BKW/THI Call Replay & Summary

Today we held an informative call with John Barker, former Senior VP and CCO of Wendy’s, who lived through the merger of WEN/THI.  A replay of the call can be accessed below.


Replay: BKW/THI Merger Thought Leader Call

Summary Bullets

Can you provide some historical context on the prior WEN/THI merger?

  • Tim’s is a unique brand; very tied into its communities
  • There was a lot of excitement about WEN/THI coming together
  • 1992 first time they were put together under the same roof
  • In his 10 years of association with the brand, the phrase “iconic” would often be thrown around when referring to Tim’s
  • Think it is a spot on description
  • No major restaurant brand is tied as closely to its community or country than Tim Hortons
  • Well-run mom and pop shop; about 2-3 restaurants per franchisee back in the mid-1990’s through mid-2000’s
  • Franchisees were in love with the brand; you don’t see that everywhere
  • Very solid business in Canada; the new unit growth was phenomenal from 1
  • Avg. same-store sales over those ten years was 7.5%
  • Wendy’s was very fortunate to pick up the chain at such a good price


What did the WEN/THI merger accomplish?

  • The WEN/THI merger worked for shareholders
  • Tremendous value was created by the time of the IPO and spinoff
  • It was a good relationship from a value creation standpoint
  • From a business standpoint, combination units never really took off on a national level
  • One business was very Canadian centric, the other was very U.S. centric
  • The two brands at that time felt that there was competition, because the franchisees see it that way


Will this deal help accelerate growth for THI?

  • This deal can bring access to different types of franchisees for Tim Hortons
  • It could require a different approach to running the brand
  • Whether or not it will be as successful as it is in Canada remains to be seen
  • The model they currently have in Canada works


Did THI stick to the mom and pop franchising model when dealing with WEN?

  • For the most part, yes
  • If THI wants to accelerate growth, they will need to change the culture of the business
  • This is a multi-year process
  • If they had large franchisees like they have in the Burger King business, that could be different


What other hurdles does THI face in building the brand abroad?

  • Good brand awareness just South of the Canadian border
  • But anywhere else, the brand doesn’t have much recognition
  • Customers elsewhere don’t understand Tim’s as a brand, they only understand the functional needs of it
  • Buffalo, Columbus, Michigan – as they immersed themselves more the in the local communities and the brand became better understood, it became more successful
  • It would be difficult to accelerate growth under another franchise model
  • THI uses a grassroots approach to building its business


Is there potential to grow the THI business outside of the U.S./CAN?

  • They didn’t need THI to grow internationally when it was with WEN because it was growing so strong in Canada
  • The functional delivery of the brand is just fine
  • The delivery of products would probably have to be adjusted to some degree, because many of the products in Canada are very unique and they resonate with customers there
  • How you do this internationally, no one really knows
  • Tim’s was an R&D juggernaut back in the day


What is the risk of 3G cutting back on franchisee support for THI?

  • This is something they must be very careful about
  • WEN never tried to change THI’s operations
  • THI has a very deep commitment to training, R&D and product delivery
  • National marketing in Canada was brilliant, development and real estate expertise in Canada was best-in-class
  • If you’re going to grow rapidly, you need to replicate these things


THI is already a fairly lean organization – will 3G find cost cutting opportunities there?

  • Comes down to how much synergy they’ll try to create across the two brands
  • WEN was careful to keep the brands separate
  • They shared services at the very highest level only
  • Two different approaches to the businesses
  • Cost cutting buckets might exist, but they’re likely small


Do you believe the motivation behind the deal isn’t tax-based?

  • There is certainly an opportunity to benefit from that
  • This has created significant value already based on the stocks’ reactions


How will this be perceived in the franchise community?

  • THI has been through this once already
  • Didn’t have that much interaction with the WEN brand
  • They didn’t really have a strong opinion about being owned by a U.S. company
  • But since 2005 to today, franchisees are a little more sophisticated and they are probably paying attention to this pretty carefully
  • They will not want their brand to change, particularly the way it’s operated


Has BKW created a firestorm of backlash against the brand?

  • Social media is often blown out of proportion
  • There could be an impact for a little while, but these are things that consumers typically get over
  • Could be a one to two day phenomenon
  • A lot of pride in the THI brand, so it’s a little different with that brand
  • This should be watched very carefully
  • On the political side, this is a very difficult position for politicians to be in as well as people who manage companies because you have a division of responsibilities
  • But you are, by your charter, supposed to pursue shareholder value creation


What if BKW sees an extended period of declining sales due to this?

