Q1 2020 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.
That's a question during this time.
Star followed by the number one on your telephone keypad.
A question.
Thank you Greg Chuck.
<unk> Investor Relations and corporate <unk> you may begin your conference.
Thank you and good morning, everyone.
This conference call.
The Powerpoint presentation, which is available on our Investor Relations website.
Wendy's Dot com.
Again, please take note of the Safe Harbor statement that appears at the end of our earnings release.
To remind investors that certain information we may discuss today.
Various factors could affect results and cause those results to differ materially from the projection set forth in our forward looking statement.
Also something his comments will reference non-GAAP financial measures investor should refer to our reconciliations of non-GAAP financial measures.
Comparable GAAP measure.
This presentation or in our earnings release.
Our conference call today, our president and Chief Executive Officer.
And our Chief Financial Officer, Gunther Plosch will provide an update on covert 19.
Impacts on our business and our first quarter 2020 result.
From there, we'll open up the line for questions.
With that and think overtime.
Thanks, Greg and good morning, everyone.
Sure sure first quarter earnings were in the middle of the global endemic in a challenging economic environment.
The good news for us.
Turning from a position of strength.
We had significant momentum in our business coming into this was strong global same restaurant sales growth any very strong launch over breakfast daypart.
In which we saw a global same restaurant sales up 15% and its launch week.
We've had to be nimble and move quick which we've done successfully at least system in order to navigate these unprecedented times.
We are starting to see improvements and our sales with global same restaurant sales being down approximately 10% for the weekend at April 26 from down approximately 30% the last week of March.
We're also pleased to have seen significant growth in our digital business to 5.5% of sales more than doubling from 2.5% of sales in 2019.
This has been driven by strong customer demand for this offering.
Long with the addition of new delivery partners.
Differentiator for us as a brand is the relationship that we have with our franchisees and the partnership across our system shown through this pandemic has been nothing short of incredible.
We are confident that we will emerge from this as a stronger Wendy system.
We have taken several actions to ensure financial flexibility and preserve cash as a company as well as support our franchise community, which GP will online later on.
As a result of these efforts our cash balance remained strong at approximately $365 million as of May threerd.
We have announced today, our quarterly dividend a five cents.
Important note that even with a reduction to our payout we still have a very strong payout ratio and we'll revisit our dividend each quarter as the impacts from cobot 19 continue to evolve.
Lastly, as we look to the future we remain committed to our long term growth initiatives.
That said the timeline of these strategies may take a different shape as we prioritize the immediate response to cobot 19.
Our goal remains the same to become the world's most striving and beloved restaurant brands.
Before we talk more about all the actions underway in our business I'm going to turn it over to GP to walk you through our first quarter financial results.
Thanks, Todd and good morning, everyone.
I will come out quarter, one we solved before we turn to update you know Cobiz 19 response and other key initiatives.
We had significant momentum you know business in the back half of 2019 and discounting between the 20 with global seamless on sales up approximately 4% through February and 15%. The first week of March with our successful launch of breakfast.
We then began to feel the impacts of Cobiz 19, which ultimately led to SLS and the trusted revenues being approximately flat for the first quarter.
Year over year company restaurant margin decreased by 490 basis points to pinpoint 1%.
Really driven by labor wage inflation higher commodity cost breakfast training expenses and high maintenance cost.
Please note that he made some investments into first quarter in breakfast waiting and maintenance that represented about 150 basis points headwind to our margin lastly, the rapid sales deceleration from probably 19 in March created additional headwinds for us.
Teenage increased approximately 5% primarily as a result of higher salaries and benefits severance and meeting cancellation expenses due to the Cobiz 19 pandemic.
It was partially offset by lower incentive compensation accruals.
Adjusted EBITDA decreased by about 12% to 89 million dollar. This was primarily driven by decreasing company operated restaurant margin and a high achieving expense.
Adjusted earnings per share decreased approximately 36% into first quarter, two nine cents driven by a decrease in adjusted EBITDA into higher provision for income taxes.
Excluding the 24.7 million payment related to the settlement of the financial institutions case, our free cash flow would've been approximately 4 million in the quarter.
The decline from prior year was due to lower net income higher incentive compensation payouts and the timing of when the incentive payment.
That I was talking single wouldn't talk.
Thanks GP.
Liberating high quality food at an affordable price is more important than ever and I'm humbled by the stories of healthcare system continues to support our communities.
From delivering breakfast in hot meals too much appreciated first responders and healthcare workers to volunteering personal time to local causes and charitable organizations I'm very proud of how we collectively strive to do the right thing and give something back.
When used as a people business in a restaurant teams are focused motivated and their spirits remain high as they work through these challenging times.
Our restaurants are essential defeating or communities and we could not do this without great leadership and support from our dedicated restaurant teams who are on the front lines.
We've taken steps to help protect our team members and customers. During these uncertain times, including no contact and limited contact ordering options and focusing on social distancing practices at our restaurants.
We have also invested in additional training across your system to ensure employee and customer safety in areas, such as Handwashing and hygiene, recertifications, social distancing and proper mask utilization.
Finally, we are working tirelessly with our franchise community. So they are set up in the best position possible to navigate through this disruption both operationally and financially.
On the operational front, we have work to ensure that our teams are receiving the supplies they need be changes to evolve and simplify our menu and updated staffing and procedures to continue to run great restaurants through the drive thru and with delivery.
Financially we have executed many levers to help franchisees preserve cash flow, which TP will discuss in greater detail shortly.
All these initiatives have set us up to be in even stronger business on the other side of this crisis.
Moving on to provide more detail on our recent U.S. sales performance as we shared in our March press release, we successfully continued the momentum we had built in 2019 ended the first two months of the quarter supported by customer count growth in advance of our breakfast launch on March the second.
Breakfast performed extremely well out of the game pushing us same restaurant sales to plus 16% in the first week.
We then began to feel the impacts of cobot 19 in the second week of March and continue to see the impacts on our business in many of the communities we serve.
On the positive side, we have begun to see improvements in April sales with the most recent weak and proving to down approximately 2%.
First the last week of March which was down 29%.
We are encouraged by these trends even in the face of stay at home orders that had resulted in average mobility in America dropping by about 70% to 80%. Despite the significant decline our business has performed well and we would expect to see sales continued to trend upward as restrictions are lifted across the country. As we are starting from a stronger position.
