Q3 2019 Earnings Call
Good morning, welcome to the Wendy's Company earnings results Conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question answer session.
A question during this time.
Our followed by the number one on the telephone keypad.
A question.
Thank you, Greg Lament truck senior director Investor Relations and corporate Afghan <unk> you may begin your conference.
Thank you and good morning, everyone. Today's conference call and webcast include the Powerpoint presentation, which is available on our Investor Relations website, IR Wendy's Dot com.
Before we begin please take note of the Safe Harbor statement that appears at the end of earnings release.
This disclosure remind investors that certain information we may discuss today its forward looking.
Various factors could affect our results and caused those results to differ materially from the projection set forth in are forward looking statement.
Also some today's comments will reference non-GAAP financial measures investors should refer to our reconciliations of non-GAAP financial measures to the most directly comparable GAAP measure at the end of this presentation or in our earnings release.
Our conference call today, our President and Chief Executive Officer, Todd Penegor will provide an update on key initiatives and our Chief Financial Officer, Gunther Plosch or your third quarter results and full year outlook.
After that we'll open up the line for questions.
I will hand things over to Todd.
Thanks, Craig and good morning, everyone.
Before I get into our third quarter results I want to take a moment to think all of you who attended or tuned into the Investor day, a few weeks ago, because we shared we're striving to become an accelerated official growth company by playing a different game to unlock growth.
Let's dive into our third quarter results, which highlights the strong momentum we have in our business.
As previously announced we showcased our ability to be enough accelerated efficient growth company through a robust system wide sales increase of 5.7%.
On the backdrop of strong North America same restaurant sales of 4.4% and continued global restaurant expansion, which translated into strong earnings growth.
We opened 40, new restaurants across the globe in the third quarter and have opened 111 year to date.
This is pacing slightly ahead of the openings. We had this time last year and we remain on track to deliver our goal of 1.5% net new unit growth in 2019.
We also continue to Reimaged restaurants, and now have 56% of the global system on the new image.
Company restaurant margin came in at 16.2% for the quarter growing 50 basis points from the prior year as we leveraged our same restaurant sales growth.
Our Q3 results exceeded our expectations as we achieved approximately 3% adjusted EBITDA growth, 12% adjusted EPS growth any 6% increase in our year to date free cash flow. This strong result will flow through to our updated outlook for the year, which TP, we'll talk about in a moment.
Our balance marketing strategy contributed to accelerate at North America same restaurant sales growth of 4.4% in Q3.
We began the quarter with her bacon fast promotion highlighting the newest addition to our made to create hamburger lineup. The Bacon Jalapeno Cheeseburger. We then turned up the heat with the relaunch of spicy Nuggets and the customer response exceeded our expectations. Thanks to our powerful social media voice that had customers craving for this product.
Promotion increased or average check and significantly changed our incoming customer count trends fully began this promotion.
Supporting the launch of spicy not gets were promotion through our mobile App. This led to an increased awareness of our digital platforms as we doubled our number of mobile ordering transactions during the promotion.
The addition of the Bacon jalapeno chicken sandwich to our made to crepe chicken lineup as well as the Buffalo chicken salad added to the excitement around spicy during the quarter.
We continue to build up on the equity we established in the first half of the year around driving flavor and innovation with our menu.
We have momentum in our business and we're excited about the plans. We haven't plays for the fourth quarter and into 2020 to continue to drive one more visit one more dollar.
As we shared at our Investor day, our Formula is simple yet powerful accelerate same restaurant sales and drive global restaurant expansion with a strong restaurant economic model to fuel this growth.
With organic same restaurant sales at the forefront to drive a healthy restaurant economic model, which is job number one we continue to focus on our one more visit one more dollar strategy to drive mix.
This is working as evidenced by our strong third quarter results.
As Curt discussed at our Investor Day, we continue to make progress on improving our operations and have a comprehensive plan in place to ensure we succeed.
We're also enhancing our digital capabilities as we continue to provide more access to the brand through expanded delivery partners and launching a loyalty program.
We believe our strengthening business will set us up for a successful breakfast launch in the first quarter of 2020.
Our franchise system is fully aligned to this launch on the backdrop of strong customer demand for breakfast at Wendy's and since we have designed a program that we expect to benefit the overall restaurant economic model.
These initiatives working in tandem give us confidence in our ability to accelerate same restaurant sales growth into the future.
Accelerating the pace at which we open restaurants around the globe to give customers more access to our brand is vital to our growth story and we are on track to deliver our commitments in 2019.
