete package and what I mean by that is a menu board that is representative of the outside to really be able to display and show the products, along with a new coffee program, Wendy’s Custom Bean, as well as a full array of a menu that we call first generation today, the first step of a great breakfast menu.

John Glass - CIBC World Markets

Thank you.

Operator

Your next question comes from the line of Andrew Barish with Banc of America Securities.

Andrew Barish - Banc of America

Can you give us an update or maybe let us know how far along or how close you are to thinking about refranchising again as the margins have moved a little bit higher? Obviously there’s some challenges in the second-half but is that more of an ’08 issue or sort of on hold, given the strategic alternative process?

David J. Near

First of all for this year, we talked about refranchising 50 to 60 stores and we are on track to accomplish that and hit that number. For guidance into ’08, I think we’ll probably get into fourth quarter before we decide exactly how many stores we look to refranchise in ’08. I think in fourth quarter we will have an update for you there.

Joseph J. Fitzsimmons

We did 21, Andy, in the second quarter.

Andrew Barish - Banc of America

Any financial gain or loss in the numbers?

David J. Near

Very little.

Joseph J. Fitzsimmons

In fact, Andy, in the franchise line itself, it would have been a negative compare to the gains that we had booked last year during this period.

Andrew Barish - Banc of America

Thank you.

Operator

Your next question comes from the line of Rachael Rothman with Merrill Lynch.

Rachael Rothman - Merrill Lynch

On the 2007 guidance, can you give us some sense for how your targeted margins relate to the reduced EBITDA guidance? Could you comment a little bit on the franchisee incentive for the remodels and whether or not you are still anticipating the $12 million expense there?

David J. Near

On the remodels, we have spent I believe $4.4 million year-to-date on the remodels. I think that we see that continuing at the clip that it is on, that it has been on for this year. It continues to go well. I don’t think that we expect to spend as much as we did at the beginning of the year but I would see it continuing at the clip that it is going now.

Kerrii B. Anderson

I would say certainly, I mean, you have to be candid. The uncertainty that exists with the process that is in place at the moment certainly has put a damper. I don’t think it is an intention that franchisees don’t want to reinvest but they want more certainty about what the future is before they do so. I think that has probably slowed the impact at the moment.

Joseph J. Fitzsimmons

Relative to what is included in the guidance, we won’t get to the 450. We are making progress towards the 450 but we are comfortable that the assumptions that we have built into the revised guidance that we gave you in June are achievable, given what we see in food costs at this point in time.

Rachael Rothman - Merrill Lynch

Could you just tell us roughly how that breaks down between restaurant margin, G&A reduction, same-store sales growth -- how your different major categories break out to come to the revised EBITDA guidance?

Joseph J. Fitzsimmons

We are not going to get into all the individual pieces but what we did was assume that the sales growth going forward would be approximately the same sales growth that you saw in the second quarter. So we are not looking for improvements in momentum on the sales side. We have factored in what we think are even higher costs in the second-half of the year than we have in the first-half of the year.

I think we’d say that what we gave you as guidance is based on the current circumstances. I think what Kerrii would say is we would like to do better than that and we’ll try to find ways to overcome some of the obstacles that we are facing.

Rachael Rothman - Merrill Lynch

And then, just more of a housekeeping or quantitative question -- can you help us reconcile a little bit between what you guys disclose as your restaurant level margins and then the restaurant level margins that we would calculate as presented in the income statement? They always seem to be off slightly.

David J. Near

If you would take sales as reported and subtract out cost of sales as a percent and company-restaurant operating costs as a percent, you are going to get very close to that number that we disclose as the overall margin. As you know, we also have some sales of our bakery franchisees in those numbers, as well as sales in kid’s meals toys but you should get pretty close just by looking at the face of the P&L.

Rachael Rothman - Merrill Lynch

Thank you.

Operator

Your next question comes from the line of John Ivankoe with J. P. Morgan.

