Q4 2019 Earnings Call
A question during this time.
Our followed by the number one on your telephone keypad.
My question.
Thank you Gregg Hillman 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.
Our 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 cause those results to differ materially from the projections set forth in our forward looking statements.
So some of today's comments will reference non-GAAP financial measures.
You 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 earnings release.
Our call today, our president and Chief Executive Officer, Todd Penegor will provide an update on key initiatives and our Chief Financial Officer Contra Plush will review, our fourth quarter and full year 2019 result, as well as our 2020 outlook from there we will open up the line for questions.
With that I will hand things over to Todd Thanks, Craig and good morning, everyone.
I'd like to open today's remarks with the Wendy's vision is it is important to remember that our goal is to become the world's most thriving and beloved restaurant brands.
Everything we do at Wendy's ladders up to this vision to build an even stronger brands.
Vision is powerful and you will see throughout her remarks today that we have momentum have become more focused and are set up for accelerated long term growth that will help us achieved this vision.
Before we dive into 2020, let's begin with a few highlights from 2019, which demonstrates the momentum we have in our business heading into an exciting here for the Wendy's brand.
We finished the year with a strong system wide sales increase of 4.4% that exceeded our expectations on the backdrop of robust North America same restaurant sales of 2.8% and continued restaurant expansion as we opened 182, new restaurants across the globe.
2019 wasn't investment here, helping to lay the foundation for accelerated growth in the years to come we invested approximately $17 million to support our launch of breakfast and another $5 million to rollout scanners towards North America system to help with the integration across all our digital platforms.
As expected we finished the year with approximately flat adjusted EBITDA and EPS versus the prior year.
We had another strong year free cash flow as we generated $221 million. This allowed us to return approximately $314 million to shareholders in the way of share repurchases and dividends.
Lastly, we could not be more excited about or upcoming breakfast launch a lot of work has been completed enersystem is fully staffed and trained we are ready to launch what we believe will be America's favorite breakfast nationally across the U.S. on March the second.
I could not be more proud to say that we have achieved our ninth consecutive year at North American same restaurant sales growth, which is extremely plan on keeping alive in 2020 and beyond.
So 2019, we focused on enticing customers to visit one more time and to spend one more dollar and this strategy was successful as we achieved one of our strongest same restaurant sales performance is over this nine year stretch.
This strong performance in 2019 was driven by accelerating same restaurant sales growth in the back half of the year, which sets us up extremely well heading into the current year.
We are approaching 2020 from a position of strength and momentum with the full support of the franchise system behind US we will continue to partner with our franchisees to ensure we are providing customers with promotions that bring them into our restaurants more frequently than or operationally sound with the restaurant economic model at the core of at all.
We believe that scale matters and that we are well positioned to win now and over the long term as we can deliver on the consumer need for speed convenience and affordability will separating ourselves with quality.
Our system is engaged and we are excited about our plans for 2020.
With that I will now hand things over to GP, who will provide more details on our 2019 results. Thanks, Todd as Todd mentioned 2019 wasn't investment you for us helping to lay the foundation for accelerated growth into use to come.
Lets jump in a full year financial results.
The increase in the trusted revenues was due to positive same restaurant sales at franchised and company restaurants as well as an increase in company operated restaurant sales from the acquisition of restaurants as part of our ongoing system optimization strategy.
Revenues were also driven by approximately $38 million pass through payments related to stop leases as part of the new lease accounting standards.
Company restaurant margin decreased by 30 basis points to 15.5%, primarily driven by labor rate inflation and higher commodity costs, partially offset by the positive sales mix from company same restaurant sales growth of 3.1%.
Adjusted EBITDA met our expectations coming in flat at $413 million.
Even with approximately $22 million in investments for growth.
Adjusted EBITDA was impacted about previously mentioned 17 million dollar investment to support our launch of breakfast and another 5 million to rollout scan us throughout North America system.
Well as an increase in DNA.
This was offset by an increase in franchise royalty revenue and an increase in restaurant margin dollars due to increased sales at our company restaurants.
Adjusted earnings per share was flat for the full year at 59 cents.
This was driven from fewer shares outstanding as a result, if our share repurchase programs offset by an increase in income taxes.
To round things out free cash flow came in its $221 million.
In about $10 million year over year. The decrease resulted primarily from an increase in capital expenditure.
Now, let's turn to quarter four we were very pleased with our results as we close outs the year with very strong same restaurant sales growth.
Dive into the numbers.
The increase in the trusted revenues was due primarily to positive same restaurant sales of 4.3% in North America.
Adjusted revenues, the also driven by approximately $9 million.
Through payments related to Subleases as part of the new lease accounting standards.
Year over year company restaurant margins decreased by 170 basis points to 14.3%, primarily driven by labor rate inflation higher insurance cost and higher commodity costs. This was partially offset by sales leverage from company same restaurant sales growth.
Excluding the legal reserve for the financial institutions case that was recorded in the fourth quarter of 2018 Gionee increased by approximately 23% primarily as a result of higher incentive compensation.
As expected.
For the EBITDA decreased by about 23% to $83 million. This was primarily driven by investments to support the U.S. systems in advance of our breakfast launch in Q1.
And increasing gionee and the decrease in net rental income also drove on favorability.
It was partially offset by an increase in franchise royalty revenues and fees on the backdrop of strong system sales growth.
Lastly, adjusted earnings per share decreased by approximately 50% into fourth quarter to 8% driven by a decrease in adjusted EBITDA.
With that I will pass things over to talks to talk about our 2020 plant.
Next GP.
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.
I'd like to provide a brief update on or 2020 strategy for each of our growth initiatives, starting with our one more visit one more dollars strategy that is gaining momentum.
Our marketing strategy contributed to strong North America same restaurant sales growth of 4.3% in Q4, and let us to finish the full year at 2.8% one of our best results over the last decade.
Same restaurant sales grew over 4% in the back half of 2019, driving significant momentum into our core business as we head into or launch of breakfast.