Many others.
We've also seen strong growth in our U.S. digital business more than doubling to approximately 5.5% of sales compared to 2.5%. In 2019 is we have shifted primarily into a dry through and delivery only business model.
Finally, our closure rate has remained low with approximately 99% of our U.S system open and ready to serve our communities primarily through our drive thru and delivery options.
We could not be more pleased with the launch for breakfast Daypart in March.
Is it truly exceeded our expectations.
Through our marketing efforts, both on social media and on Air we quickly achieved over 50% awareness, which is significant as people are recognizing that wendy's now serves a great breakfast.
Customer satisfaction has been overwhelmingly positive and our new day part has been sustaining at approximately 80% of U.S. sales throughout the month of April.
Franchisees have been very pleased with the stapler as it is providing a sales driver that they did not have previously.
It has also proven to be profitable even at lower sales levels than we had anticipated.
As we noted in our release. This morning, we will be abating marketing fund contributions for the breakfast day part for the rest of 2020 to provide relief to our franchisees.
We have also been able to work creatively with our labor model at breakfast to reduce staffing.
As a result, the breakfast breakeven has been reduced decreasing significantly by about 35% on average.
Well the environment, we encountered as we started breakfast was not what anyone would have expected the strength of our program makes us daypart a key bright spot for us. It has performed well despite significant headwinds, which reinforces how excited customers are about having a great new breakfast option.
We continue to remain encouraged by the performance and our fully committed to continuing to bring America. The breakfast. It deserves during this difficult time and then in full force on the other side of the spend dynamic as consumers return to their morning routines.
We know that the current environment is difficult for many of our customers, but we will not compromise on offering great tasting craveable food across all dayparts at an affordable price.
The work being done by our marketing team to evolve our calendar in such a short period of time to continue to meet the needs of our customers has been incredible.
We have launched some great programs and created some fun for our customers with group not day on April 24, which was a free for peace Nugget for every car coming into Wendy's.
We have also acted quickly and other ways to adjust our approach in this environment such as taking all advertising with delivery focused messaging on the fact that we're open for business and implemented a free junior frosty with orders for a limited time to delight our customers just to name a few.
We believe that we have a strong marketing plan in place for the rest of 2020, we remain fully committed to breakfast and as part of this plan. We will continue to apply media pressure in this area, which we have also found to help our lunch and dinner dayparts.
We will also be streamlining our promotional calendar.
We believe that customers are interested in their favorite is more than ever.
Lastly, you can count on us to continue to leverage our world class, social and digital communications to reach our customers in ways that only wendy's knows how to do.
Our customers count on us to deliver the quality they've come to associate with Wendy's brand and we will continue to bring them craveable meals at an affordable price today and into the future.
Our digital business has experienced strong growth in 2020, as we have been able to benefit from the foundation, we laid in 2019.
We have expanded both our delivery in mobile ordering businesses in the U.S. safety inconvenience are paramount concerns for consumers and the scope of 19 environment.
We have seen significant increases in or app downloads and users with interwrap as both are up around 25% since March.
The team work to increase access to the Wendy's brand rapidly through delivery launching with Grubhub in February Postmates in March and we are in the process of rolling out who breach as we continue to bring convenience to our customers.
As we have stress before frequency remains an opportunity for us and it will be more important than ever as normal routines resume in the months to come.
We will be looking to our loyalty program to help US sold for this and the team has been preparing diligently for a launch in the near future.
We believe that we have built a loyalty program that people will love and we could not be more excited to get this into the hands of our customers.
Lastly awareness of all of our digital offerings is even more important as we focus on convenient safe experiences. We plan to feature digital ecosystem prominently across our marketing platforms to create even more visibility and encourage consumers to integrate these new opportunities to interact with wendy's into their new routines.
Coupled with marketing dollars being spent by or delivery partners on Wendy specific promotions will help to provide increased awareness on or delivery business.
Restaurants are essential to feeding our communities and we could not do this without great leadership and support from our dedicated general managers in restaurant teams, who are on the front lines.
As I mentioned earlier, we have taken significant steps to help protect our team members and customers. During these uncertain times.
We have instituted in an emergency paid sick leave policy for our company hourly employees to provide additional support for employees affected by Cobot 19 that has been recently extended through the month of Maine.
We have also implemented restaurant recognition pay inner company restaurants were overly crew members shift managers and assistant general managers will be receiving a 10% increase and hourly pay through the end of May.
These actions have led to very low turnover in our restaurants, which is critical to delivering on high customer satisfaction.
As the operations within our restaurants have shifted primarily to drive through in delivery only our dedicated teams have used this time as an opportunity to focus on delivering an exceptional dried through experience.
This emphasis has resulted in overall speed of service improving across the system through the pickup window.
We have also streamlined our menu with the removal of certain items, such as sites outlets in ramps, which simplifies operations within the restaurant for our teams.
Customers are noticing these operational improvements as overall customer satisfaction scores have seen significant improvements in both company and franchise restaurants.
Before I close I want to briefly address the reports out there around beef shortages in our U.S. restaurants.
You know beef suppliers across North America are currently facing production challenges because of this some of our menu items, maybe in short supply from time to time had some restaurants in this current environment.
We continue to supply fresh hamburgers to all of our restaurants with deliveries two or three times, a week consistent with our normal delivery schedules.
We have also shifted our marketing efforts in the short term to focus on our chicken products to alleviate pressure.
We're working diligently to minimize the temporary impact to our customers and restaurants and continue to work with our supplier partners to monitor this closely.
Our focus even in the face of this near term headwinds is to continue to delight every customer period.
Our company wide response to this pandemic reinforces the value that Dave Thomas instilled over 50 years ago. When he founded this great brand the values that continued to guide us today.
Health safety and well being of our teams and customers has always been and we'll continue to be our top priority.
Our system will remain focused on continuing to provide essential access to quality affordable food to all our communities around the world.
We are uniquely positioned would drive throughs delivery and digital to win the Wendy's way.
I believe that we have put ourselves in a position to be fast out of the gate when customers returned to some kind of new normal and that we will be a stronger brand on the other side.
I am more confident than ever that we will achieve our vision of becoming the world's most thriving and beloved restaurant brands.
As a close I want to send a heartfelt. Thank you to the entire Wendy system.