John Ivankoe - J. P. Morgan

Thanks. I would like to ask a question similar to another couple of questions that have been asked and again, the impact of pricing as it relates to customer traffic. I think a lot of us are struggling because a number of companies, such as John Barker mentioned McDonald’s taking something like three points of pricing, and on that basis they are obviously running positive traffic in the U.S.

What I would like to know is, other than pricing, what is it that the competition is really doing better than you right now and what is going to change near-term to allow you to at least begin to perform in line with your peers, if not better than your peers, other than just the price impact?

Ian B. Rowden

A couple of thoughts and Dave and Kerrii can weigh in here. I said earlier that our brand has been less elastic based on its historical performance and that’s true. The impact of price increases for us is probably a little more extreme in that regard.

The other thing that our competitors are doing, and I would not say they are doing better than us but they are doing that we are not doing, is they are in a day-part segment that is fueling their growth in breakfast, which is why we had the initiative to get into breakfast and as Kerrii said, our expansion is on track. But we said all along we are going to make this expansion at a rate and with a process that the system can digest and that we can continue to be profitable all the way through, and that is something we are very focused on in the environment we’re in.

The other thing that we recognize that our competitors are doing that we are making ground up on is from a beverage point of view and from a desert point of view, so our focus on frosties and expanding our beverage portfolio is important to us. And we are also exploring snack day-part opportunities, which we have traditionally not developed menu items for and we are focused on that as well, and that is in addition to our ongoing focus to reinvigorate our core brand and our core business.

So we’ve got this balance going on at the moment that Dave and I and Kerrii are focused on as we blend in a price increase, we manage what that does to transactions and we expand our business at the right rate.

John Ivankoe - J. P. Morgan

Could you remind me what late night is as a percentage of sales, how that has been trending and whether again, like some of your competition, whether there is any room to actually expand late night in terms of number of hours you’re open?

David J. Near

I think we are at about 10% of our sales with the late night business. I think that we do have some opportunity to look at expanding in certain areas, you know, the late night business, extending hours. That is actually an analysis that we are going through currently.

The only thing I guess I would add to Ian’s points and you asked on what the competition is doing differently, one of the things I think some of our competitors have done a decent job over the past couple of years with is their value proposition, which again is very important to us as well and we continue to explore ways where we can make sure that our value proposition resonates as well as we’d like it to and that it needs to.

Kerrii B. Anderson

I might just add on the late night comment that to Dave’s point, not only can we perhaps extend our hours a little more but we also I think can do a better job marketing it and that is an effort that we have underway today.

If you remember a couple of years ago, we had late night tags on our commercials and we had late night stickers on our windows and if you drive by as of a month ago, you wouldn’t see those things. We are back focused on making sure everybody understands that we are open late night and we are also tagging some of our commercials with that.

Ian B. Rowden

Yes, and that we have products that, to Dave’s point, extend our value proposition into day part that we kind of led the way on and our competitors have converged on, so that is important to us.

Kerrii B. Anderson

I might just add one other thing, I mean, and this is Dave’s focus, as laser-focused as he can be, that’s just improving operations. We have to acknowledge that the competition has improved their facilities, they have improved their operation metrics from a few years ago, and it is just really important that we are in our restaurants, talking to our customers, serving them hot food and with a smile and a thank you. That is something with these QSC inspections I think we have really been focused on stepping up the operational perspective.

David J. Near

Absolutely.

Operator

Your next question comes from the line of Glen Petraglia with Citigroup.

Glen Petraglia - Citigroup

In terms of transaction count, just building on that, in the release it says that the core hamburger business is growing and I guess -- maybe you can help us think about if your hamburger business is growing, where is your business ultimately struggling?

And then Ian, regarding the advertising, could you potentially share with us any feedback in terms of consumer purchase intent after seeing the advertising?