Spicy Nuggets were once again, a powerful promotion in the fourth quarter as customers continue to show up for this offering.
This was followed by the two for five meal deal, which showcases some of our top premium menu items in the Dave single and spicy chicken sandwich as well as our chicken nuggets, including spicy.
This promotion drove a strong average check in the fourth quarter as customers regularly added fries and a drink to this offering.
We plan to accelerate and drive further flavor and innovation through our made to create platform in 2020.
We recently brought back the iconic big Bacon classic and added it to this lineup highlighting our freshly prepared bacon and our fresh never frozen beef any delicious sandwich, we will continue to utilize our made to create platform by leveraging news to keep the platform fresh and Ownable.
The continued strong performance of our core business is critical to our success as we embark on a year of transformational growth with our launch of breakfast and we believe that we have a plan that sets us up for success.
After over two years of preparation we're ready to launch what we believe will be America's favorite breakfast across the U.S. system on March the second.
There is strong customer demand for breakfast at Wendy's and our franchise system is fully aligned to this launch as we have designed a program that we expect to benefit the overall restaurant economic model.
Our system has been very busy recruiting for the breakfast Daypart and we are excited to report that we are fully staffed and ready for launch.
We have also spent the last few weeks training our crews as expected training has gone very smoothly as the menu was designed to be simple and easy to execute.
Our system is energized and excited to bring the breakfast offering to life for our customers.
We have created a differentiated menu with mass customer appeal that capitalizes on our quality heritage featuring the breakfast Baconator fries, Gino and honey butter chicken biscuit.
We're excited to deliver America, the breakfast it deserves and we will be driving awareness in a big way.
Our digital business experienced strong growth in 2019, and we laid the foundation for future success, we expanded our delivery and mobile ordering businesses and technology capabilities in the restaurant with our installation of scanners across in North America system.
In 2019, we had approximately 2.5% of our U.S. sales coming through digital channels, which doubled from the end of 2018.
We are energized by the work occurring in the digital space to improve access to the Wendy's brand.
In 2020, we are expanding or delivery business with additional partners in grubhub, and who breeds continuing to bring convenience into the hands our customers by working to improve our mobile ordering capabilities and lastly to launch our loyalty program.
Awareness will remain a key focus in 2020, as we ramp up the integration of our digital initiatives into our advertising.
With the plans we have in place we are well underway to achieving our goal of 10% of our sales coming through digital channels by 2024.
At the end of the day, we will not be successful if we can't deliver great experience when customers visit our restaurants.
Our team is highly focused on two areas speed and great tasting food.
Improving speed of service to increase throughput is key to driving increased sales and higher customer satisfaction in our restaurants as well as to ensure that are breakfast lunch reaches its full potential.
We have implemented several new training procedures that we expect will have outsized benefits in this area.
On delivering great tasting food, we will continue to enhance our operational procedures to ensure that our products are being delivered to customers at the highest quality possible and we will continue to do more throughout the year.
This will all be brought to life by having our restaurants fully staffed and trained as previously mentioned we have been successful hiring for the breakfast daypart in a very challenging labor market and I could not be more proud of the team.
In addition to showcasing why Wendy's is a great place to work. We have also launched a new central hiring web site that has helped the overall hiring process.
This has been a huge win and we expect continued benefits in the future.
Operational excellence is paramount in our journey to become the best Wendy's, we can be and we know that we have more opportunities ahead to be even better.
We're pleased with our US development results for 2019, as we met our expected growth goal of about 1%.
Our Reimaging program also remains on track is franchisees continued to see the benefits from this program with higher sales and customer counts, we now at 58% of our global restaurants in the new image.
As we move into 2020, we're expecting or use footprint to continue to expand based on the tailwinds that we have created with our groundbreaker incentive program and our smart family of designs, which has significantly lowered the cost to build the wendy's restaurant.
In addition, we're also continuing to focus on non traditional channels, which will also provide a tailwind in 2020 and beyond two our U.S. pipeline.
Lastly, we are expecting 2020 to be a busy year from me system optimization perspective, as we are planning to Refranchise, Our company operated New York market.
We believe that getting these restaurants into the hands of franchisees will help unlock significant growth in this market.
As a reminder, we will be retaining our Manhattan restaurants.
We're also planning to complete approximately 100 franchise flips in 2020, which will further strengthen our franchise base.
2019 wasn't exciting year for our international business, and one where we laid the foundation for the future.
As discussed at our Investor day, the team was very busy working through our long term international strategy in 2019.
As part of this we have developed a global leadership team that is focused and disciplined with a relentless commitment to economics and growth.
With the economic model as a key focus we did a full assessment of our current footprint and franchisees one such decision as previously announced was to expand into the UK market and to do so by opening company restaurants to kick start development.
On the flip side, we have had to make some tough decisions as we prioritize our growth markets and resources.
We closed our Malaysian market in the first quarter of 2019, and also made the decision to exit Brazil in the fourth quarter.
We had five restaurants in Brazil, which were part of a joint venture as a result of this market closure. It created a profit headwind of approximately $2 million in 2019.
This groundwork has strengthened our foundation and feel great momentum as we finished 2019 with approximately 7% system sales growth internationally.
We also had some big wins, we signed large development agreements in Canada, and the Philippines, which will set us up for the future.
As we look forward to 2020. It is all about accelerated growth, we will continue to grow our existing markets to scale and are very excited to enter a new market in the United Kingdom.
We are expecting that we will more than double our net new restaurant openings internationally in 2020, as we embark on our plan to double our system sales to $2 billion by 2024.
We know that international is a huge opportunity for the Wendy's brand and we're excited to grow this business with our great franchise partners.
In order to bring the Wendy's way to life, we must remain focused on investing in the quality of our food, providing great value delivering exceptional service and elevating our restaurants.
We will bring this still lives through our focus in 2020 by continuing the strong momentum within our core business launching into the breakfast daypart and enhancing our digital platforms to create even more touch points with our consumers.