After watching our company wide response over the last couple of months I could not be more proud to be part of the Wendy's family.
I can never say it enough, but thank you for all you are doing I.
Ill now hand things over to GP to talk to the actions we are taking financially to support our franchise system and on the liquidity front.
Thanks, Tony one of the things that make some vendors. So special is our relationship with our franchisees and we ask me partnering with them to ensure to set up in the best position possible to mitigate this crisis.
The good news is that we had a lot of momentum coming into this year.
As we disclosed previously we have provided deferrals of royalty advertising and rent payments to our system to assist with cash preservation in the short term. We have also updated its the national marketing from contributions from the breakfast day part in 2020.
Combined with labor model improvement.
Let's take a reduction of the break first breakeven point proximately, 35%.
This continues to make breakfast and attractive state.
Food or more extended reimaging and newbuilds requirements by one year to provide additional cash flow relief for the system.
In addition to partnering with franchisees to find solutions to a Libby cash flows.
Jim has been working primarily franchisee lender to encourage flexible payment terms in this environment.
As a result of these efforts we expect the majority of our franchisees will benefit from interest only payments for three month period, which will help liquidity position.
Lastly, we believe that franchise system has been able to benefit from the key aspect to the paycheck protection program.
As a reminder, many of our franchisees very small pieces is.
Over 50% about franchisee system owning five restaurants for land.
We also believe could Q, IP, which fixes the qualified improvement property deductibility issue.
Great.
Provide a large benefit to our franchisees due to the significant amount of re imaging we have done over the last two years.
As we previously disclosed on March 26, given the level of volatility and uncertainty surrounding the future incentive Cobiz 19 on the global economy, and any specific impacts to our company.
With strong our 2020 and long term outlook.
We intend to provide an updated financial outlook became reasonably estimate the impact of Cobiz 19, and changing market conditions.
We can however, even update on our liquidity position and the actions we have taken over the last couple of months.
Our cash balance as of May sued remains healthy at 365 million dollar.
Following the drawdown of our refund facility, our cash balance has been very consistencies level. Despite the impacts of Cobiz 19.
In an effort to manage our cash burn we have identified savings in capital expenditure of approximately 20 million Donna.
And achieved a of approximately $10 million.
This cash flow will help us to offset a portion of the deferral that via providing to franchisees in the short term.
Confidence that these reductions will allow us to continue to invest pieces for growth.
Managing that dynamic environment operating currently.
There are also aspects of the Kazakhs that we believe we benefit from.
Planning to defer our sheet social security payroll taxes.
Permitted on that the Kazakh.
Half the option to defer these payments through the end of 2020 and repay them in 2021 and 2022.
This benefit could be upwards of $12 million to our 22 any cash flows.
Like our franchise system, you're also expects to benefit from Q, IP, which fixes the qualified improvement property deductibility issue for interior upgrades.
Yes, I close I would like to highlight capital allocation policy, which remains unchanged.
Our first priority remains investing in profitable growth.
Discipline in our investment choices and we have always focused on ensuring a strong financial return for our franchisees and for us as the franchise.
We announced today the declaration of our quarterly cash dividend.
We have reduced our second quarter dividends to five cents per share payable in June.
It is important to note that even with this reduction our dividend payout ratio on a trailing 12 month basis.
Inline with our capital allocation policy.
We will continue to evaluate our dividend payment on a quarterly basis is that business impacts from Cobiz 19 continue to evolve.
Lastly, we will utilize excess cash to repurchase here and we'll reduce that.
As previously disclosed we have currently placing our share repurchases on hold.
Sure as strong liquidity position during this time.
We believe that we've taken the appropriate actions as a company to get us through these unprecedented times.
Coming out the other side of this we believe maybe we'll return to being an accelerated efficient growth company, who showcased strong system wide sales growth on the backdrop positive same restaurant sales and global rests on the expansion.
We would translate into significant free cash flows.
I will now hand things over to Greg to close out.
Thanks GB.
Due to the uncertainty in travel restrictions being placed as a result of covert 19, all our investor meetings over the next two months have now been shifted to virtual meeting.
We will be attending to virtual conferences, which will be with Bernstein and Oppenheimer on May 28, and June 17th respectively.
We will be doing to virtual and the ours. The first on may 13th with Evercore solely focused on the Canadian market and on May 14th with Guggenheim with a focus on the Midwest markets.
Lastly on June 20, Threerd will be converting a plan HQ visit with Piper Sandler.
Well conference call, if you're interested in joining us at any of these events. Please contact our respective sell side analyst or equity sales contact at the host firm.
With that we are ready to take your questions.
At this time I'd like to remind everyone in order to ask your question. Please press star followed by the number one on your telephone keypad and we'll pause for a moment, while we compile the Q and a roster.
Our first question comes from the line of Brian Bittner with Oppenheimer Encode go ahead. Please your line is open.
Thank you good morning tide, GP and Greg I Hope you in your families are doing well.
You mentioned breakfast sales are mixing at 8% in April how do you think you've been able to achieve that in this environment without the incremental marketing spend it's just it's no secret that breakfast is the most challenged daypart across the industry. Recently. So also wondering what you think about the potential breakfast.
Once America returns to some type of normalcy in and the population does return to work.
Thanks, Brian you are doing well too and and thank you for for those comments no.
As you know with with mobility down so much and people not having a morning teen the breakfast day part across the industry has been hit very hard, but we're very pleased with.
With the advertising support that we've had out there are strong social media presence that even with that headwind, we've been able to get folks to come out and and continue to try our great breakfast offerings customer satisfaction has been very high provide some comfort for folks said at a time when they're looking for comfort.
That really bodes well for the future as we're getting a lot of great trial, a lot of great word of mouth.
Which really sets us sales up when folks get back into a routine into the future to really continues the success that we saw right out of the gate. So.
So we're really encouraged about where breakfast can play and importantly, as we support our breakfast business. It does have a nice halo two our lunch and dinner business as we continue to create impressions around like quality, great tasting food at Wendy's.
Thank you for that type of my follow up GP can you just talk about your updated plans to invest in breakfast from the corporate side incrementally. After 2020 are you still going to be making extra contributions and 21 and 22 or is everything sort of on pause right now.
Good morning, Brian Yes, Great follow up question is taught said we're extremely pleased in terms of how we got out of the gate breakfast.