As Abigail discussed at our Investor Day, we will begin pursuing accelerated international development on the backdrop, a strong growth in our existing markets.
We also announced that will be entering Europe by opening company restaurants in the UK within the next 12 to 18 months.
Our growth plans culminated with the announcement of our new compelling long term guidance at Investor day, which I'd like to take a moment to highlight.
Our new long term growth algorithms call for us to accelerate our system wide sales growth to 4% to 5% and grow adjusted EBITDA and free cash flow high single digits.
There are three pillars that we expect to be the primary drivers of this acceleration of growth.
The first is breakfast, we believe that we can grow this day part to at least 10% of our U.S. sales based on strong customer demand and on the strong program that we plan to execute.
The second is digital and we believe that digital sales could contribute approximately 10% of total U.S. sales by 2024 versus the approximately 2% we sit at today as we plan to provide more access to our brand through our digital platforms.
Lastly, we believe that internationally, we can grow to 1500 restaurants and double our sales to approximately $2 billion by 2024, driven by growth in our existing markets as well as expansion into Europe .
We are excited about the growth plans that we have as we are investing in accelerated growth and playing a different game to achieve our goals.
In closing it is important to remember that our system is one family and we won't be able to do any of this without the support dedication and partnership of our franchisees were totally aligned with our franchisees on the plants. We have in place to grow the system is all in to execute with excellence and has the passion and commitment to ensure we achieve our vision.
Becoming the world's most striving nimble loved restaurant brands.
With that I'll turn things over to GP.
Thanks, Todd very pleased with our quarter three we've talked on the strength of accelerating same restaurant sales and global restaurant expansion, which is translating into a robust free cash flow generation as Todd mentioned due to our strong so S in quarter three big Cds, many of our financial target.
Five into the result.
The increase in the truckload revenues was due to positive same restaurant sales its franchise and company restaurants.
Well as an increase in company operated restaurant sales.
But also driven by last year's acquisition of restaurant.
Adjusted revenues were also driven by approximately $10 million.
Pass through payment related to stop leases as part of the new lease accounting standard.
Year over year company restaurant margin increased by 50 basis points.
16.2%, primarily driven by leveraging higher than expected same restaurant sales of 4.7%.
The decrease in general and administrative expenses was primarily due to a 2.8 billion dollar reduction.
Our legally we serve as a result of an increase in anticipated insurance proceeds available for use related to the proposed settlement of the financial institution case.
Please note that these adjustment will be excluded from our adjusted EBITDA calculation, which is consistent with how we treat it's the impact of the financial institution case in the fourth quarter over 20 Pete.
Excluding did she they would have increased approximately $2.5 million or 5%.
Increase was primarily the result of a higher incentive compensation accruals.
Adjusted EBITDA grew by 2.5% $210 million.
This was driven by an increase in franchise royalties and company restaurant margin on the strength of accelerating same restaurant sales.
Partially offset by an increase in franchise support expense due to our approximately 4 million dollar investment in scanner for North American restaurants in the quarter.
We're now expecting our cana investments to be about 6 million dollar.
Since our previous estimate of $10 million due to an efficient rollout.
I Trust that earnings per share increased by approximately 12% in the second quarter 219 cents.
Driven by a trusted EBITDA growth.
Fewer shares outstanding as a result of our share repurchase programs and a lower tax rate as the result of and expect it takes we sort of freely.
This was partially offset by higher depreciation expense.
To round things out you to date free cash flow increased 6% $292 million driven primarily by our strong core earnings growth.
In light of our strong performance in quarter three we have updated several of our guidance metrics for 2019.
As announced at our Investor Day, we expect global system wide sales to be at the high end of our previously announced guidance range envious no tightened that range.
The result of our strong sales performance, we're now expecting adjusted EBITDA to be at the high end of our guidance range as well.
We're not expecting cheap today to be approximately 95 to 200 million dollar.
Two an increase you know incentive compensation accrual and expect our adjusted tax rate to be 21% to 22% for the year.
In addition to adjusted EBITDA coming up to the high end of our range has we felt it you know a trusted EPS guidance being raised by about three penny taken our new range to 58 to 60 cents.
Lastly, we continue to expect capital expenditures and free cash flow to stay within our previously articulated guidance range.
Lastly, I would like to highlight our capital allocation policy.
As we discussed at our Investor day in early October our policy is largely unchanged priority number one is investing in profitable growth.
Disciplining, though investment choices and we are always focused on ensuring a strong financial return for our franchisees and for us if the franchise or.