We will have a focus on speed and great tasting food you create an experience that brings people into a wendy's more frequently lastly, we will continue to provide more access to the brand around the world through our global development plans and continue to create a place customers love to go through our Reimaging program.
It is important to remember that our system is one family and we wouldn't be able to do any of this without the support and dedication of our franchisees with the passion they bring to the brand day in day out I know that we will become the world's most striving and beloved restaurant brand I will now hand things back over to GP. Thanks, Todd I would now like to walk you through.
Our 2020 outlook, which is very consistent with what could be half shift previously.
Moving to 2020, our roadmap remains unchanged, we have striving to be comment if accelerated efficient growth company to these showcasing meaningful system wide sales growth on the backdrop of accelerating say most on sales and global restaurant expansion, which is translating into significant free cash flows.
Now, let's take a deeper look into key financial metrics, starting with global system wide sales.
Strong system wide sales growth of 4.4% in 2019 pushed us to the high end of our global system wide sales range.
Ended the year, it's $10.9 billion.
We expect our 2020 system wide sales to grow approximately 10% to 15%, which equates to $12 billion to $12.5 billion.
We expect this growth to come through core growth, 4% to 5% comprised of say most on sales in existing Dayparts digital acceleration and global restaurant development.
We expect an additional 6% to 8% of growth from our breakfast launch and finally, the 50 Threerd week will add about 2% of growth.
Moving on to adjusted EBITDA, which we expect to grow mid single digits to $425 million to $435 million.
Core growth breakfast and to 50, Threerd week or EBITDA Tailwinds offset by the New York. These position maybe expects to sell about 40 restaurants by midyear.
As a reminder, on the breakfast investments we are still anticipating that we will have a loss on our breakfast business in 2020 due to the marketing investments we're making.
Now did our breakfast plans are set we wanted to provide some details on our expected advertising investment in 2020 on how you can expect these two flow on our financial statements.
Over the course of 2020, we plan to spend approximately $70 million to $80 million of advertising to promote awareness and frequency within the breakfast day part this will drive our broking media weights up about 30% higher than the out today and these important to remember.
Did we will not be reducing our lunch and dinner spending as a result of our breakfast launch.
In accordance with revenue recognition standouts, the advertising expense related to breakfast will be smooth evenly across the quarter starting on a pro rated basis beginning in quarter one.
We expect the trusted earnings per share to grow to 60 to 62 cents in 2020 on the backdrop of adjusted EBITDA growth and continued benefits from our share repurchase programs, partially offset by higher tax rate in 2020, as we lap the onetime benefits we had from a tax we soon.
If release in 2019.
Finally, we expect our free cash flow to grow $230 million to $240 million fueled by strong core earnings growth.
Lastly, we expect capital expenditures to be approximately $75 million, which is expected to runway to moving forward as we balance our investments in development technology and maintenance capital.
As that close I would like to highlight our capital allocation policy, which remains unchanged.
First priority remains investing and profitable growth disciplining, though investments choices and via always focused on ensuring a strong financial return for our franchisees and for us at the franchise or.
We remain committed to maintaining an attractive dividend with a payout ratio north of 50% and will utilize excess cash to repurchase shares and or reduce that.
As a reminder, we increased our dividend twice in 2019 to a quarterly amount of 12 cents per share.
This is an increase of over 40%.
On the share repurchase front, we recently completed our previous 225 million dollar share repurchase authorization.
And our board has authorized in new 100 million dollar program expiring in February of 2021.
Also executed the repurchase of approximately $10 million of out of the benches in the fourth quarter.
Our formula is simple yet powerful we on the accelerated efficient growth company that is showcasing strong system wide sales growth on the backdrop of positive same restaurant sales and global restaurant expansion, we just translating into significant free cash flows.
I'll now hand things over to Greg to close out.
Thanks, GP I wanted to quickly take a moment to provide an update on our segment reporting structure.
In May 2019, we announced the realignment of our business as we saw an opportunity to increase our effectiveness by driving clear accountability for growth across the organization.
In order to better align our reporting with the organizational structure, we've changed our previous in North America International segments by combining our Canadian business with the international segment and separating our real estate and development operations into its own segment.
Our future reporting will reflect our results in the following three segments U.S. International and global real estate and development for more information regarding the changes related to our new segment reporting structure and for our 2017 through 2019 results as reported under this new structure. Please reference the segment reporting update presentation.
That is publicly available in the supplemental financial information section of our Investor Relations Web site at IR Wendy's Dotcom now, let's turn to our upcoming IR calendar.
We will head to New York City on Tuesday March Threerd for Roadshow with Bank of America that onto the S Conference. The following day in Boston.
The following week on March 12, we will attend the JP Morgan conference in Las Vegas.
If you're interested in meeting with us at any of these events. Please contact their respective sell side analyst or equity sales contact at the host firm.
And finally on Wednesday May six we plan to release, our first quarter earnings and hosted a conference call that same morning.
With that we're now ready to take your questions.
Thank you at this time I would like to remind everyone in order to ask your question Press stars on the number one when your telephone keypad. Your first question comes from Chris Ocull of Stifel. Your line is open.
Chris Ocull your line is open.
[music].
Sorry about that can you hear me.
Okay.
We can begin but let me okay great.
Good morning.
It looks like your guidance calls for 6% to 8% breakfast sales mix for 2020 or roughly that amount I guess, you're probably seeing some cannibalization, but how quickly do you expect to be within that range.
Hi, Chris the way, we talked about it at Investor day in the way, we're thinking about it is will drive a lot of awareness with with advertising as we start our national launch here on on March the second.
Our hope is and our desires to drive a lot of trial early during the course of the year, but we do believe it will be a build throughout the year and really talked about how we will exit the year at at that kind of mix as we really work too and green the habit with consumers to to come to Wendy's more us into the future.
And then Todd outside of sales performance, what other consumer metrics will you be evaluating to determine the breakfast rollout is meeting your your goals.