Ian B. Rowden

Let me make a couple of comments about the performance of our core hamburger business. A key to our strategy, as you know, is to restate our position from a freshness point of view and from a point of differentiation based on fresh, never frozen and made to order. These are important language points to us, so as we’ve introduced in recent weeks the new advertising campaign and a product that sits squarely in the middle of the message, the product being the Baconator, we’re seeing our core hamburger business expand. There’s no question about that and we’ve said that in statements we’ve made.

From a consumer point of view, I will tell you we are seeing recall levels in the first six weeks of our advertising that match levels that have been achieved in much longer periods of time with previous campaigns. Kerrii mentioned the percentage of population who are recalling not only the line but the language that we are using. And from the copy testing we’ve done on the advertising, we are seeing people play back very directly to us at a rate which is much greater than the norm, both the message that is being conveyed and how important it is. And that is fuelling purchase intent.

So the things that you would want an advertising campaign to do quickly, this campaign is doing so we are really pleased with that.

Now, the caveat there is this is just the start and we’ve got lots of dimensions with which we will take this idea in the coming months.

David J. Near

Just to tag onto Ian’s comments, one of the things that did, one of the products that performed very well for us last year was Frescatta, when we launched Frescatta at the end of first quarter, beginning of second quarter, and that has proven to be a very good product for us but we also see it -- its lifecycle probably coming to an end at some point here in the future and we have some plans to evolve that product into something else, because we have very good feedback and purchase intent on the bread carrier, Frescatta. So we’ve got some ways that we are looking at to evolve that product into something else.

Ian B. Rowden

The final piece on the advertising is this red wig icon obviously is something that is becoming very powerful for us very quickly. That’s just exciting.

Glen Petraglia - Citigroup

Thanks. Dave, while I have you, in terms of the exterior remodel tests that you’ve done, perhaps just to give us some color in terms of what has changed and how long it takes in order to get a real read on how well those remodels will perform.

David J. Near

Glen, we just finished the remodels. They were primarily focused on what we call our image stores, which are our older stores from 1969 to about 1990 and we just finished six different versions of the exterior remodel there.

It is much too early for us to get a read as to what it looks like from a sales growth perspective doing those remodels, but we will -- we are certainly evaluating those as the weeks roll on here.

They look great. We’ve had great feedback from the customers since they’ve been done, great feedback from our management and crew and so we’re really excited about it. We are also excited that we brought them in at a cost that we think is palatable for our system as well.

Glen Petraglia - Citigroup

Historically, would it take a month or are we talking six months before you know whether they having an impact?

David J. Near

It would probably take anywhere from 30 to 45 days to do a complete exterior remodel.

Glen Petraglia - Citigroup

Thanks.

Operator

Your next question comes from the line of Roger Smith with Société Générale.

Roger Smith - Société Générale

Thank you. Could you just tell me the quarterly same-store sales number -- was there anything else in your view besides the increase in price that was a major impact to the figure?

David J. Near

You mean on why it wasn’t higher, Roger?

Roger Smith - Société Générale

Exactly.

David J. Near

I think we referred to the competitive landscape, number one, and then the pricing.

Roger Smith - Société Générale

So if you were to categorize it, was it 90% due to price increases and 10% due to competitive initiatives, 50-50 -- is there a way to categorize that?

Jonathan F. Catherwood

We couldn’t break it out for you like that. One thing I can tell you that J referred to is if you look back at the same period last year and the activity that we were undertaking, there was incremental advertising expenditure that we’ve culled out, there was the introduction of Frescatta, the introduction of a crispy chicken sandwich that revitalized our value segment, as well as a vanilla frosty.

It was a period of time for us that was a very strong period and I think environmentally, that plays to the performance.

Roger Smith - Société Générale

Let me put this a different way -- if you did not have the price increase, what do you think your same-store sales would have been?

David J. Near

We can’t tell you.

Roger Smith - Société Générale

Okay, and the second part to that, with the new ad campaign and such, and it seems to be hitting the right metrics, according to what we’ve just heard, why do you still believe that the performance, at least in same-store sales, is going to be similar to the second quarter? Wouldn’t that suggest if things seem to be working right, the hamburger business doing well, you are going to put the tag back for late nights, you have the remodels going on -- everything seems to be progressing nicely. Wouldn’t one expect that your same-store sales should do better than what we just saw in the second quarter?