We remain committed to maintaining an attractive dividend with a payout ratio north of 50% and real utilize excess cash to repurchase shares and or reduce that.
We recently demonstrated our commitments to our policy is to be announced at Investor day at 20% increase in though the we then beginning in the fourth quarter.
And that we plan to launch 100 million dollar accelerated share repurchase program in the fourth quarter office here.
All formula simple, yet powerful VI and accelerated efficient growth company that is showcasing strong system wide sales growth on the backdrop of positive same restaurant sales and global restaurant expansion, which is translating into significant free cash flows I will now hand things over to Greg to close out.
Yeah.
Thanks, TV I wanted to quickly take a moment to provide an update on how our new business units structure is expected to impact our future reporting structure.
In May 2019, we announced the realignment of our business as we saw an opportunity to increase our effectiveness by driving clear accountabilities for growth across the organization.
We have placed focused total piano accountability under current Kane for the U.S. business and Abigail Pringle for the international business.
As a result of this we are continuing to evaluate the impact. These changes will have on our future segment reporting structure.
Starting with the filing of our 10-K in February we anticipate that we will report our results in three segments, U.S. International and global real estate and development.
Now, let's turn to our upcoming Investor Relations calendar.
First up GP Abbvie King our manager of IR and I will add to the Stephens conference in Nashville on Thursday November 14th.
The following week, Todd GP, Abbvie, King and I will embark on a week long investor Roadshow with stuff in L.A., San Francisco, New York and Boston.
On December 10th we will host the headquarter visit here in Dublin, Ohio with Wells Fargo.
If you're interested in meeting with us at any of these events. Please contact the respective sell side analyst or equity sales contact at the host firm.
And finally on Wednesday February 26, we blend or at least our 2019 earnings along with further details on our 2020 outlook and host the conference call that say morning.
With that we're ready to take your questions.
At this time I would like to remind everyone in order to ask your question Press Star then the number one on your telephone keypad.
First question comes from Brian Bittner of Oppenheimer and company.
Your line is open.
Good morning, Thanks for taking the question and congratulations.
I want to ask about sales expectations in 2020 that you laid out at Investor day specific to 2020, you talked about breakfast, adding 60% to your system sales.
On top of core 4% to 5% growth.
System sales outside the breakfast so.
Before the 50 Threerd week, you're basically talking about 10% to 13% system wide sales growth can you just talk about what the same store sales range is within that 10% to 13% is it is it eight to 10 is how we should be thinking about your actual same store sales expectations for 2020.
Good morning, Brian I think thanks for the question, Yes, you recap on what we said an investor days is correct.
The only color I can give you the 4% to 5% growth.
Good driven by seamless in sales growth and unit growth same restaurant sales calls about tuned to us 2% to 3% to remain to say these unit growth. So that's the difference between total sales growth and seamless itself.
Okay, and just follow up and last question when we take all your guidance for 2020.
We come to conclusion in our model, you're spending close to 50 million of incremental spend on breakfast advertising I'm not asking you to clarify that I'm not sure if it's perfect or not but that's where we get to this will begin to subside as we move forward, which you talked about.
Past 2020, how do you want to thinking about how this rolls off and becomes a tailwind to EBITDA is it going to be very preplanned, how it rolls off over the next many years or is he going to be adjusted how it rolls off based on how breakfast sales are doing.
Hey, Brian .
Loops that you've done a good amount of work on days as I said at Investor Day right.
Let me do on the three year period to make sure that the company's providing funds to maturity. This was to use with Eddie fitness media weights on the to drive a breakfast business into any Sweeney.
We're going to have steel losses on the breakfast business, the going to be less than between 80 million dollar lost as you're making in 19 and you can expect.
Going to be profitable Rex.
Between between anyone even more profitably 2020 too and then once you come between these maybe suite.
Reinvestment commitments.
He is disappearing and via reaching profitability on the breakfast business.
Into him so how steep will not steep slope fees.
Action on how fast the sales are going to expand as you know we've see them invested they call it's going to take that while the change to habits and aim to be a coincidence that you're going to reach to at least in person defense sales.
This business, who is going to slide up.
Consecutively as we sell two feet of investment levels are going to go down and then disappear once we reach.
Thank you GP.
Your next question comes from will Slabaugh of Stephens. Your line is open.
Yes. Thanks, guys had a question on buoyancy in digital as you get prepared to launch loyalty can you talk about ways, you're going to incentivize the guest to sign up for that program and I know kind of on the back of that question a lot of your QSR peers that have had trouble with with digital engagement. So far just given so much of your transactions or through to drive through so.