I think there's a few things right. We know we need to be breakfast fast in the mornings. So speed of service is critical as is the consumer comes into the restaurants for the breakfast Daypart.
We want to make sure that we are delivering high quality, great tasting food day in day out to make sure that they are loads. So we can ingrained habit and they want to get us into their their morning routine.
And we'll continue to to monitor.
Sales and relative sales performance to the competition moving forward, but making sure that we're doing it in a very profitable fashion for franchise community.
Great. Thanks, guys.
Yes.
Your next question comes from Jeffrey Bernstein of Barclays. Your line is.
Great. Thank you.
Two questions first from the comps that you talked about sequentially improving in the fourth quarter and it seems like onto your basis improved every quarter of 2019.
With that as a backdrop it does seem like the check was the driver with traffic still negative so I'm just wondering whether.
Whether you're comfortable with that imbalance or how you plan to maybe better balance that.
Is there anything in particular that you'd attribute that accelerating momentum to whether its specific new product or day part or anything like that.
Any color you could add and I think you made mention of momentum continued into 27 or whether you'd offer any color on the quarter that they first quarter.
Yes, yes, we're very proud of the momentum that we built in the back half of the year in our business. The new segment reporting it can actually see the U.S same restaurant sales, 4.5% in Q3 again, 4.5% in Q4.
And as we talked about.
Last year I guess it into 2018, we really wanted to get a better balance between traffic and and mix and as you think about where we went during the course of 2019 and how we work through the.
Fourth quarter, we did see strong check growth as we did expect.
A lot of it in the fourth quarter was we're lapping over that dollar any size price promotion from a year ago, but.
But we're really starting to see the benefits of that one more visit one more dollar promotional calendar that we set up during the course at 2019.
If you think about our check growth, it's been approximately half price mix. So we feel comfortable with with that balance and customer counts were down slightly as we lapped over some of the promotional activities that we had in the prior year, especially in the fourth quarters, we lapped over the dollar any size fried promotion.
But we feel good that we've got the right balance in the traffic function is more getting the right balance between.
Our promotional high low one more visit one more dollars calendar than anything else. So we feel good about where we stand.
It really started to build momentum with the reintroduction of spicy chicken Nuggets. It allowed us to hit all of our digital platforms that are social media platform advertise that get more folks into our restaurant and then really while some great experiences day in and out in the restaurant.
Got it the question was on profitability you mentioned in the release.
You dealt with labor inflation commodity inflation and down traffic.
But those are kind of the big three components in all of them being headwinds.
Your restaurant margins were down significantly I'm, just wondering whether you could talk about sentiment from franchisees on their profitability and looking ahead and maybe what your expectation is for labor commodity and traffic.
I guess pricing to offset that in 2020. Thank you.
Good morning Jess.
Company sites to fourth quarter, I would say most items definitely bands to plan that was one exception.
On the by 110 basis points of headwinds due to its who have been though insurance reserves.
I would say commodity inflation was pretty strong into fourth quarter above 3.2%.
This is about 2% into sued quota and into 2% commodity inflation, we experienced on the year I would also see labor inflation ticked up a little bit at about 4% movie ended on the year.
Since inflation.
To your question in terms of how franchisees at tracking the publicly in general we always say that tracking closely to our out performance. Since we had these onetime insurance through thick and to fourth quarter. Some of our franchise community might not have experienced debt.
As far as outlook for 2020 of expectation is.
That our restaurant much in the company restaurants is going to expand slightly.
Definitely driven by a little bit of profitability on breakfast.
We have sales growth that via banking on.
Got to be do we expect inflation and we do expect inflation on the labor side of about 4% and on the commodity side north of 2%.
Great. Thank you.
Your next question comes from Sir John zones of Keybanc capital markets. Your line is open.
Hey, Thanks, good morning, So I appreciate the the range on the breakfast advertising spend is that range depended on it on the sales mix achieved and how does that range change. If you don't achieve the target to mix or are you exceed the targeted mix.
Eric as we talked about we're committed to breakfast and we're going to in green the habit and said that we will have commitments to support the system ingrained the habit of breakfast over the next three years. So we are committed to the range that we had laid out and in that that 70 to 80 million dollar the great news.
As is it's it's all incremental dollars that we're bringing to the party we're going to have more media pressure out there, we're not stealing from a lunch or dinner. So we'll not only be able to showcase breakfast will continue to be able to keep our nice support on lunch and dinner and all of our messaging will have a great Halo two fresh high quality food that Wendy's continues to deliver.
Sales came in a little bit softer, we're not going to flinch, we're absolutely committed to this day parts. So we're very much committed to spend those kind of dollars. During the course of this year.
This is going to just to point out it's not just in one year investment is a multiyear investments. So we definitely expect to put our money into into the state for the next three years. So we really look forward for profitability of breakfast come to any doing.
And then to the follow up based on what you've seen thus far I know you're are weak away from launching but.
Have you seen the competitive response would you say, it's more or less intense than what you previously expected.
Yes, specifically in regards to either breakfast since everybody knows there is a new entrants coming into the breakfast daypart, we would've expected to be highly competitive and that's what we're seeing there is a lot of competitive messaging out there, but we know that we'll have our messaging we started in social we'll have more coming on mainstream media where we.
Started this week with chef, Mike you'll see a lot more next week as we really rollout the full national campaign, we've got everything in the restaurants. The great news as we said in the prepared remarks is we're fully higher which has been great lot of folks and think we could hire the staffing for that breakfast daypart and fully trained and in our teams are energized and excited and our systems.
All in behind breakfast to drive great execution. So we will make sure that we created great first impression with all the trial that we have as we launch into the breakfast Daypart.
Thanks, Good luck.
Your next question comes from Matthew Difrisco of Guggenheim. Your line is open.
Thank you GP I think in the release you mentioned that net rental income was down I don't believe that number was has ever been really meaningful as far as down it's been directionally up sequentially or even up year over year.