  • Daily sales should be monitored closely
  • BKW could pull back on the deal, but sincerely doubt that will occur
  • You can do a lot to monitor social media
  • Most big brands have these capabilities


How difficult is it to bring two companies with distinctly different cultures together?

  • It’s a big issue because restaurant companies have distinct cultures
  • Culture at THI is deeply ingrained; they certainly won’t want to change
  • WEN decided early on to let the THI culture carry on
  • The only place it blended was at the senior level


Will the THI Chairman stick around much longer?

  • Don’t have any insight into that
  • It would be wise for BKW to hold on to some of the high-end talent from THI, no matter how they structure the organization
  • Smart companies always figure out a way to do that
  • THI has been a juggernaut over a long period of time
  • If we start to see leakage of people at the company, it would be concerning
  • Franchisees will be watching this pretty closely


Howard Penney

Managing Director


Fred Masotta


Seeing Red in Europe

Client Talking Points


We shorted France yesterday in Real-Time Alerts, and European equities are down across the board this morning. The bull thesis on Europe has shifted from “Growth is accelerating” to “The ECB is easing.” The problem with easing is that a lot of large sell-side firms are projecting an ECB rate cut next week, and interest rates are already reflecting this.


Chinese equities sold off late in the day yesterday, somewhat coincidental with Europeans returning to their trading desks.  Chinese industrial profits came in at 13.5% in July, a sequential decline from the June number (+17%).


Interesting note regarding outstanding mortgage debt: A CFPB study shows 30% of Americans 65 or older have mortgage debt (up from 22% in 2001). Loan balances increased to $79k from $43k.  In aggregate, what you have is the retirement-age class seeing a meaningful increase in both mortgage debt and the amount of outstanding debt.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.


The level of activism in the restaurant industry has never been more rampant.  In the past year alone, we’ve seen CBRL, DAVE, DRI, BJRI and BOBE attract largely uninvited attention from these investors. BOBE has a long history of mismanagement, evidenced by flawed strategic rationale, an excessively bloated cost structure and severe underperformance relative to peers.  Fortunately, its poor operating performance presents a tremendous opportunity. After almost a year of pushing for change at Bob Evans, activist investor Sandell Asset Management is claiming a big victory. Activist investor Sandell won at least five seats on the board of the restaurant operator and food processor, based on preliminary results from the company’s annual shareholder meeting last week. This is precisely the sort of bullish catalyst that was central to our high conviction on BOBE.


Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position.  Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.

Three for the Road


New Test May Detect Organic Food Fraud: Is Your Produce Really Organic?: "nuclear magnetic resonance spectroscopy"



You can never cross the ocean until you have the courage to lose sight of the shore.

-Christopher Columbus


France is experiencing a 16-year low in housing starts.


Takeaway: We expect that July was solid with gaming revenues up 6-10% assuming normal hold.

Nevada should release gaming revenues this week



With another easy comparison, we are projecting YoY growth of 6-10% for Strip gaming revenues in July.  McCarran airport traffic increased 1.9% YoY, slightly below the year-to-date average, while taxi trips increased 2.4% in July.  Both statistics have proven to be significant predictors of gaming revenue growth.  


The comparison is easy as July 2013 experienced a 14% Yoy decline in GGR as baccarat volume dropped 16%.  The wildcard, as always, will be baccarat volume and table hold percentage.  For this analysis, we are using normal slot and table hold and baccarat volume growth of 20%.  


July growth should be in line with investor expectations but we would caution that the August comparison is difficult, up 20% in 2013.  August 2014 could show a meaningful decline in gaming revenues.



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CHART OF THE DAY: US, German and French Government Bond Yields

Takeaway: Interest rates in two key European markets have been falling off a cliff compared to the U.S.


CHART OF THE DAY: US, German and French Government Bond Yields - Chart of the Day

27 Up, 27 Down

“Have no fear of perfection, you’ll never reach it.”

-Salvador Dali


Last night I enjoyed my first major league baseball game of the summer.  It couldn’t have been a more perfect night.  I had cute Southern gal on my arm and the weather was almost perfect.  Sadly, the hometown New York Mets lost in a 3 -2 heartbreaker.