Minimal investment in though aside that allowed us to really create.
50%, we end this levels with the channel population, which is actually astounding since we only had just a short period of time to achieve that number so for the time being.
Stains, we've thrown our way investments accompany investments from breakfast and VA evaluating the situation.
On the go forward basis, so far no no news versus what we communicated and as much.
Thank you.
Our next question comes from line of Andrew Charles with Cowen and Company go ahead. Please your line is open.
Great. Thanks, just to Echo what Brian said I Hope you and your families are well.
Net sales are steadily on the path back towards positive territory, how do you see value tactics evolving from the free Frost didn't nuggets promotions during April into something more than during the coming months, which would you consider your value playbook to be some bits more proactive meaning that you know what franchisees need to help profitably accelerate traffic or is it reactive based.
What's in the marketplace.
I think are and I want to continue to play a proactive game Andrew It's we've talked a lot about one more visit one more dollar and continue to have that balance on the on both sides of the menu.
We know that we need to continue to have our customers backs in this time of need.
And you think about where the customer is today.
Unfortunately unemployment levels are high and.
Folks are going to be looking for a great tasting affordable meal.
Charles are going to want to be able to trade up across the menu. So we will continue to make sure we've got that appropriate balance.
And and continue to play offense.
To create a lot of loyalty and even more frequency into the future. So we'll continue to stick to our playbook, which has been working quite nicely.
Thanks, and Todd just following up on that you talked about obviously balancing with some premium items as well.
I think are different stages of the initiatives they laid out the investor meeting and how to roll those out, but just given the beef shortage that youre seeing in certain instances and the displacement consumer habits of mid Cobot 19 are you still playing to launch a plant based Burger this quarter as the timeline on that been pushed out.
Yes, we look at our marketing calendar as you know we've got a lot of things and in the plant based arena that that's in our pipeline that will launch at the appropriate time due at the Wendy's ways. We said in the past, but right now the consumers really looking for core offerings, and we're really focused on delivering them core.
Marketing calendar is focused on that and we want to make sure that we're delivering those products very high quality and very fast, especially as we're focused on drive thru and delivery that can create a lot of loyalty for the future with some great experiences, especially as we're bringing in a lot of lapse lot of new customers through this time when Theyre restaurant options are limited.
Thanks Scott.
Our next question comes on line of Sara Senatore with Bernstein Go ahead. Please your line is open.
Hi, Thank you.
Okay from your underlying trends and.
I think the beginning.
In March kind of like yet modestly positive same store sales even expect all Sam.
We talked about how.
Back to his marketing in supporting lunch and dinner can you.
Maybe identified email.
Anything about.
New customers for existing customers to extend to which.
As any substitution going on.
Turning back Thats and another day part.
And the related question.
You could just talk about.
Beyond that traffic versus ticket.
Your comp the composition of anything on delivery channel through traffic ticket just trying to understand the practice impact specifically, but some color on overall sounds from Jenna. Thank you.
Yes, a lot in their Sarah So let me start with.
In the Hamburger category, we grew both traffic share in dollar share in in the first quarter. So we feel very good about that.
We just feel that's a good start to the year as you talked about in periods, one and period to and on the call in our prepared remarks, we talked about customer counts actually improving.
As we employed are one more visit one more dollar strategy with the two for five Neal deal.
Well as the big Bacon classes in our and our made to crave lineup.
We did experienced significant traffic lift in in with the launch of breakfast in the first week of large so we are feeling really good about bringing more folks into our restaurants more often and then as as the quarter ended with with cobot 19 hitting.
Clearly traffic fell dramatically but.
And we ended up with with traffic down slightly.
In.
In the total quarter.
We had pricing in line with with food away from home inflation, and we had a little bit of mix benefit.
But we do feel good that we got a nice balance on our marketing calendar and the pressure that we have out there across lunch and dinner and breakfast.
All of our messaging is really focused on quality food being available through our drive throughs and with delivery.
Which which is giving folks some positive impressions of the Wendy's brand.
Our next question.
Our next question comes from line of Chris Carroll with RBC capital.
Go ahead. Please your line is open.
Hi, good morning, Thanks for taking the question. So can you expand a bit more on breakfast profitability and the reduction of the breakeven point so.
And if there any details you can share around what's driven the reduction and how much of that is sustainable as sales continue to improve.
Good morning creates yoga spend a lot of work on breakeven point remember in the into run up to breakfast breakfast launch who grew up really hard to franchise community to make sure we have really very profitable daypart.
Optimized to whom model and really dramatically improved economics versus previous and we've taken that notwithstanding food.
Obviously, there's a little bit less traffic running through there to actually.
And even more profitable model for us. It's in essence means we can run debate the instead of three.
People actually two we most of our restaurants in that obviously improves financial is quite dramatically and we do use.
Breakeven point by about 35% you've never given the absolute but you can point out, but obviously as improved dramatically.
Fine debt.
The marketing contribution to abatement on breakfast sales is really creating ebay profitable seamlessly AFFO franchisees.
And what we really got to see as you remember we were going to start bringing labor in between nine and 10 30 and with the dining rooms close we haven't had to do that so thats. Another part where we could really optimize that labor model through the morning.
And to Sarah's question earlier, we are seeing breakfast be highly incremental we're not seeing cannibalization at all so it is a nice additional new layer of business that we've added four different occasions.
During the course of a week.
For a month.
That is is really driving frequency for our business.
Great. Thank you.
Our next question comes from lineup, Jeff Farmer with Gordon Haskett go ahead. Please your line is open.
Great. Thanks for your morning, you did touch on it in a couple of questions, but from a high level what drove that dramatic improvement in what is your same store sales over the last three weeks and specifically the most recent weeks what do you guys seem that that's driving net income increased demand.
I think theres a couple of things going along the way we took the time when things were really dark out of the gate to really focus on running some great drive through.
Times, and we've seen nice improvements in in their speed of service at the drive through even with more items per order coming in as there's much more big orders happening as one person goes out to order food for everybody.
We've been really focused on delivering great tasting high quality food and and we've seen that in our overall satisfaction at the restaurant level. So thats increased dramatically. So folks had a taste of a great experience and.
Some of the stay in place restrictions are starting to get lifted and the whether it's gotten a little nicer folks want to get out and they're looking for restaurants that are fast that are affordable.