For most quarters, how should we think about back going forward and how is that sort of embedded in your guidance or could you give us some color on why that was down.
Year over year, almost $5 million are so it looks like.
Good morning, Matt, Yes, but would you have seen is a comparison base I'd be had a couple of onetime lease buyouts that who stole rental income stream last year, we didnt repeat these into fourth quarter LCC against the negative comparison.
I'd say on the go forward basis.
Rental income that you are seeing for this year, probably twice with a sensitive and what to expect going forward.
So pretty much flat on a income net income contribution basis year over year, so not really growing EBITDA.
Yes, it would be good estimate.
Okay. Thank you.
Your next question comes from to it was Palmer of Evercore ISI. Your line is open.
Thanks.
Congrats on comps.
Recent quarters in 2019 in particular.
Question on chicken.
We're seeing big growth from chicken sandwich players out there popeye's Chick Fil a.
Those guys operate in your regions or some of your key regions.
Wendy's, obviously has a phenomenal history with chicken sandwich is going back a long ways.
You yourself had some really good growth with the spicy chicken nuggets in the second half so.
I wonder about.
The gives and takes on that on that platform, you're you're going have to lap your spicy chicken nuggets youre going to see some competitors launch their own renovated chicken sandwich offerings.
But you yourself might see upside from that platform, if not 19, but in the future. So what are your thoughts about that on chicken and I have a similar one on plant based.
Yes, David on the chicken business, we've been very proud of our performance not only has the return of spicy chicken Nuggets been nice unhealthy, it's actually been a nice mixed driver for us as we've traded soaks up from four piece into 16, and even 50 pieces along the way.
And with all the chicken wars going on we were able to really engage with our social media team and create a lot of news around our own product and drive a lot of folks into our premium chicken sandwiches and everything lined out nicely with our to provide promotion, where we had our premium sandwiches.
With their chicken sandwich as well as the date single as well as as Nuggets in that promotion, where we've seen nice drive into our premium products, which is our best tasting food as well as nice add ons to the check which helped drive mix along the way, we're absolutely focused to continue to to renovate and improve.
The quality, which were already very proud of our chicken sandwich will continue to do that through the course of this year, we'll continue to upgrade in and enhance the operational procedures in the restaurants to make sure that we have.
Most tender juicy chicken in the business. So we are focused on that but we are in good position to continue to compete.
And then and then on plant based seems to be a ton of high right now around plant based products or.
Needless burgers.
Burger King has been underperforming you guys on comps lately, they have a product but in other words not driving the monster comps, we're seeing from a popeye's for instance, with a better chicken sandwich.
You tested a black being burger in the past I don't know how you're thinking about this in the future.
What are your early thoughts about testing or going into meatless do you think thats a potential big idea for wendy's. Thanks.
Yeah, we would love to see other consumer vote with their some again, whether it's a big idea, but we do think that plant based is here to stay consumers looking for a more protein and their diet. We've always said would do it the wendy's way with thought with high quality.
Product, if we entered into that space and would do it.
In an operationally effective way within our restaurants, we've tested several things we've got a great plentiful Burger in Canada that testing quite well and I'm sure you'll see that lunch soon in that market.
We've tested the black Bean Burger, where we simplified the operational procedures in the US we've tested a plant based chicken sandwich. So we've got.
And Arsenal of plant based products that we could sprinkle indoor calendar as appropriate through the year.
And it really allows for news, which I think it's the biggest driver on a lot of this plant based as you bring some news to the category.
Can you provide some varieties for those proteins acres to rotate around the from traditional protein. So you will see us play in that space. During the course of this year.
Thank you.
Yes.
Your next question comes from John is co of JP Morgan Your line is okay.
Thank you I was wondering if there is any decision in terms of using some national promotional pricing to really drive a lot of interest and initial trial and breakfast and I have a few quick ones after that.
Well, John I wouldn't want to give the competitors are full promotional calendar on where we're managing our business, but we are locked and loaded we built the economics in a fashion, where we are committed to compete we have our base plan as we get into our launch calendar next year. Our next week, rather we've got our contingency plans.
In place if we needed to do other things, but we're really proud that we've got value built in across the entire menu. So we start there we've got high quality product, we've got competitive price points and.
We know that we're going to drive a lot of trial and we're going to be really proud to to get our great tasting food and beverage offerings into the consumers models.
Sounds good and understood I think on the answer and then secondly.
As the intelligence in the market grows and franchisees have kind of have more time to think about it.
The eventuality of breakfast kind of making making profit out of store level on a couple of years basis have you been able to hone in that number I assume it's something south of 100, but I'd just wanted to get a sense at this point as we talk in February 2020, like how high that number might be and then secondly is there.
For a push from the franchise community kind of from the ground up ticking up to take certain stores or perhaps even certain markets. The full 24 hours.
Yes from a full 24 hour perspective.
Not not that pushed today those are always growth opportunities in the future for for the right trade areas from a breakfast perspective, we've really set it up for our franchisee to make make money from day one right. We've we've managed the upfront costs, we paid for the small, whereas we paid for some of the support on hiring and training.
Eight for the menu board work in a lot of that we got into into last years.
Expenses, so they should be integrate spot to make money from day, one and the work they had to do as hire and train and we've got that now behind us. So we're ready to execute going forward any thoughts yes. John This is taught side, we've taken away the need for Dan, making any onetime investments. It is immediate return.
Obviously, we worked really hard on the breakeven points for the breakfast business was obviously, a key who it'll be had to overcome with franchisees and the component to the combination of simple menu only three crew members who needs to run this daypart gives us basically that financial flexibility.
And then we got franchisees comfortable refills breakeven levels as you know we have introduced that new breakfast in about 300 restaurants.
Beginning of last year and view seeing profitability levels.
Thank you didn't know modeling so so far so good and John one last end that you're asking about participation right. So we've got roughly 50 850 restaurants in the US business, we gave folks and opportunity if there any unique location to opt out we only had about 80 restaurants that have opted out of breakfast. So we've got the whole system all end to get ready to to support the launch.