Of course, perfect evenings, days, and stock market runs never last forever.  As sad as that is, in life, business, and as stock market operators our luck and performance will always ebb and flow and perfection, should it occur, happens oh so rarely.


In baseball perfection is often epitomized by the so called “perfect game”.   A perfect game occurs when the pitcher (or a combination of pitchers) retires 27 batters in a row through nine innings.  The pitcher cannot allow any hits, walks, hit basemen, or any opposing player to reach base for any other reason. 


Perfection in this sense is extremely rare.   In fact, the feat has only been achieved 23 times in major league baseball history and only 21 times since the modern era began in 1900.  The last time a perfect game was pitched occurred on August 15, 2012 by Felix Hernandez of the Seattle Mariners.


27 Up, 27 Down - EL chart 2


According to Wikipedia, the first known use in print of the term perfect game occurred in 1908 in the Chicago Tribune.  Report I.E. Sanborn wrote the following about Addie Joss’s performance against the White Sox:


“. . . it was an absolutely perfect game without run, without hit, and without letting an opponent reach first base by hook or crook, on hit, walk, or error, in nine innings.”



As it relates to global markets, what is perfection? Is it the SP500 at all-time highs? Is it German bund yields at all-time lows? Is it corporate debt issuance at generational highs and terms at generational lows?  Is it car loans at zero percent interest for a 9-year term? Or is it an all-time high in the number of uniformed market mavens appearing on T.V.?


Back to the Global Macro Grind


Those long of European equities this morning are not dealing with perfect portfolio performance.  Led by Russia down just under 200 basis points, European equities are red across the board this morning. 


Even as bottoms-up stock pickers in Europe continue to have edge, the U.S. based macro asset allocators seems increasingly concerned about European growth, which was the original reason for being long Europe coming into the year.  Clearly, eight months and a life time ago now!


In the Chart of the Day, we compare the interest rates of France to Germany and to the U.S.  As you can see, interest rates in these two key European  markets have been falling off a cliff versus the U.S.   This is probably the best real time market indicator of future economic growth that we know of but, as the Europe bulls would also argue, decelerating growth leaves the door open for more

aggressive easing by the European Central Bank. 


This, then, is the new, new bull thesis for European equities. Specifically, that by burning the Euro, Draghi will be able to inflate European equities.  But with German 10-year yields below 1.0% and France not far behind, how much incremental easing is already priced in? 


As the Wall Street Journal writes this morning, “some sell-side economists, including JPMorgan, Deutsche Bank and Nomura are now pricing in policy easing next week.”   Expectations will always be the root of all heartache, won’t they?

One of our favorite sovereigns on the short side continues to be France.  As my colleague Matt Hedrick noted yesterday:


“Just two weeks ago France’s government cut its GDP forecast in half (again) to 0.5% (from 1.0%) for 2014 and it will likely miss its FY deficit target of 4%.  News this week of President Hollande reshuffling his government (after Economy Minister Arnaud Montebourg stepped down on Monday), is confirming evidence to us that the policies of Hollande’s government are not on track to return growth to the economy over the medium term. That Hollande himself is wildly unpopular, with a paltry approval rating of 17%, furthers the outlook that the government’s pledge that the “recovery is there” is grossly disingenuous.”


Political upheaval and growth getting cut in half are as good a reason as we know to, at a minimum, invest elsewhere if not to get outright short.

Speaking of short ideas (one of Hedgeye’s favorite investment topics) our firebrand energy analyst Kevin Kaiser is adding a new short to the firm’s Best Ideas list this morning and will be hosting a call to discuss his thesis on September 3rd.   As Kaiser writes:


“VNR is a serial-acquisition / roll-up story that now sports a $2.5 billion market cap and $4.0 billion enterprise value after 22 separate acquisitions since 2008. It is owned primarily by retail investors for its outsized distribution yield (8.5%) and monthly distribution payments. VNR has actually trademarked the slogan, "The Monthly Distribution MLP.


But what unwitting investors don't realize is that VNR finances its distribution payments with capital raises - call that what you want to call it. In our view, VNR's "game" is at the beginning of its end. When VNR's distribution is ultimately cut, investors will discover that the Fair Value of VNR is substantially below the current market price.”


Vanguard is a whole lot of yield, with very minimal cash flow.  Usually a toxic mix!

Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.32-2.41%


CAC 4152-4439

USD 81.91-82.78

EUR/USD 1.31-1.33

NatGas 3.85-4.06


Keep your head up and stick on the ice,

Daryl G. Jones

Director of Research


27 Up, 27 Down - Chart of the Day

The Strong Hand

This note was originally published at 8am on August 14, 2014 for Hedgeye subscribers.

“The odds are six to five that the light in the end of the tunnel is the headlight of an oncoming train.”

-Paul Dickson


Whether it be hockey (which no doubt many of you are tired of us writing about!), card games, or chess, it's critical to put yourself in the best position possible to win.  In effect, you want to play the strong hand.   Most games involve some level of probability in which playing the odds can improve your chance of success meaningfully.


For example, in chess there are few basic rules of thumb that even the novice chess player should know and follow, such as:


  1. Use the center pawns to gain space on the opening
  2. Control the center of the board
  3. Secure your king early
  4. When ahead in material, force exchanges
  5. And perhaps the most important . . . never fight a land war in Asia.


Obviously, the last rule of thumb is not for chess, but was reputedly advice given by General MacCarthur to President Kennedy and then popularized in the 1987 movie, “The Princess Bride”.   As rules of thumb go, given America's lack of success in the four Asian land wars post World War II, Korea, Vietnam, Afghanistan, and Iraq, the last point may be the most accurate rule of thumb.


The Strong Hand - mac


As it relates to global macro investing and asset allocation, a couple of rules of thumb we have recently been reminded of are: 1) be on the right side of liquidity (It’s all about the flows, bro!) and 2) it’s the fundamental changes on the margin that matter.


Back to the Global Macro Grind...


In the Chart of the Day, we highlight a point that many asset allocators have been focused on over the past few weeks, which is that high yield bonds, even despite the recent rally, have sold off sharply from the highs of the year.   As a result, the spread between high yield and comparable duration treasuries is at its widest of the year.


Some strategists have been flagging this as an opportunity to wade back into the high yield market, an entry point if you will.  One point that gives us pause on this line of thinking is the risk of illiquidity in the high yield market.  In some ways, this time IS different on the liquidity front.


According to Lipper, fund flows in high yield bond funds have experienced outflows of some $13 billion over the past four weeks.  Rightfully, you might push back and say that is a smidgen of the size of the entire high yield market, which according to recent data from Barclay’s is north of $1.2 trillion in the U.S. alone.  So based on those rough numbers, we are looking at only about 1% of the entire market in outflows, but the kicker, again, is liquidity.


Since April 2013, the New York Fed has started to break out dealer inventories of high yield bonds and they currently stand at about $8.2 billion.  So even as the high yield market has ballooned from $660 billion in 2007 to almost double that now, liquidity, as facilitated by the dealers, has been shrinking.   This then is the unintended consequence of government regulation and tighter capital rules: dealers have a more limited ability to facilitate an orderly rush for the exit.


The other rule of thumb we noted above is that fundamental changes on the margin matter.   Europe is on the sell side in our current macro themes deck and that position is seeing the benefit of more slowing economic data from Europe this morning.  A few points to highlight from this morning’s data:


  • Eurozone GDP slows to +0.7% year-over-year in Q2 2014;
  • German GDP contracted sequentially by -0.2%; and
  • France cut their GDP forecast in half again to +0.5% for 2014.


For Germany, this is the first sequential contraction since 2012.  Given this, it no surprise then that the German Bund hit a record low of 1.0% this morning and has also been front running this slow down.  Clearly, low reported inflation is leaving the door open (some might say wide open!) for incremental easing in Europe (a point the German bund market is front running).


Incidentally for those that have been watching, the U.S. 10-year yield is ticking lower again this morning.  The contrarian Hedgeye call that 10-year yields may touch 2.3%/2.2% may happen sooner than even we anticipate!


And conversely in a sign today that this time truly isn’t different, Reuters is reporting that mortgage lenders are again offering stated income mortgages in an attempt to facilitate mortgage activity.  When combined with excesses in the auto loan market and a spike in subprime credit card issuances, perhaps there is more than just liquidity that is making the credit markets shake.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.39-2.48%

RUT 1109-1148

DAX 8980-9272

VIX 11.84-15.55

WTIC Oil 96.60-98.26

Gold 1301-1323

Copper 3.09-3.15 


Keep your head up and pawns in the middle,


Daryl G. Jones

Director of Research


The Strong Hand - 08.14.14 COD


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