That are safe and we're delivering on that from his time and again.
And we continue to see all of that play into.
The the business trends in our business and is these restrictions start to get lifted we've clearly seen faster impacts on the recovery in areas like out west and most recently down in the southeast.
Because folks know they can get an affordable high quality safe meal from Wendy's. So all of that plays into our momentum.
We're out there with some good impressions right, we're supporting the breakfast business and supporting our lunch and dinner business, we've added new layer with with delivery continuing to accelerate as we brought on new partners with Postmates and above to bring on worried so all of those things play into our trends.
That's helpful in just a follow up.
Again acknowledging that the majority of these statewide closure mandates will expire over the next two weeks I can see that well see how that would be.
Tailwind, but in terms of when these specific or are there.
Managements other criteria that management has out there on the reopening front. So it's not as simple as a state saying you're back open for in restaurant dining is there something specifically the wendy's.
Needs to see in terms of some type of metric.
To give you comfort with or your franchisees reopening. These these restaurants to in restaurant dining once that state wide closure mandate expires at any given states.
Yes, clearly we're going to watch.
The the national authorities, the CDC and others are talking about we'll see what folks are talking about at the state level, but we're not going to rush to reopened our dining rooms are going to be smart about it.
The safety of our employees the safety of our customers will be paramount through all of this.
We will continue to get our restaurants set up on the inside for social distancing and and for safety, but I would expect us to start to open our restaurants in phases first phase would be to really start extending some of the hours again when we got hit early on we we had pulled back on late night hours, where we've seen that business be impacted we can start.
Standing there.
We can open the restaurants for carry out as a as a phase two and we can do that very efficiently to take some pressure up to drive to window and then ultimately get those restaurants dining rooms open with the as appropriate social distancing.
Set up in those restaurants, but we'll be smart about it will be safe about it will look at the competitive landscape, but most importantly, we will focus on safety of consumers and employees.
Thank you.
Our next question comes from line of Eric Gonzalez with Keybanc go ahead. Please your line is open.
Hey, Thanks for taking the question and good to hear from everybody on the at the company operating margins, it's hard to get a sense of what's happened by looking at the full quarter, particularly breakfast launch in there. So perhaps you can give us a bit more color on how the company operating margins look through April and May inclusive of any inflationary pressures on beef and whether it's still a good proxy core franchisee cash flow.
Good morning, Eric Yes, there is lots going on in a much into first quarter. As you pointed out a couple effect. So you had commodity inflation of about 3.9% mainly driven by before.
That meant on the face of to BNL that food costs.
Go down about 40 basis points on prior year. So the underlying inflation was about 110 basis points. So price mix that we played in actually helped offset somewhat on the labor side. We've got the labor inflation of about 5.5%. So that created a headwind for us of about 107.
He basis points.
He said on the prepared remark, but you were ready for double digit growth. So if you obviously stuff, though restaurants well.
And then be made investments we've made investments in training and all those investments.
To the headwind for us of about 150 basis points.
Just in March two I'd be were fully staffed ready for double digit growth, we saw that rapid deceleration of labor and mix really be couldn't we couldn't.
Take labor out fast enough and it created additional headwinds for us into quarter.
Is there any comments on April and May that you could possibly make in light of recent pricing.
No.
You've been very detailed information on sales were not going to go down the path breaking out margin, but from us.
Okay fair enough. Thanks.
And our next question comes from the line of Jeffrey Bernstein with Barclays. Go ahead. Please your line is open.
Great. Thank you very much.
Two questions just one trying to parse through the strong improvement in same store sales Im just wondering whether you can give any kind of metrics in terms of presumably it's all to go with is quite some maybe mix of drive through versus pick up and maybe mix delivery.
Your confidence that you can hold much or all of that to go mix once the dining rooms, we open whether they have any early evidence or any thoughts in terms of maybe at a hold that any kind of color around again, the mix or weekday weekend that would be great I had one follow up.
Yes, Jeff I mean, right now where we sit here in the US it's that were mainly a drive thru and delivery business. We've got a few dining rooms, starting to open but mainly just for takeaway business right now and that's probably.
5% to 10% of our restaurants with some of the restrictions that have been lifted recently, so we've been really focused on a and haven't great dry three times.
The restaurant recognition pay in the work that we did with.
Fully sick leave.
Our turnover has been very very low in our restaurants and it's allowed our best positions that were our best people to work in the best positions to really create some great experiences to drive our business delivery has ramped up you know we talked about on the call that were up to 5.5% digital mix and that's picked up rapidly in the last 30 days remember when.
We pre announced some information we're only at four three so in in 30 days, we picked up another 1.2% of mix.
Delivering really delivered by both delivery, primarily but also mobile ordering and all those things play into great great experiences and I really do think folks want to start to get out, but they want to do with smartly and safely and we're a great option to grow provide high quality affordable food.
Very quickly in a very safe environments, I think thats really playing in and certainly having a breakfast daypart as folks start to get into any kind of routine knowing that we hung in there really really well on breakfast without a routine that really foreshadows some excitement for the future for us.
Got it and then my other question, we're just on the balance sheet, both of yourselves and franchisees.
GP I know you mentioned something about cash burn rate, but I don't think you provided specific so any color you can give on that coupled with just the franchisees think about the same thing I'm, assuming they're pleased with the efforts you've provided for relief, but any color you can give in terms of their feedback or maybe their financial position on leverage at this point would be great. Thank you.
Good morning, CIS, Yes, happy on the company side right last time, we talked we disclosed and have much cash balance of about $340 million. That's no up to three in the $65 million in the context of actually our sales sit down in the month of April so that is good.
You are getting rental income still getting obviously cash.
Our company restaurant operations and that helps us.
I would expect that all the actions we have taken by deferring payments for abating.
Marketing contributions.
And helping our franchisees and as we said our expectation is that a lot of our franchisees will have gotten the health food. The PPP program. So we would expect said the actually pretty decent shape.
Great to hear thanks very much.
Our next question comes from the line of Andrew Strelzik with BMO go ahead. Please your line is open.
Hey, good morning, two questions for me the first I'm curious about.
Been able to diagnose kind of the behavior of the digital customer at the analyst day.
Talked about much higher frequency and I'm curious, if you're seeing any of that and also the demographics or any different from your customer base and then my second question is on the DNA savings I'm curious, where those are coming from and if that has changed at all your thinking about which unit could look like over time. Thank you.