Next week.
And in terms of on it I would like if the franchisee for example has 10 stores in nine of the make money and one of them doesn't for whatever reason, it's outside of the original 80 that didnt opt in or is there something in the agreement that kind of requires all those stores I mean, the franchise groups stores to stay open or do you allow I guess some flexibility on a case by case.
Basis, just trying to get a sense of overall system penetration not just in 2020, but over the next couple of years.
Hey, John do you have a very confident with our breakfast offering with the financials, but youre right days something in the agreement that on the case by case basis.
Exceptional basis, we are willing to entertain to sold as franchisees can opt out.
Really aligned both as strange as to when franchisee that they have done everything day codes to make the bricks as long successful.
Mike helps them out we just couple of actions and John that would be on a restaurant by restaurant basis, not on a franchise basis.
Excellent understood. Thank you.
Your next question comes from Andrew Strelzik of BMO capital markets. Your line is okay.
Hey, good morning, excuse me a couple of questions for me first.
Just if you could give some color on the 5 million dollar reduction on on the cash flow guidance for 2020 that would be great and then my other question is just on the digital side you have a number of things that you're working on there and seem pretty excited about the potential.
For digital mix to go higher overtime. So I guess in terms of 2020, what are you thinking to be.
Kind of the key driver behind that to get that higher and do we think about that starting early this year is up more of a backup.
Type of inflection thanks.
So Andrew on cash flow guidance, you you're right at Investor Day, We said cash for would be $235 million to $245 million you might remember beginning of December within file the restructuring plan on T. side of things that creates between 13 and $15 million of one.
Im cost that is keeping our asked to take our cash flow statement about $10 million Asia, we solved.
Beginning of December we revised the cash flow outlook to $230 million to $240 million to another fluids I'll have to headwind because it internally.
Below what the guidance, we have a slightly so we might book, we did not change of free cash for guidance for next year.
And on the digital front, we're excited about three things one we got Motorola mobile offering out there and we started to drive a lot of awareness in the back half of last year in in our advertising campaigns will continue to do that throughout the year. So I think you'll see a steady build on on mobile ordering throughout the year.
Livery I think it continued to see a build on that front, we're introducing new delivery partners with with.
Grubhub and Hoover each side, joining door dash working by the middle of year to have a fully integrated into our Pos to make for a more sort seamless experience at the restaurant and for the delivery drivers. So that will build as you get throughout the throughout the year and then during the course of this year, we will introduce a loyalty programs are really complete the ecosystem around our.
Digital experience at the restaurants, I think you'll see all of those things really contribute to adoption.
And retaining.
Digital consumers and we like the digital consumer right, they're much more frequent with a higher average check, but I think you'll see that is steady build throughout the year.
Great. Thank you very much.
Your next question comes from Andrew Charles of Cowen and Company. Your line is open.
Great. Thank you your largest franchisee in the us experiences some challenges from other brands in their portfolio that very clearly do not stem from the Wendy's brand and I have two questions about this first I was hoping you could talk about the contingency plan in place to avoid any disruption in store operations. During this period of turbulence for them.
And then secondly, if the when dislocations are sold to another franchisee either in parts or in the entirety is there any reason to think you wouldn't be eligible to collect the franchise flipped fee basically just as the guidance for 100 franchise franchise flips embed any locations from your largest franchisee. Thanks.
Yes. Thanks for the question, Andrew and I know, there's been a lot of press. So NPC inside the largest franchise that you're referring to they have about 400, Wendy's restaurants and as of today MPC is fully committed to growing their wendy's business through operational excellence Reimaging, New development, there big supporters of the.
Breakfast lunch and they're all in on on breakfast to grow the business and their Wendy's business is performing quite well and they have momentum in their business will continue to stay close to them as they managed through.
They are there overall capital structure and and there are opportunities for the future.
If if they did want to do some things and wanted to partner with us on potentially selling some wendy's restaurants, obviously, we'd be there to help and we could manage those through a franchise slip but their businesses is quite good on the Wendy side, they're fully committed to driving that into future.
Thank you.
Your next question comes from John Glass of Morgan Stanley Your.
Your line is open.
Thanks, very much just just going back to breakfast for a moment.
One is how does breakfast interact or how does it change. Your average check are we going to be talking about in 2020 sort of higher transaction counts, but pressure on check and by what degree of magnitude do you think and just going back to the question about value in competitive response I understand you say there's value across that menu, but you're also eager to show. The franchisees. This is profitable so does that in any way.
Hey limit or limit your ability to offer value real competitive value. If the competitive set really goes there or do you feel like Youve prenegotiated everything and even in the worst circumstances of competitive pressure you've got the answer that you need.
Good morning, John So on check related to Brexit. So we definitely expect in our core business. So rest of bay definitely checks to increase behind pricing and continued.
Also do some mixed behind one movies is one more dollar.
Breakfast day part is definitely a day part that has been able to profitability, but to be low average check. So it's obviously, adding 6% to 8% of sales that we will mean that.
Specific to the good work if you are doing and check expansion on the core business will be kind of.
Offset partially by low average check we havent breakfast.
But that downward pressure on average check will obviously be more than outweighed by bay positive traffic growth that we are expecting so thats kind of the checked and makes you should be expecting for 2020 and on value within the breakfast segment clearly, we do believe we got value across the menu but.
We have built the economic model with a strong promotional calendar to drive trial in grain the the habit with consumer.
See this week, we add a national coupon drop that you probably picked up in your mail.
Today or yesterday.
We will continue to monitor that competitive situation and and make sure that.
We're competitive and we've got those plans in place and the Great News is in spirit of the partnership and in alignment with the system. Those plans have been pretty aligned. So we know we need to go to compete and how will promote to compete if we need to go there.
Okay. Thank you and then just a follow up modeling question is the sale how much does the sale of in New York market ex Manhattan help store margins and about that back half I would think it will be a pretty significant benefit or could be a significant benefit do you anticipate that in the back half.