Kerrii B. Anderson

I think it is a fair question. I think you do have to acknowledge that if you go back, and all these facts and information is available, last year we did in April, 0.2; in May, negative 0.5; in June, 2.5 same-store sales. So we are now going up against July, August and September at 3.6, 4.7, and 4.3.

Roger Smith - Société Générale

Sure.

Kerrii B. Anderson

I think just acknowledging in this industry, you know, although we have seen our competitors with some of the initiatives they have out there be able to do it, it is not -- it is generally very challenging to be able to topple over 3s and 4s, you know, or forward against 3s and 4s.

I think we are conservative. I think we have to be that way given where we are and our position today. I think it is more of that.

To your point, do we not have confidence in the future? No, we have great confidence in the initiatives we have. We also acknowledge the commodity pressures that are out there.

Roger Smith - Société Générale

Sure. Let me just -- when we had the meeting back in February and you gave the guidance and such and maybe I’m quoting it wrong but I seem to remember a lot of talk of 2% to 3%, or 3% to 4% comp store sales. I assume that all the price increases and all the strategies were pretty much in place back then. I am just a little confused as to why everything just changed.

Kerrii B. Anderson

I think for one thing, since February the consumer’s landscape has changed. The price of gas is -- I mean, I’m not sure when I stood on the stage in February I knew that gas was going to be over $3 a gallon.

So I do think there are some other factors that are -- and commodities. I’m not sure we though what was happening from an ethanol perspective would have the impact on commodities then.

I think we are just trying to take into consideration all the factors that we are aware of today that are different.

Roger Smith - Société Générale

The impact on commodities, that impacts your costs. How does that impact the consumer directly, coming into your restaurant?

David J. Near

It affects consumer availability of spending, if they go into the grocery stores and the gasoline stations.

Roger Smith - Société Générale

Right, so that would impact the whole industry as well and other companies’ results seem to be a little bit better on the same-store sales.

David J. Near

I don’t know about that. If you look at a cross-section of the same-store sales, you take a look at Yum! Brands and some of the casual diners who have announced, I think in general we have seen a down-turn, with a few exceptions.

Roger Smith - Société Générale

Fair enough. Thank you.

Operator

Your next question comes from the line of Scott Frost with HSBC.

Scott Frost - HSBC

I was going to follow up on a question that I think Tom O’Neil asked earlier, talking about higher rates on below investment grade debt. You had said that this was a positive development because one of the things you are considering were a Triple A securitization of franchise fees, et cetera, et cetera. Does that imply that a leverage buy-out or a levered transaction or anything involving raising debt in capital markets is off the table or am I reading too much into that?

Joseph J. Fitzsimmons

You are reading too much into it, Scott. They can be used either by a buyer or could be used by the company.

Scott Frost - HSBC

Okay, so we can’t rule that out then, right?

Joseph J. Fitzsimmons

No, you cannot rule that out.

Scott Frost - HSBC

Thank you.

Operator

Your next question comes from the line of Steven Kron with Goldman Sachs.

Steven Kron - Goldman Sachs

Thanks. Good afternoon, guys. A couple of questions; first, can you talk about getting back to the same-store sales for a second and talk about the menu mix, taking price out of the equation a bit. What are you seeing from the types of products consumers are buying, whether it be premium or something a little bit more value? Are you noticing any change there and is that contributing to some of the year-over-year pressure in comp?

David J. Near

I don’t think so. I don’t think that is contributing to it. In terms of -- we did mention that our core hamburger business seems to be very strong right now, Baconators are doing very well. We’ve been very successful with our Frosty lines in terms of the Frosty Float promotion that we just went through. That’s doing very well. Vanilla Frosty continues to do well, so we are starting to see I think some very good traction from a product mix perspective, which is one of the reasons I think you are seeing our margins continue to improve.