Can you talk about how you incorporate the drop through the into getting the customer to order ahead, we're scan as their as or in that drive through.
Yes, well couple of things as you think about the journey. We said we will have a loyalty program in place.
Earlier in 2020 don't want to give out too many of the specifics, but we did talk about at Investor day than it would be a point point based program.
And then everything that we haven't digital our biggest opportunity is to continue to drive awareness, how do we get folks into mobile ordering how do we continue to make sure that we've got a complete universe of options when you get into our path on loyalty be one of those things to make sure that folks not only come but they stick with us to become more loyal so.
You to drive awareness as we go into next year on all things mobile and we'll continue to incent folks to to get into the mobile Arena and then we believe that the programs when they create seamless more frictionless experience moving forward.
We will allow the the the users to continue to come back to US scanners plays a big rolling that to really make sure that.
The experience for not only our employees, but for the customers become seamless when they're utilizing all of the mobile tools that were putting in place.
Got it got it thank you.
Your next question comes from Andrew Charles with Cowen Your line is open.
Great. Thank you.
It looks like spicy chicken Nuggets are still available, but we're not seeing the same level promotion relative to threeq.
The plan, especially nose to make these a permanent addition to menu or can we expect and be posted an out overtime to help generate bullish for the brand.
You know it so clearly space you know I guess fan favorite we had a lot of folk show up day, one behind our strong social media presence I, even before national advertising turned on and like like we always say.
Every item on the menu needs to earn its right to stay on the menu and we feel good that we continue to see nice velocity of of spicy Nuggets, we do have a two from five promotion going on right now in the in a in the market really featuring our.
Our premium sandwiches encore Hamburger, our spicy chicken sandwich, but we also have the 10 p. spicy chicken nugget.
Spring featured in that so the momentum continues on that portion of the business and we'll let the consumer continue to vote with their stomach on how long that offerings season or restaurants.
Got you and then Todd just to expand on that you've done a nice job in 20 on team, bringing new platforms like five dollar big box and made to crave and I was wondering about the decision to promote to $5, which is more similar to other offerings that are already in the marketplace.
Rationale this is more check in margin accretive relative to the big box.
Exactly this would be one how do we trade consumers up into our highest quality best facing products, how do we get them into premium when you think about our base.
A hamburger business for Hamburger business, our core chicken business, we want to make sure we get that food into the consumers now is to make sure. They continue to come back again and drive frequency.
Isn't a big traffic driver is the way we look at its more of a check driver consistent with our strategy to make sure. We got a nice balance between one more visit and one more dollars.
That's helpful. Just my last question for GP as it can you talk about the step up that's implied in Fourq. Eugenia you have you had the $2.8 million reduction legal reserves, the right a tailwind which should be thinking about in the fourth quarter. That's helped drive the gene a higher.
Yeah, great great questions again.
Vintage payout accruals, what if you remember last year, the second half student gold to plan for us as a result, if we'd be accrued incentive comp or below hundreds to sense and we ended up with really low cheating a in even here in the fourth quarter sales last year was about $44 million.
The implied guidance range, which you need for fourth quarter is about $45 million to $50 million will take a midpoint of $48 million, which is roughly line what do you actually exceeding prior quarters. So there's not really a messy step up on the face of two p. they'll go east because obviously the receipt of adjustment.
It has pushed on the face of to you know achieving a down to $46 million and again to be clear that need not be.
The performance it was adjusted EPS.
Very good thank you.
Your next question comes from David Palmer of Evercore ISI. Your line is open.
Thanks, Good morning, guys.
A question about.
About your underlying business, which is it's crazy.
Because.
Run mid year. It looked like you really needed the sales layer that was breakfast.
But now given the success displacing Nuggets, which has given you guys real spark on your underlying comps.
Really wonder how you think about that based business.
Going forward, you're going to be lapping yet this.
Sort of momentum later in 20.
Earlier in the year you seem to have some this momentum, but I worry that you might lose it with breakfast.
So I really wonder about the underlying business as much as anything as you go for breakfast and I almost wonder if you look back with what will regret about having to go for this hail Mary on breakfast given that your underlying business has gotten such a spark.
And I guess my my other question is on the value side of things do you know lot of these value constructs seem like they're dated at this point like you don't really need them and maybe the or sacrificing margin for them. So.
What is your future on on value. Thanks.