Okay, Great question actually.
Profitability actually minor right, we have actually very sizable restaurants, there that have good profitability. So there's no material impact midwestone margin.
Thank you.
Your next question comes from Jeff Farmer of Gordon Haskett. Your line is open.
Thanks have a follow up question on the $70 million to $80 million and breakfast advertising in Twentytwenty I'm, just curious what that implies about.
When these corporate advertising contribution that goes above and beyond.
It would be the royalty reallocation on those breakfast sales dollars. So I'm just curious what what wendy's corporate contribution to that $70 million to $80 million and breakfast advertising spending would be in twentytwenty.
Yes, Jeff Good morning, you're thinking about this correctly the contribution if you're going to make these between 40 and $50 million. So if you look through the PNM for breakfast you will then come to conclusion that we're making still a loss in breakfast.
In in 2020, less as a low over last and be obviously hit in 19, SBC, though initial investments and again.
We would expect as the breakfast daypart growth that we are starting to make profits on the breakfast day part as a company.
2021 was still actually contributing cash in 21 20 tool to make sure that heavy getting great consumers.
Thank you just one other follow up.
A little bit more challenging, but what is the implied.
Twentytwenty same store sales guidance range Thats captured in that 12 to 12 and a half billion system sales guidance numbers guidance number obviously theres a lot of moving pieces to that so.
Any color you can provide on that would be helpful.
Yes, it's you have seen in the prepared remarks, so a total global system sales growth is between 10 and 15%.
Net unit growth is about one of the half to 2% growth. So on a global basis system sales growth phase is slightly north of 10%.
All right. Thank you.
Your next question comes from Gregory Francfort Bank of America. Your line is.
Hey, guys I, just had two questions and I'm, a big fan of the Black Bean Burger, So I'm going to make a unsolicited plug for that but then.
I had two questions. The first is just on NPC are they paying you today I think theres been some comments that they might not be paying yom and so I just wanted to kind of clear up our they're paying you today and if they would pay you through bankruptcy and the other question I had was just on breakeven mixes and.
You sort of commented.
On kind of getting the breakeven mix down for the Wendy's system was a key priority around breakfast.
Any sense or short of clarifying what number that is either in 2020 or on a run rate basis in terms of where franchisees make money at breakfast. Thanks.
Good morning, Greg, Yes, so mpcs fully cooked and with their receivables and dividend payments due to us. So we see no problem, great working relationship with them and obviously and regular contact with them. So local chosen that side.
The second question was.
The second should we just don't break breakeven mix rates for breakfast.
I don't want to comment on it right I mean, it was obviously compelling enough for franchisees to get over to Atlanta look, yes, 99% of our restaurants are going to participating breakfast because they felt this compelling.
All these financial information out today.
Wait so I'm going to keep anyway.
Understood. Thank you.
Your next question comes from sat Sara Senatore.
Yes.
Your line is open.
Thank you I have a question on international development and then another follow up question on breakfast.
On the international growth I know you mentioned, leaving a couple of small markets.
I think about the track record of your expansion I think there have been a little bit more in the way it fits and starts certainly seen some with some other companies in terms of entering and exiting markets.
Could you just talk a little bit about if there any commonalities among the markets you've exited if it is about the partners.
That you've had versus at the end market and consumer demand just trying to understand kind of the let's give and like I said, yes.
More choppy in terms that growth.
And then on breakfast.
Could you just talk a little bit about the product line.
Hi, there significant differences between this launch and the last one besides just you mentioned simplicity, but things that maybe a more compelling in terms of menu news.
This time around.
Yes on the international I think if you really want to come down to what the common thread is it's really the economic model right. We haven't been able to deliver a strong economic model in in the markets that we had exited and was taken a disproportionate amount of time between the local franchise partner for us to really bring those opportunities to life. So we did exit Malaysia.
Early in the year.
We did exit, Brazil, which was five restaurants.
Complicated we had a three way joint ventures as some good learnings from that but we really wanted to do is paved the way for the team to really be focused around scaling up the existing markets that we have is Abigail talked about at our Investor Day, and then get ready for our launch into the UK, which is on track.
To to really supports some growth not just into the UK, but into Europe overtime.
On the breakfast side of the business, we do have a simple yet profitable on menu that we've really set up with some very craveable food items like you think about taking some of our signature products and turning them into a great.
Favorable items in the morning Daypart. The breakfast Baconator is is to die for a great opportunity for folks to come in and experience.
Good on that front honey butter chicken biscuit is another truly differentiated us food item that that is craveable, yes season potatoes in the restaurants, which is a nice differentiator.
Got it for us to Chino with Cold Brew coffee with our frosty mix at the fat half the calories of a frappaccino, which is another great. One and then we've got all the other lineups.
Products lined up against the competitive set so fastball down the middle all skews that will move nice and strong.
And importantly high quality fresh craft eggs on all of our sandwiches every single day.
Our fresh never frozen.
I've been baked smoked applewood Bacon I'm getting hungry just thinking about it right.
Yes.
Sounds great. Thank you very much.
Your next question comes from Catherine Fogarty of Goldman Sachs. Your line is open.
Great. Thank you.
Two questions here. So first of all as we think about the cadence throughout the year.
Taking breakfast and looking at the Standalone rest of Daypart businesses.
Is there anything we should be keeping in mind as far as add periods and the year, where maybe you had and maybe some benefit from.
Emotional activity from third party delivery.
Anything that we could have on our radar. Thank you.
Good morning, No no big no big.
Ups and Downs you, obviously have you had momentum into second half you had local growth into first half that's probably if you will be a little bit even if you see beauty as we go into core growth side of things.
As you know breakfast he's going to build we only have four weeks with breakfast business.
The first quarter, but it's obviously going to be relatively small contribution and that's going to build obviously for the remaining three quarters.
Great. Thank you and we've made some comments in the press release that taking price and for Q. Other other drivers in there how are you guys thinking about price.
