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The Wendy's Company Second Quarter Conference Call Highlights

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The Wendy's Company (NYSE: WEN) reported its second quarter results on Thursday morning, and then hosted an analysts conference call to further expand on its results. The conference call was hosted by Chief Executive Officer Emil Brolick.

Quarterly highlights

Wendy's saw its revenue decline by 19.5 percent from a year ago to $523.4 million as a result of lost revenue from the sale of company-owned restaurants. However, operating profit improved to $63.9 million from $57 million a year ago. Year-to-date, Wendy's generated a cash flow from operation of approximately $81 million.

Wendy's saw its same-restaurant sales rise by 3.9 percent in the quarter due to new item innovation and product promotions surrounding its Tuscan Chicken Sandwich on Ciabatta and Asian Cashew Chicken, BBQ Ranch Chicken and Strawberry Fields Chicken salads.

Capital expenditure rose $33 million from a year ago to $115 million.

During the quarter, Wendy's improved its company-owned restaurant margin by 370 basis points over the past two years to 17.8 percent.

According to Brollick, the company saw its best fourth quarter performance since 2011, when it relaunched Dave's Hot ‘N Juicy cheeseburgers. In fact, same-restaurant sales have now grown for six consecutive quarters.

Wendy's announced that it will sell 135 company-owned restaurants within Canada by the end of the first quarter of 2015 to franchisees and reinvest the sales proceeds to promote its franchises. At the same time, the company is guiding to return its U.S. restaurant system to positive net restaurant growth by 2016 at the latest.

Looking forward

Wendy's expects another quarter of positive comp sales growth but expects its third quarter same-restaurant sales growth will be slightly less than the low end of its full-year outlook of 2.5 to 3.5 percent growth.

As explained by Tood Penegor, the company's Chief Financial Officer, the company is now anticipating a two percent increase in commodity costs for the year, nearly double what the company previously guided to in the first quarter, which will cause no impact on the full-year same-restaurant sales outlook.

Wendy's remains on track to achieve its “Image Activation” goals for the year, which include reimaging 200 company-operated restaurants, in addition to reimaging 150 to 200 franchise-owned restaurants.

EBITDA growth in the mid- to high-single digits is expected in 2015, followed by a high single-digit growth in 2016 and low double-digit adjusted EBITDA growth beginning in 2017.

Notable quotes

Emil Brolick on Canada: “We believe a franchise model will help us penetrate the market more quickly than under a company-operated restaurant model, as we plan to grow our Canadian restaurant base by approximately one-third and reimage approximately 60 percent of our Canadian restaurants by 2020.”

Tood Penegor on reimaging restaurants: “We are seeing, as we talked about, sustainable sales lifts of 10 to 20 percent, depending on the investment levels across all of our IAs. And your assumption, yes, you can clearly see that we have a bigger mix of our restaurants Image Activated. That's what's really driving the delta on our growth relative to the franchisee growth. But what we would hope and what we are seeing is that we continue to lead as we're working toward those 200 restaurants that will Image Activate this year.”

Emil Brolick on new product innovation: “We have what we think is a very strong calendar for the remainder of the year that does include new product innovation for that, and the team has already laid out a tentative calendar as we look to 2015. And we want to, of course, continue to build on our heritage of product quality, but in all honesty, we also hope that there are windows out there that we can use products, whether it's spicy chicken or items like that. The Asiago Ranch Chicken Club did extremely well for us in January this year, so we also believe that there'll be products like that that we can use to continue to build sales.”

Todd Penegor on mobile ordering: “We are in a beta test as Emil talked about a couple of weeks ago on CNBC on the mobile ordering side of the equation, and then eventually we'll take some of that beta test and start to think about 'How do we take that into our royalty program going forward?' So we really believe that the digital space is a great opportunity to not only create more loyalty to drive more transaction, but can also create some operational efficiencies for us over the longer term. So stay tuned for more of that going forward.”

Emil Brolick on international expansion outside of Canada: “At the most recent board meeting, we had quite an extensive presentation on our thought process about our global strategy. And we feel that it's, we've tightened that up quite significantly and we are in the process of executing against that. It's going to take a couple of years before that begins to pay off in terms of increased EBITD profile, but we clearly have a line of sight on how to bring that into play, and clearly, we want to be a stronger global player than we are today.”

Todd Penegor on 24-hour restaurants: “In terms of the priority of initiatives and the things that are most profitable for the business, that's not something that is close on our radar.”

Shares of Wendy's were recently trading at $8.16, up 2.32 percent.

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