No. Thanks for the question David You know, it's a we're excited about the playbook that we're running and we talked a lot early this year that in the back half of the year, we were going to get a little more balanced between traffic and check and really get focused on driving mix and we've been able to do that with the balance we have bringing back spicy chicken nuggets being focused on.
The made to create platform, having a nice healthy balance on the high end the low and it has built some nice momentum in our business and.
We expect to continue to drive the momentum in our core business into the future and a great News is you know the stronger the core is the more confident we get into the breakfast daypart, because we don't want breakfast to be hail Mary we went breakfast to be an additional layer to growth in our business. That's why we're talking about being accelerated efficient growth company.
And remember the construct to hover, bringing this to light, bringing new advertising dollars to life to support breakfast. So we're not going to southern sacrifice, our support against lunch and dinner.
So we will have additional dollars out there that should have a nice halo across all of our dayparts not just breakfast as we have the impression, but a across lunch and dinner. So we do feel good that we've got tools, both on our base core business to drive growth and excitement and optimism around breakfast going forward.
So we do feel like we're living in the best of all worlds comes down a great execution right. We've got the plans in place we laid them all out when you think about our growth I.
Initiatives at a at Investor Day Breakfast digital and international So we know we need to do we got the Hearts and the mines are the system to go execute now we've got to go execute.
Thank you.
Your question comes from Matt Difrisco of Guggenheim Securities. Your line is open.
Thank you just have one little follow up and then also broader question the broader questions I guess with the state of the Union sort of for the franchise network in the wake of we're in the in front of.
In front of the breakfast rollout is or potentially some greater consolidation among the franchisees is this something that.
I guess is fully digested, where they're all onboard or are there some that might be a little concerned but have lived through breakfast in the past that might this might spur some greater consolidation or.
Brian Flips and then with respect to the digital it sounds like you said, 2% today is digital.
Can you sort of put into context, how delivery plays into that is delivery is that basically what you're expecting for delivery growth going from two to 10.
On digital because that digital number sounds relatively still even though its 2024 pretty low 10% as a goal.
So first off Matt on on breakfast in the and consolidation we.
We expect folks to be really focus we came out of our our convention a couple of weeks back and the attitude and optimism about our business in the future business has never been higher in fact, if at all time highs. So they're excited about where were taken this business on all of our growth platforms breakfast being one subset.
So I think we've got a system focus to grow I don't think you'll see more consolidation in the short term I think folks are excited that breakfast can add to profitability and can drive valuation in their business. So they're going to give it a good go in fact, it may potentially even slow down some of the buying flip activity that you might see in the in the first half of the year.
So as they continue to execute against this new opportunity of of growth going forward. When you think about digital clearly going from two to 10 is is a journey you know a lot of our 2% is driven by delivery today.
As we move forward it to get more balanced when you start to think about what we're doing around delivery, what we're doing around mobile ordering.
And even kiosk and select.
Trade areas. So you'll start to have all of those tools start to work against the delivery journey, which then move to us to get to that 10% of our of our transactions coming to a digital channels.
Thank you so much.
Your next question comes from Gregory Francfort Bank of America. Your line is open.
Hey, guys. Thanks, Thanks for the question I I too that the first is maybe can you talk about the incrementality assumption, you're making in the 60% breakfast component 2020 sales I think one of your biggest competitors when they launched Brexit a few years ago kind of got a similar mix in the 6% to 7% range, but but the lift to sales maybe was.
In this great. So just what the assumption is there and the other piece is going back to mobile.
I think you talked about in your prepared remarks, doubling the mobile mix during the promotion of spicy Nuggets can you talk about how much maybe sticking. This there has been in that and what the mobile mix was before you did that promotion and after and kind of how much you were able to drive on a consistent basis going forward. Thank you very much.
Yes, we look at breakfast all the Volumetrics all the work that we've done in the restaurants that we have breakfast today, we don't see a lot of cannibalistic activity going on.
We have modeled some of that into our outlook for the year to make sure that we've taken into account that.
But our opportunities to drive frequency frequency of visit is a is an opportunity for us.
May not see someone come back for lunch at a wendy's a fad breakfast that day, but we have the opportunity for them to come to our restaurant a little more often so it's really a frequency play.
So we don't see.
A lot of shifting from a lunch and dinner into breakfast.
In fact, the way, we're setting up our promotional plan and our advertising, it's a whole lot incremental support as I just talked about.
Earlier.
As a as we get into the mobile piece as we drive awareness every time, we drive awareness, whether that's mobile ordering whether thats delivery, we move up to a new stair step plateau. So it does it does spike during the the activity, but then settles in at a new hire plateau. So it continues to build and we know that awareness.