Steven Kron - Goldman Sachs

Okay, and then a follow-up on breakfast. I know in certain markets where you have been testing, I think about a month ago you tried to get a bit more aggressive with more offensive or guerilla-type tactics in certain markets. Can you maybe talk a little bit about the traction that you have seen from some of those more assertive initiatives?

Ian B. Rowden

I can answer that for you and first of all, you are right. The marketing program we put in place is very much a community marketing place program which is designed out of the learning of the usage patterns of consumers for breakfast. Part of that includes the rolling out as Kerrii said of new menu boards, the introduction of our new coffee based on the agreement we have with Proctor. The final menu that we have in place, which we call generation one menu now, which is being rolled out through all the restaurants, and a swag of local marketing activities that range from some couponing and some discount offers.

We are seeing traction with it. We are seeing, I will tell you repeat purchase intent growing and we are seeing traffic shifts from existing competitors in those markets on an ongoing basis to our business. So we feel good about the start we’re making and there is a lot more that we will do as part of that process.

Kerrii B. Anderson

I might also add that as we roll these stores out, every store has a local store marketing plan, which we begin to work on a couple of months before the store actually puts breakfast in. And that’s just a real key to success, we believe.

Steven Kron - Goldman Sachs

Lastly, Ian, looking year over year, clearly last year you had the $10 million incremental advertising expense in the quarter. How should we be thinking about the competing forces of trying to realign and get the messaging out? I know that $10 million last year was kind of a one-time in nature thing but it seems to have dropped back to historical levels here. Are you spending enough on advertising to get that brand message out or does there need to be a little bit more of a push, given what we are seeing from a sales perspective at this point?

Ian B. Rowden

I will tell you -- first of all, it was $10 million in this particular quarter last year that we had. The total that we invested was more than that. It was $25 million. But to answer your real question, which is are we spending enough money, we believe we are. From a share of voice point of view from a level of penetration of the advertising and from a medium mix point of view, we believe that from both a reach and a frequency point of view, we are very strong and we don’t consider weight of advertising an issue.

I will say to you, and we’ve said this publicly, what we are getting from our current advertising is much stronger impact based on the message and the way it is being portrayed, and that is helping us and we believe we are going to see that continue.

Steven Kron - Goldman Sachs

Thanks a lot.

Operator

Your next question comes from the line of David Palmer with UBS.

David Palmer - UBS

Thank you. I am going to try to rephrase this because everyone has been beating up on your sales trends, but that really is the elephant in the room, is that everyone can see your one- and two-year sales trends and it doesn’t appear to be signaling any turn in any convincing manner. It sounds like you have more confidence than what the street has.

You have the breakfast initiative. You have re-imaging. You are trying to broaden your appeal with adults and it seems like you are in early days there. Could you perhaps give us some more of what you might be seeing that might be giving you confidence that we can’t see here, really talking about not just one quarter but long-term sustainable growth?

Kerrii B. Anderson

I think, David, from one perspective, we admit the fact that we are conservative. We want to be somewhat conservative. We are going through a year of transition. The price we are taking, we know while it might have an impact short-term on transactions, it is absolutely the right long-term approach for this brand and for the profitability of our restaurant.

That said, we had a number of new products we introduced last year. We are introducing a few less this year. Last year we were doing a number of items. The consumer is a little different. I think we are just trying to be cautious as we talk about the current guidance.

I think the Wendy’s brand is an extremely powerful brand. I think we are better connecting with our customers than we ever have from a marketing perspective, and we are focused on delivering the operational experience more than we ever have been in the last several years.

While we are working on all those things, let’s not ignore that there’s a lot of distractions out there. While we are focused on re-imaging, just like you said, until we get through this process, I think it is hard to expect a lot of franchisees to make the changes in reinvestment. That said, the company is moving forward with the things we’re doing.

We’re just cautious.

David Palmer - UBS

So perhaps maybe you feel like this is kind of a build the foundation type year where you might not really see necessarily any one- or two-year sales accelerations?