This year with the consumer although the you know pretty sound you see a stronger opportunity take price or is this something and that you're a little bit more mindful of thank you.
Yes, if you're going to stay careful on pricing and what's the situation care fluid, especially in the context, obviously ofone commodity inflation.
2%.
If we price we will not go ahead of food away from home inflation, if you place with what we stayed within that range.
All right. Thank you.
Your next question comes from Dennis Geiger of Yes. Your line is open.
Thanks for the question you commented earlier some on the profitability of the 300 or so stores that are already are running breakfast, but is there anything more than you can say with respect to what you've seen in those test stores over in recent months, you know anything where it's added to your confidence around your plans or if you've made any tweaks.
Over the last few months, even at a high level, if thats, what we with respect to cannibalization that you've seen the operations and the drive through efficiency any kind of additional franchisee response anything new that you've seen over the last several months would be helpful. Thank you.
Good morning, Dennis So so what you've seen into his restaurants literally a confirmation of what we thought would.
We saw when we switched out Indian these restaurants, the old breakfast to the new one.
So a couple of things to be so happy accrues because the.
Breakfast is just much simpler to work, we definitely saw breakfast Bill business building slightly versus what we have previously soi into little bit of word of mouth there.
Since we didnt have advertising on it to drive to the business a little bit better.
Currently I would say, we got comfortable that the financials that would be multiples the profitability would be getting.
We've seen those levels and last but not at least as we explained in investor day right to be used only metrics modeling to actually size.
Besides the price here and as we switched models and especially as we introduced at breakfast into our 40 company restaurants.
The sales levels without advertising, where exactly in line with the model was predicting so that obviously increases our confidence as we took it on the national media and loan support that and that they it's going to behave as models.
Thank you.
Your next question comes from Nick Setyan of Wedbush Securities. Your line is open.
Thank you obviously menu innovation plays a big part.
And your business how are you thinking about.
Vision when it comes to the breakfast day part.
Is that something that's going to be relevant in 2020 or is that more down the road and then the second question is on bank mouth, 70, 80 million advertising spend are there any other expenses related to.
To the to the breakfast rollout on top of the marketing spend that we should be aware of.
And I guess, we think about innovation clearly focused and make sure that we have the appropriate level of innovation across our lunch and dinner daypart and not lose focus on on that strong business and we've got some great platforms that we can continue to innovate into as we said on the prepared remarks.
On breakfast, we really want to make sure that we had green the habit and were great Executionally. So we know what our breakfast lineup looks like today and for for the foreseeable future.
But again, it's an opportunity for us in the future as we in green the habit to continue to innovate and provide news into that space is as we learn more on how the consumers interacting with us.
On the breakfast investments will turn it over to GP every morning, Nick So as you know we made a one time investment in quarter four about $17 million.
Previously be going to spend is $20 million to the remaining three a goal is to be spending actually.
In 2020 is really related for the recruiting campaigns, maybe also rainy day early parts of 2020 to make sure we get to hiring done and you also have a little bit of achieving investment that via making to make should it be happy enough people you know business that look off dayparts. So there's a little bit of additional investments.
Well, what are the buff to $70 million to $80 million.
Thank you.
And obviously just to be clear all over that has been contemplated in that guidance.
Your next question comes from Joshua long of Piper sampling your line is open.
Great. Thank you for taking my question wanted to switch gears to the international segment and as we approach the launch here in the U.S. breakfast and you mentioned several times that staffing went well and.
That was a key part to getting the breakfast fuselage thinking about how you're going to be opening up some of those stores in the UK. If you could talk about your efforts there to build the team and get the infrastructure set up to.
I'll offer a successful launch there.
As we go forward.
Yes. So we're on the early innings as you know in the UK, but we have hired our first employees. So we've already set ourselves on the on that journey. We've identified several sites. So we're feeling good about preparing for our first restaurant openings, we're finalizing the menu with locked down and brand positioning working through.
The restaurant designs and our technology. So all is on track.
And you know we're bringing.
A new concept the new restaurant to to the UK with new facilities and I think folks are really excited about haven't wendy's enter that market and when you have that kind of excitement and certainly helps on your recruiting efforts and we'll leverage a lot of the things that we've done here in the U.S. and the learnings to really ramp up for us for hiring so we don't see any challenges on that.
Front.
Great. Thank you.
Today's final question comes from John Tower of Wells Fargo. Your line is open.
Great. Thanks for sneaking me and just a quick couple ones first can you discuss the rationale behind outsourcing the IP function function to Accenture and then second and looking at the initial coupons for the breakfast push I see Theres, a promotion featuring free coffee with the purchase but has the idea of offering just free coffee without any purchase Ben concern.
Third at at the stores and.
I know that Didnt, Canada, one of your larger competitors that seem to have worked well for them to break into the market and actually be fairly successful expanding that day parts. So hoping you could maybe discuss that.
Good morning, John So on the technology side of things. So we definitely came to the conclusion day, it's important that competitive on the technology front.
Process was around to be wants to have flexibility in excess capacity.
Capabilities of global technology leader it'd be seeing could potentially be done internally. So it was one of two reasons.
You made that decision.
We also helps us to be do create a service model that is slightly cost advantaged and so we are committed to execute don't slowed at cost advantage to the bottom line, but actually you reinvest back into our technology to make sure that boosting fulfilled.
Yeah, and John on the promotional calendar am I going to you about any of the specifics we've got a lot of tools and the toolbox to make sure that we continue to be competitive and our real focus is in green the habit, how do we get folks to show up at our restaurants, how do we have them trial, our food and then I would create great experiences to bring them back. So we designed the economic model.
With a promotional cadence that we feel good about that's been locked and loaded with franchise community. So thanks for the question.
Thank you.
Thank you Doug there last question of the call. Thank you Todd and GP and thank you everyone for participating this morning with four speaking with you again on our first quarter conference call and May have a great day you may now disconnect.
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