Still our biggest opportunity. So we're gonna have to continue to build that to continue to ramp up the stickiness of all things in the mobile arena.
Hello perspective, thanks Todd.
Your next question comes from Nicole Miller of Piper Jaffray. Your line is open.
Thank you good morning, I Wonder if you ask about international the 1500 stores goal, how does that get split between company and franchise. How does it scale does that does it start with a big Bang or does it well and then how do you support those stores with marketing. Thank you.
Hi, Nicole.
Great Great questions. The majority of the grossing international you see at least through a franchise restaurants, we have announced it vehicle to into the United Kingdom, It's a stronghold for Europe , and behalf announced that you're going to have restaurants, there, but it's going to be there.
Minority or the footprint.
I'd also say that they might show, which you have to growth.
Really coming from existing markets I think gifts demonstrated these during investor day by 2024, only 5% Defoe restaurants, basically relates to Europe , which basically means in new geography.
So in essence, it it's 50 to 60 stores currently a year internationally. It just it seems to be a modest step up and then again the second part how do you have on marketing support internationally.
Yes, it is something that you're doing differently. So a couple of things to franchisees or what was going to decode for into a sito obliged to spend the certain percent or the revenue on local marketing activities.
As we are getting in international markets via more open these days to potentially make investments on the marketing front, especially in Europe to help the establishment of new brand into new geographies to date. This money set aside for that.
Okay, and just to be clear about fall within the confines that's spot on said that but by Japan that you've been talking about.
Sorry, you were breaking up can you repeat the question.
I'm, sorry about that that vendor support would be within the confines of a larger strategy or guidance that you've been discussing.
Yes, this would be correct.
Thank you.
Your next question comes from Dennis Geiger of UBI US Your line is open.
Great. Thanks wondering if you could talk a bit more about anything you've seen with respect to the breakfast impacted test stores, perhaps since since your last communicated about a month or so ago I guess Todd you just gave some commentary around the other day parts and sounds like you are seeing good things there, but just anything incremental with respect to customer feedback.
Operations anything like that at least at a high level. Thanks.
Yes, a couple of comments so a one of the things that we had offered up for some unique locations. There were a you know.
Some restaurants that could have opted out of breakfast across the system in that period of up potentially opting out has passed and very few restaurants have decided up does so there's a lot of folks that as they look at the operational simplicity. They look at the menu. They look at the investment like it's a return they feel good about where we're going.
As we look at how it's performing in the restaurants, we have not a lot of new news right. We don't have any new incremental support out there, but what we're hearing operationally very efficient menu to operate we feel very comfortable that we can open the restaurant with two and run with three during the the breakfast Daypart.
And the model of opening the restaurant at 630 had drive through window, only and then opening up the Nitin room that at nine o'clock has been received fine in the communities, where we have the restaurants. So everything's on track and now we really turned the page two you know what do we need to do to get our general managers excited our journey begins on hiring.
Okay, and then eventually into training to prepare ourselves for launch the other thing to add standings use we did a lot of one of the metric modeling around the size of the business and what was the also modeled so it would would you expect if you don't do advertising and the good news east.
The model that we had if he's actually accrue it through the sales levels should view seeing actually disease level to be expecting.
Great. Thanks, guys.
Your next question comes from Chris Ocull of Stifel. Your line is open.
Thanks, Good morning, guys taught it sounds like the system plans to spend about half of what maybe another large chain spend during their first year when they rolled out breakfast are there certain milestones you want to see to determine whether you should do or what is the system needs to invest more to support the rollout.
We've laid out kind of these the vision on where we think breakfast eats again, when we know it's going to take some work to weigh in green. The habit you know we're in this.
Played the long term game and we know that.
Changing people's behaviors takes a little bit of time, we do feel confident that over time, we can get 10% of our business driven in the breakfast day part, but we don't have predetermine milestones in spend levels along the way we know that we're playing a game to bring the system along and bring the consumer along over the next.
Several years to really make sure that breakfast is a sustainable daypart for US a strong foundation that can then lead into a consistent growth beyond all the support period.
Okay Fair enough and then I apologize GP, if I missed it but can you provide some more details around the pricing actions for the quarter and how mix changed and then would you expect to happen for mix and price heading into the fourth quarter.
Yes, so so what we've seen in into sewage quota, we have seen price and mix both contributing about equal portions to our sales growth and then bfc negative traffic negative trends seem to be totally expected remember you have changed though oh commercialization strategy to one movies.