David J. Near

I think we are continuing to build the foundation and I think the other big piece is, and Ian’s talked about it a lot, we really are trying to target a demographic that we typically haven’t targeted as hard in the past. I think when you do that, it takes time to build that piece. I think that we are confident that what we are doing is the right thing but again, I don’t think it happens overnight all the time but I think that is another reason that when you look at it, you have to have a little patience in terms of allowing that to build the right way.

Joseph J. Fitzsimmons

The other thing is, seriously, if you look at the out-layer in this industry right now, it’s McDonald’s in terms of sustainable same-store sales and it’s the fifth year since they started a turnaround with a foundation like what we are talking about. They really are the out-layer.

If you look at some of the weakness in the industry here recently, whether it is some of the casual dining with Panero’s and Yum!, McDonald’s took a while to get that turned around. Our brand is not totally dissimilar to that right now in this year.

David Palmer - UBS

I guess the only response is to the outside, some of these initiatives for you aren’t new, such as late night. You are not yet participating in breakfast, but to some degree you look like the odd man out within the hamburger fast food segment. Obviously those other two are having a pretty good run here for even a couple of years in the case of BK.

David J. Near

Yes, for very relatively low AUVs.

Kerrii B. Anderson

And a focus on breakfast with BK.

Ian B. Rowden

And closing some of their worst stores.

David Palmer - UBS

Thanks very much.

Operator

Your next question comes from the line of Jeff Bernstein with Lehman Brothers.

Jeff Bernstein - Lehman Brothers

A few follow-ups, just first that pricing and traffic paradigm. I’m just wondering if you’ve had the strategy in any market for an extended period of time, where perhaps you have seen evidence of traffic bouncing back. If you have any examples of that, that would give comfort that the pricing will ultimately see traffic return.

Ian B. Rowden

I would say the way we have taken pricing in the last couple of months, it is too early for us to be able to definitively put numbers around that. The expectation with all the other things that we are doing is that we will absorb a lot of this but we took a lot more price than we have historically done and we have to acknowledge that and we have to make sure that we manage that through the system.

David J. Near

It is hard for all of you to understand, but our long-term strategy is to turn around this brand the right way. We know we had a gap in pricing and we are working to fix that. The short-term impact on that we are definitely feeling. We are not going to break it out in that detail for you but we believe it is the right long-term decision to help us improve the profit gap, which all of you are very aware of and have talked to us about for the last two years.

Jeff Bernstein - Lehman Brothers

But there is no market at this point where it’s had it enough where you at least see a start of a return to traffic to give comfort on that?

David J. Near

Well, sometimes you have to after profit at the expense of near-term issues like traffic.

Jeff Bernstein - Lehman Brothers

Just on breakfast, I’m wondering maybe directionally if you could talk about how it is tracked in terms of following the launch. I know it is a very habitual day part. I am just trying to get some color around recent commentary you’ve made noting that it seems like only 30% of stores have cleared the 3,000 per week hurtle. I’m just wondering as you push it out further, whether you are getting more comfort that more and more stores are reaching the level you want or whether you are perhaps resetting the hurtle a little bit?

David J. Near

After the test markets, the four test markets that we had that we started last year, we just rolled additional stores the past two months, so again it is a little too early to give you all the details there in terms of what is happening.

I can tell you that since the initial launch of those stores, that we are seeing nice progress from the launch to week to week as things progress. We feel very, very good and encouraged by that trend. We are taking a very disciplined approach to this. I think we are doing the right way, as Karrii mentioned. We in the company stores are leading by example here and making sure that we pave the path the right way and continuing to enhance breakfast as it continues.

Jeff Bernstein - Lehman Brothers

Is there a certain break-even dollar amount on breakfast below that 3,000 that you guys target as this is the level we need to achieve in order to push breakfast further?

David J. Near

At this point, I don’t know that we’re comfortable giving that break-even number but we are continuing to monitor it and as our products evolve, that number will shift back and forth a little bit.