Good morning, Andrew let's start with Gionee, achieving a savings really but a function of reductions in travel expenses.
And really reduction of incentive payout was probably the to be could drive us because offsets as well.
But tailwind or headwind is.
Delaying the sale of on New York restaurants, we obviously, both as originally planned half a little bit of headwind.
On that front.
As far as is delivery in the delivery adoption. These are occurring is definitely much faster than you anticipated.
We've talked at Investor day be said, you're going to get to 10% of sales, but 2024, we are now its life into hubs.
Since literally five month database today, so adoption is rabbit rapid behaviors and what we see out of this business about the same we still see any way to check sizes, we still see those customers visiting.
There was more frequently than the non digital customer so all the basic construct also.
No it's changed into profitability model for us hasn't changed because we've all talked notice we have made sure that older delivery related strategies getting passed on to the consumer and steel.
It's a what a type that has very high customer citizens.
Great. Thank you very much.
Our next question comes on line of Chris will call with Stifel. Go ahead. Please your line is open.
Thanks. This is Patrick on for Chris and good morning.
Appreciate the color you guys provided on the beef shortage and some of the challenges there in the short run but was curious if you have any sales quantification or any visibility into sort of the duration or if you will see sort that get worse before it gets better from here then a follow up.
Yeah, Patrick no quantification it would be hard to quantify.
What the impact is because even where we might have spot outages folks are still at the restaurant and they're buying other food items, one where there. So what we said on the on the main calls exactly what we're seeing right. It is tight out there today, we're still delivering beef to every restaurant.
Every two or three days.
But from time to time, there could be some items that were out of stock on we shifted our marketing calendar two to help manage through it over the next couple of weeks. We do believe it is temporary and we're close with.
Our big supply partners and we have several of them on a on the fresh beef front.
And we do believe we'll work through this and in short order, but we will make sure that in the short term were delighting every customer with what we have and I know there were a lot of reports out there yesterday that we were completely out of beef in many restaurants and one of the the things that people can do in the here.
In the digital lab and on Wendy's Dot com.
If you are tight on beef you can turn it off.
In the animal or it doesn't mean, you're out of beef at the restaurant level, but you wouldn't want to really disappointed consumer if they looked in mobile order said, yes beef and then they drove the restaurant anywhere.
So what posted an abundance of caution is make sure that customer wasn't disappointed, but we could have still had beef in the restaurant so temporary in nature calendars be an adjusted.
We do think it's probably a couple of weeks of a challenging.
Tightness that we'll have to work through.
And then we'll come out the other side working with our partners and and continuing to support our business.
Great. Thanks for that those really helpful.
Also I just want to shift to digital investment I know you made some comments in your prepared remarks, but really just curious about have you guys. Obviously loyalties appears to still be at the top the list in terms of upcoming launches, but what else have you guys seen as digital has really become a key part of the bigger part of the business over the last several weeks and months have you shifted.
Any strategic priorities there in terms of the investments you're looking to make in digital or how are you sort of thinking about that currently in terms of prioritization.
Yeah, Patrick you made investments last year really by rolling out scanner, so to get us ready for older digital businesses I think what can the top of mind of consumers. He's definitely contactless, it's probably one of the reasons why deliver researching and my view, so apps downloads increasing by.
It's 25%.
From an investment point too few we continue to invest but the biggest opportunity for us is to drive awareness levels as sobieski take the majority of those spots to make sure that consumers know that they can get the when these delivered to the homes.
The safe fashion, and obviously be made the investment to broaden our well provide a base by starting up with Grubhub in February starting up with post may seem much and via into middle starting up services.
I think kind of describe selling business.
Great. Thanks, guys.
Our next question comes from the line of David Palmer with Evercore ISI go ahead. Please your line is open.
Thanks.
I know it sounds like long time ago, but congrats on the breakfast launch I mean, the fact that you guys are still mixing so high.
Them without that support at this point it's.
Very impressive.
Question for you on that on the sales recovery side.
You're talking Weeklys is obviously dangerous because obviously short term like that could include some some noise. Yes, you obviously had some of this stimulus stuff in there whether it was really good last week.
So to what degree do you view that as a little bit of a sugar Russian there.
Combined with weather.
In terms of thinking about a run rate and then beyond that as America opens up do you feel like you understand how the sales will build is the dining rooms come open and.
Obviously, there's some secondary effects or maybe its primary effects of people getting back to work and needing that drive through both in the morning in the lunch day part to greater degree and I have a quick follow up.
I think a couple of things David is the stimulus checks came out we did see.
And impact on our business hard to really quantify how big impact but.
Anytime disposable personal income improves a bit you do see an impact in in our business. So that was a positive.
But when you look at them trends, it's not just the one week trend. We're three weeks into the trend and we added a lot of momentum before hand, and what we've really seen as businesses that have had momentum continue to create a lot of good momentum as they create a good connections with the customers and from the data that we shared this morning, we really only had really too tough weeks.
We are down dramatically.
And our U.S. business.
We've got a got labor that wants to work in our restaurants, we've got recognition pay to get them in there.
Got them well trained.
As America's starts to open up.
We built a lot of muscle at the restaurant level to run even better drive-thrus.
We're getting better at surfacing delivery or getting better at managing mobile orders.
And early on before we shut the restaurants, we got really good at at carry out even without the dining room open. So that based approach. It's something we will look at when and how we have to pull that trigger to support the needs of the customers will still being very safe for the employees and the customers.
And then yes are there early examples states that are opening up seeing how the sales rebuild.
Do you get a sense that.
There's a pretty standard amount of sales lift that you're getting as stores end markets reopened.
Yeah. It if you look at regions of the country, you know where cobot 19, it out west early so folks for hunker down a little bit earlier and are starting to come out and we've seen that business be a little bit stronger and come back and we know that pace of come back and we plan for that and support for that as a model for the rest of the country recently down in the southeast.
With that with a with a lot of those states starting to open up we've seen a nice bounce back. So we understand what what's going to happen from a supply chain perspective, what we need to do to be able to services customers. So we've got a good handle on it.
But the great news is with the with the great experiences we created during the challenging times as folks get out and be a little more mobile.
Got us in the routine just a little more often which is which is great to see.
Thank you.