One more dollar and be lapping, mostly the 50 cent frosty promotion, which was designed to create more and more visits so do hydraulics of to promotions are different and it's why be expected way.
As you look on the fiscal year basis on the fiscal year basis, we would definitely expect that.
Pricing and mix of going to be positive and traffic is going to be slightly down because again in the fourth quarter to hydraulics again.
Similar fashion, we violette being the $1.80 says size Fry promotion that again was designed to drive traffic. We now has a more balanced calendar out there. So we will be much more positive than price and mix and obviously a little bit of headwinds on traffic.
What is the promotions that are really driving the favorable mix shift.
Yes, there's a couple of things out there, Chris one bringing back spicy chicken Nuggets has been nice play. It's a you know an everyday favorite.
That didn't require a lot of promotion and we did see a lot of trade up from four piece into six intend and even in some cases to 50 piece. So thats been the a play on mix. We've talked about are made to create platform that continues to.
Dry folks up on the one more dollar as we trade folks up from a from our premium sandwiches. So.
So those are probably two of the biggest drivers that I've been driving the mix with us consistently throughout the year.
We've had the also that the $5 piggy bag earlier in the quarter a against the four for for promotion. So all things that we planned on and things that we're delivering on and it's performing as we expected.
Great. Thanks, guys.
Your next question comes from Catherine <unk> of Goldman Sachs. Your line is so.
Thank you I'm can you help us understand a little bit more about how the franchisee commitment.
Plays out with breakfast you know when they get the that paper and packaging and they get the employees that you can you help them find a then they kind of brought on assist and are they committed to sticking with it for six months or one year or do they have.
The ability to kind of toggle off our eyes as Stacy. Thank you.
It's a great question, so yeah definitely comedians to a national launch they had a chance to opt out at that time that milestone has passed.
And then you're obviously going to make sure that they're executing with excellence against a breakfast program.
After a year that they have an opportunity to potentially raise concerns if the breakfast business, he's not creating enough financial returns for them than we are building.
Entertain a discussion to two mutually agree that maybe they could be opting out later on but but again device they need to demonstrate the aside that they've really puts the best foot forward because again you need to understand the passionately believe that we have to be signed at very very compelling.
Program that is profitable and therefore, we really expect the ALJ range to be very very low.
And on that point would they be where they have to pay you guys at feed to opt out.
Reimburse you for some of the investments that you've made or would they have the ability to just walk away from breakfast.
Notice that there is no fee involved.
One of them make sure ways, it's not entire franchise organization. So that we view of a potential opt out really happening on an individual restaurant by restaurant basis.
Your next question comes from Andrew Strelzik.
Pmone capital markets. Your line is open.
Greg Good morning, two questions for me the first one at Investor Day, you gave kind of some longer range targets for DNA <unk> can you help us kind of think about what that trajectory looks like to getting there over the next I don't know kind of two years.
Yes, it's really very steady right. If you as you sit on the investor days to be a committed to gets down to about one of the hospice and of system sales.
Expects to achieve that level in 2023.
And so you can expect that we've seen good year stepping down. So it was slightly remember currently you're sitting at about 1.8%.
So as of yet adding.
A decent amount of sales cities. The main driver by our achieved 80% of sales going down.
Okay, Great and my other question is just the kind of the new product pipeline for 2020, there's been times over the last call. It two years really didn't surprise innovation, we pulled back to focus on ups next year, obviously breakfast is going to be a key focus and digital as well so kind of where does product innovation sit within.
That is this going to be a year, where that takes a bit backseat because of the other drivers or do you anticipate maybe you can talk about it on a year over year basis kind of think about how important that a role that plays outside of records in the quarter parts.
News is a is important and continues to drive the quality in the premium messaging that that we like when we think about one more visit one more dollars. So.
As you think about 2020, you know we will continue to bring news to the made to crave platform to keep it freshen ownable. So you'll see that does sprinkle in during the course of the year as we talked about at Investor day.
Our testing a a a black bean burger in some markets today. So if you think about.
Plant based protein alternatives.
You could see some news along that way.
But we'll we'll continue to keep that focus and ER and really make sure that we patients sequence our calendar during the course of the year to really set ourselves up for success to make sure that we can run great restaurants day in and out.
Great. Thank you very much.
Your next question comes from decreased trend of JP Morgan.
Your line is.
Hey, good morning, guys and thanks for the question I'm, just wondering on the labor side with your backlog strategy together, how are you keeping manager and staffing levels at lunch and dinner and maybe avoiding that temptation to pass ship those hours abaxis, especially as the volumes in stores may.