Joseph J. Fitzsimmons

Jeff, yes, there is a number that is below that -- the number that we quoted is where get a decent return on it, so clearly at lower levels we are break-even.

Kerrii B. Anderson

I was just going to say that that varies some times, depending on a number of other factors.

Jeff Bernstein - Lehman Brothers

Lastly for J, I know you started by saying that you have now been here for 93 days, I guess. I’m just wondering, with those three months under your belt in terms of the opportunities to create additional value, perhaps parallels to Wal-mart or changes to implement -- kind of your initial take.

Joseph J. Fitzsimmons

I came here because it was an iconic brand and I thought there was a lot of leverage. I will tell you I’ve been very excited by the things that are happening. I think we are doing the right things. We are not showing the progress but we feel confident that these are the kinds of things that are going to get us back to where Wendy’s should.

The one thing I did know from my experience at Wal-mart is how much the impact of higher gasoline prices had on sales and we did all the correlations for the analysts in retail relative to gasoline prices, and $3 was both an economic and an emotional point for a consumer.

I think we had a lot of optimism coming into the year but we faced two situations that we hadn’t counted on, and that was the commodity increases, which I think are historic in nature because of the reasons that they occurred. They are not the typical cyclical increases. Combined with the higher gasoline prices, and if a typical consumer is spending $7 to $10 a week more filling their tank, that’s $7 or $10 that they could have spent at Wendy’s.

I think we are making progress. It is not showing up as quickly as we would like but I don’t see anything that we are currently doing that we would change.

Jeff Bernstein - Lehman Brothers

Thank you.

John Barker

Operator, I understand we have one more question in queue.

Operator

Yes, sir. Your final question is a follow-up from Joe Buckley with Bear Stearns.

Joseph T. Buckley - Bear Stearns

Just one more question on the breakfast; have you determined what percent of your restaurants it makes sense -- how prevalent do you think it will be if you were to roll it out as completely as you thought appropriate?

Ian B. Rowden

There are in every system some locations where the day part just won’t work. We don’t see our system being greatly different to that of our competitors but we acknowledge that we are going to have to do store-by-store, DMA by DMA and understand the characteristics and that’s the platform that Dave and Kerrii have talked about that we are working on.

Joseph T. Buckley - Bear Stearns

Maybe one last one, kind of a simple one, just on the commodities -- how far are you locked in? Beef I’m assuming you still have the quarterly pricing contract, but on chicken how far are you locked in and what commodities should we be aware of that you are not locked in case we see continued volatility?

Kerrii B. Anderson

We are going to have Tad Wampfler, our SVP of supply chain, answer that for you. Tad.

Tad G. Wampfler

I think without saying exactly when our locks come off and stuff, we are obviously protected on a lot of items with our contracts but clearly longer term, we are all seeing beef prices in the market today that are low but I think longer term, we are all concerned about beef going up. They are just not holding back a lot of heifers now for the future development of calves, so we are all concerned about that.

On the poultry side of things, you got some good and bad news. You’ve got the grain prices, the feed prices that are working against you but you’ve got the poultry companies are increasing their placements, so that is our good news, so that one we kind of see balancing out.

I think the biggest concern in the market right now probably is on the dairy side. We see that clearly with the pizza companies taking a hit right now and you’ve got barrel cheese out there at 71% higher than last year and class two milk at 150% higher than last year. Those are products that obviously impact cheese and frosties and things like that for us.

Whenever those contracts roll off, you appreciate that we’ll get the best available pricing but they are likely to be higher than some of the numbers we’re at right now.

Joseph T. Buckley - Bear Stearns

Thank you.

John Barker

Okay, thanks, everybody for dialing in. If you have any follow-up questions, please dial my department and we’ll get back to you. Thanks a lot.

Operator

This concludes today’s Wendy’s International second quarter results conference call. You may now disconnect.

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Source: Wendy's Q2 2007 Earnings Call Transcript
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