Our next question comes some line Nicole Miller with Piper Sandler go ahead. Please your line is open.
Thank you very much and good morning. Thank earlier in the prepared commentary there was a comment about 50% brand awareness and I wanted to confirm that was around Brexit understand if that was aided or unaided and what was the message measure that basically could you just cost a little bit more thank you.
Yes on the breakfast awareness market research unaided I believe.
If you think about a normal LTL that would be out there for three to four weeks.
If we get awareness in in a 25% to 30% range, we're doing a pretty good job and a breakfast under the same metrics we were at 50.
Percent very quickly that folks understood there was a great offering from Wendy's.
And that was with really only one solid week of national advertising.
A lot on social and a lot of hype before hand.
So we've made a lot of progress, but the opportunity is still going a lot more.
Of opportunity ahead of us to create awareness for the another 50% at Wendy's serves a great breakfast.
I appreciate that thank you and then just final question you earlier talked about traffic.
Down pricing in line with we wake up call in mix being a benefit that wasn't necessarily intuitive to me.
In fact, I would think maybe breakfast is a lower check understandably digital is a higher one but still a smaller percentage of sales.
Anything else you could share on the next one please.
Well I think there's a couple of things on mix. So when we started in PD, one PD to without breakfast, we enter two for five promotion running and that drove some nice mix.
Continued to drive mix from the fourth quarter ended the first quarter. So that was that was a positive.
And that really carried over for the whole quarter and allowed us to having a slight mix benefit right probably would have been even more but you're right was breakfast came on board, we got a little lower checks, so throttled a little bit of that mix favorability.
And it really came down to a getting a little more realization out of out of price in in Q1.
Heading into Q2 and into April we're clearly seeing much higher average check sizes as you got big bigger parties come into the restaurants by food because in most cases, it's not just one or two people in the car they're buying for the whole family to bring the food back home. So.
So we're seeing that benefit help our business to offset some of the customer count declines in in April.
Thanks again.
Okay and our next question comes on line of Dennis Geiger with you'd be yes. Go ahead. Please your line is open.
Great. Thanks for the question Todd just wanted to ask a little bit more about throughput obviously, it's a big focus for the system results actually seem really encouraging based on your comments is it fair to say that kind of some of the headwinds from that larger average ticket size or more than offset by the benefits from simplification probably at the greater focus the training.
There any other considerations is staffing headwind or us or a tailwind for speed of service and then I guess most importantly, as you think about the go forward is sort of.
A sustainable menu simplification here something you'd consider as normalcy returns given what it would have some for speed and operations. Thanks.
Yeah, I think a couple of things.
One we've got our best employees in the inner restaurants, and as we work social distancing in the back of the host we've got them staying in place. So there's some great lessons learned to to drag to drive speed of service at the at the drive through window and we have seen our average times go down.
And that is with the average items per transaction being up dramatically. So that's that bodes well for the future when we get to normal average items per transaction around the speed of service. So there's some good lessons that we've learned there we've done a few things on ops simplification and took a few things up the menu and that certainly helps.
We'll continue to watch consumer response, and see if some of those things should earn the right to get back onto the menu in the future.
But we haven't dramatically pulled a ton of stuff out. It was just some really slow movers to help a little bit.
We haven't introduced a lot of new product.
None in London, New LTL is not a new things like a plant based offering.
Because we don't want to have folks get distracted on something new they're focused on driving the core really really well and those are some great lessons for the future.
Thank you.
Our next question comes from the line of mix in with Wedbush Go ahead. Please your line is open.
Thank you good morning, I just wanted to ask a question on international can you maybe parse out the different markets, particularly Canada and its performance or maybe the trajectory as as two weeks of progress.
And also.
How are you thinking about the entry into Europe now in terms of timeline.
Good morning, Nick as a couple of things so if you've seen from from the releases or you have more temporary closure in international than in the U.S., It's really a function of some of the government governments being a little bit more restrictive.
The parts of the World, where we have the majority of disclosure is really in Venezuela in Honduras in Latin America, and the Asian side, we do the Philippines, Indonesia are the ones did accountable for the majority of.
The temporary closure.
So that's kind of the picture on international as far as the UK is concerned we continue to be committed to UK, we think it's a great opportunity for us.
We think thats happening.
We have pushed out.
Launch into the from the 22 anymore.
Thank you.
Our next question comes from the line of John Tower with Wells Fargo. Go ahead. Please your line is open.
Great. Thank you for taking my questions just a couple follow up.
On the franchise system can you just talked about the extent to which the franchisees have actually decided to defer their payment options or.
Use the abatement on the royalty side.
Across the system and then.
Secondly on delivery I know historically you at the brand have charge higher prices in the delivery channel then perhaps in store and I'm just curious to hear if you guys have changed that philosophy as this crisis is kind of it.
Yes are you still.
During a similar amount or are you not necessarily subsidizing the cost of delivery.
For consumers at the moment.
Good morning, Sean so as far as.
The uptake on how often do through a payments I would say the majority of franchisees are taking was up on these ofer.
However, several franchise organizations that did not to take us up on the off so we do have a little bit of cash coming in from those organizations, but I would say that's the minority than my choice. He has taken us on that also as far as a deliberate delivery economics are concerned.
We are not changing a position on the so I'd be a passing on all cost to consumers.
And.
Watching customer satisfaction ratings, and especially value perception weightings of what a type stupidity favorable so as far as view consumed.
Got to model right to be a satisfying consumers and you're protecting divest some economic model for franchisees and the good news John is we've got several of our delivery partners, helping support free delivery in the interim to to make sure that we can reach out to those consumers as you've probably seen in or advertising, we're taking everything with delivery. So we're really helping to.
Drive awareness that Wendy's does deliver still not as high as we want it but making some nice progress.
Great. Thank you best of luck.
Our next question comes from the line of Fred Whitman with Wolfe Research go ahead. Please your line is open.
Hey, guys. Good morning, just wondering what the pause and image activation obligations. When you step back and look at the current store design do you think there are aspects of the box that you're going to look to reevaluate skipping the disruptions and sort of the ships.
Pickup Mets.
I think we've been progressing quite well with our image activation you think about the different designs that we've had 28 Cedars 40 theaters 55 theaters, we've got a whole variety options depending on the trade area in the amount of customers that are going to dine in.