Openflow may not working every single store and may not need the additional labor hours. Thanks.
Yeah actually very proud about still labor model that we have created for breakfast a it needs only three people.
The other thing good view, a doing use viewing vestings. It's part of a 20 million dollar investment you're investing actually you know BNS generating advertising to make sure would be can high a dose 20000, new employees for the system to make sure to the part can be stopped.
Actually think it's a popular daypart for people to work in these creates actually more flexibility.
Doing.
Good morning, and lunch day part as you have already accrue in place. So if you have call call offs later on in the mid morning, you can actually have become a much better from that so overall, we think.
Filter through pretty well and.
And executing against it but you do appointees right do these are type type later labor market, but before the bundles and if you really boil it down it's really three to four people per restaurant that you really need to go higher so if you get down to a a location by location. It's not as daunting is it's hiring 20000 people across the system.
And everything that GP said really getting into some of the block scheduling.
We really think it can start to like to help us step the restaurant not just at breakfast, but but through lunch.
Great. Thanks.
Your final questions today come from Jake Bartlett of Suntrust. Your line is open.
Great. Thanks for taking the questions.
My Masters interest from your comments is that the traffic will be negative in 2019 and eat it seems to be the case. So in other some of your competitors as well is that what's really been the biggest driver to see for sales has been checking mix and the question is is that a.
I guess, if an acceptable sceptical state of affairs as we go into 2020 from from your perspective or from your franchisees perspective, or there's something need to change try to drive traffic faster.
I think just couple of things you know we've been very proud over the last several years that we've been growing are holding category traffic shares. So we've been doing a lot of work to bring more customers into our restaurants more often and hadn't participated in some of the the check growth that others have seen.
As we moved into the one more visit one more dollar strategy and our promotional calendar. This year, we've rebalanced that a little bit and we think we've got that balance right.
But we do have to lap over things like 50 cent frosty and dollar any size price I think here to see a more normalized basis. You go into 2020 clearly to be successful for the long run you got to bring in more people more often you know we got a lot of tools to continue to do that got another daypart that we're entering we've got another.
40%, 45% of the system that still needs to be Reimaged, where we see a you know lapse in new consumers come back into a into our restaurants time and again and we can continue to help our game on operational consistency across our restaurants and continue to drive speed. So there are several tools in our toolbox ahead of us to key.
Bringing more customers in more often.
And you're starting to see that across the whole QSR industry and in the last three four quarters traffic has turned positive. So I'm you know we plan to participate in that and that's sort of drive a healthy business for the long one.
Got it and then GP in the in the presentation at the Investor Day, There's a lot of.
Compounded growth rate. So K gors can you give us a sense as to how fast you think the business is gonna be growing.
In 2024 for instance, kind of do they see it feels like it would actually be a ramp up to two growth. So you kind of and higher than than some of the cagar. So I'm thinking specifically around unit growth Oh, you've talked about a 3% CAGR features and 24 seems like you'd end up you higher than that and just just wanted to confirm how you're thinking of the trajectory.
The business.
Yes, definitely the total step change in growth from 19 to 20, right going from 10.9 million if million dollars to about 12 to 12 and a half billion dollars do actually expect.
A steady ramp.
2020, and 20 to 24 between 400.
If you four and 5% so there's not a lot of variation between.
But just so you can in terms of unit growth you I would assume that the international unit growth would be much slower season in 20 or 21 than it would be 24 is that how you're thinking about it.
That is correct right, but you still will be excited about the growth of international the contribution and the impact to the overall.
Sales he sees lower and those who don't forget west compounded unit growth, 3% compounded sales growth related to two days is actually only one of the up to 2% and why is that because in international view. If you have kind of a slightly negative mix somebody will be point of view going on today, but overall it doesn't have.
And messaging pick from it from a PC and beyond International is Abigail talked about we really got this focus on some of the non traditional units you know, we've got about 5% to 6% of our.
Business in non traditional today, we're open to be much higher than that 20 to 30 overtime and some of those locations. A these could be a little bit lower so those things all factor into that delta the GP just stopped.
Got it and then in the last quick question. The 20 million dollar investment that you're making in 2019 I'm assuming that none of that was included in the third quarter Nols going to be in the fourth.
They just correct.
Okay. Thank you very much.
Thank you Jake that was or last question of the call. Thank you Todd and GP and thank you everyone for participating. This morning, we look forward to speaking with you again in our fourth quarter call in February I have a great day you may now disconnect.