Weve worked hard to make sure we had separation from order pay and pick up so you can get in and get out quickly from a.
From a a mobile order perspective, if if you're doing that I.
I think they're probably some opportunities to continue to advance curbside pickup as folks start to think about.
Other opportunities to get food without having to come into the restaurant, but I think the way our program has been designed.
Around the options for every trade area. It actually plays quite nicely into where the consumer trends are going maybe see a mix shift a little bit across some of the some of those.
Different design sizes.
I think I think we're well positioned to to support all of that is as we continue to move forward.
Great News is were 60% Reimage, we thought we'd be 60% reimaged at the end of year. So were for a year ahead.
With clip getting fixed we're encouraged folks will continue to reimage I'm, especially as we work through this and a strong economic condition.
Even on our new Doug New development commitments, we started the year with net builds ahead of our plan, which we felt really good about we'll have to see how the year progresses as we move forward, but we do have a strong pipeline.
Great and then you guys had touched on the Gionee component of that $30 million in savings, but I didn't hear anything on the Capex side can you just sort of walk through what's included in that $20 million lower Capex. This year.
Good morning, Fred Yes, sorry, I forgot to answer the question actually you have to $20 million and capital the maturities development capital. So a since we have given that pulls to franchisees who delayed their commitments, we have given to liberty to ourselves as well.
Finally, our commitments as well and Thats drove July NGL, if the capital without.
Great. Thanks, so much.
Our next question comes from the line of my Matthew Difrisco with Guggenheim Go ahead. Please your line is open.
Thanks. Thank you I appreciate the question coming into what you guys talk a little bit about the digital side and went back and forth between digital and delivery can you just sort of break out I think it was 5.5 was digital how much of that is delivery. So I'm trying to figure out how much is how many what percent of sales people using mobile for either curbside.
Or pick up.
Good morning met.
I would say the majority of to 5.5% remains a delivery definitely encouraged that we've seen no at 25% uptick in app users and up down low to be starting to shift, but more bodies steel and minority off of the digital usage I would definitely expect.
That these schools to accelerate.
Maybe in the near future rolling off loyalty that hopefully bring that part of the technology and water type.
He said in the long term, we definitely expect that both mobile ordering and delivery.
For the balance.
Amongst amongst each other.
Okay and I just had one follow up also with as far as a lot of us have been asking sort of the question about the the first quarter margins as well as some of the initiatives you've done now to streamline and reduce the menu.
I guess it appears as though the headwinds from one Q.
And then taking into account the reductions that you're doing or the efficiency gains now for two clear that even in a down 2% or so we were to sort of hold these levels. The margin profile for the store level is stronger now given you've taken away some of that upfront labor or belt associated with breakfast would that be correct.
Matt you're definitely corrected to be had a couple of onetime headwinds so investment upfront investments, we made and then clearly the shop deceleration in much of that obviously created headwinds for US. We now know what you're dealing with and beginning to better position in more control into second quarter.
Again, why do you still losing sales leverage well it must be a super happy about the trend we've seen in April we still down almost 14% in sales so they still.
Fixed cost you know restaurants that they'd be losing a little bit of leverage.
Of course, the Midwest question any possibility of looking at breakfast.
All day, given its quick success, I mean, 8% was sort of your bogey.
Even in this environment you got to your percent of sales that you plan for that 8% to 10% level for the first year.
So could this be seen as something that could be a catalyst for business throughout the entire Doug.
That would not be in our plans at the at the moment, Matt Theres complexity that goes along with that as you shift from the breakfast daypart into a into the lunch daypart with how we're managing.
The grills to prepare the food and to prepare it freshly. So we want to stay focused on running great restaurants, I'm really in green the habit and continue to grow the heck out of the breakfast business will still be in very efficient at lunch and dinner.
Maybe someday way down the road, that's another opportunity and another growth wave, but not one that we're looking at in the near term.
Thank you so much Stacey.
Our next question comes from the line of James Rutherford with Stephens Inc. Go ahead. Please your line is open.
Yes, hey, congrats on the on the recent trend I just wanted to explore that comp improvement a little bit more I know, we've discussed a quite a bit on mccall, but can you give any color on daypart performance, we know breakfast as nixing at eight but what trends are you seeing at lunch dinner and late night as consumer habits have shifted recently thank you.
Yes, James clearly, we've talked a lot of all breakfast and breakfast headband from an industry trend. The most hardest hit dayparts. So it's been really encouraging that weve hung in there well clearly a breakfast business has been throttled in absolute dollars with with mobility down and not having the morning routine.
So we've seen that impacted and we've seen the late night business impacted you know as folks are not out and about as much.
And as they hunker down later into the evening, we do see the the impacts there. So we'll be encouraged to see that to start to come back is restrictions get lifted.
Early on we did see some impacts during the dinner daypart, but that has started to come back on nicely ones folks got a pass the initial hunkering down.
And and continue to see really strong lunch business for a great solution for folks to want to get out not and supports their their lunch daypart. So it's really.
Breakfast and late night, where the headwinds have been everything else and the hanging in there pretty well over the last the last several lease.
Okay, great Thanks, and congrats again.
We thought it looks like we have time for one final question or final question comes from the line of John I haven't co with JP. Morgan go ahead. Please your line is open.
Hi, great. Thank you very much of a follow up if I may some of the Breathless Press report yesterday kind of remind me to ask a question about.
Some of the.
Mobile excuse me the digital kiosks that you have in the store, which isn't something I think we've talked about in a little while so kind of comment on whether this is an opportunity and kind of alluding to a previous question, maybe where you can start to think about reducing the amount of seating in the store putting in some more kiosk ordering and whether increasing some.
With that capacity for what probably is going to be a sustained to go business is a possibility in other words kind of rethinking image activation, you know a little bit to some extent because I mean, I think it's pretty amazing that your business is down only 2% without customers walking in the door.
Good morning, John right.
Puts it already previously we think all these signs of a pretty well laid out.
From the going to take some lessons learned in ceilings can be tweak and obviously kiosk use positioning to roll the complain to future.
The context over dining room business that might look a little bit to do funding in the future is definitely though at least to think through I would say, it's a little bit too early to come to sold its conclusions on it.
Thank you.
Thank you John that was our last question of the call. Thank you Todd and GP and thank everyone for participating. This morning, we look forward to speaking with you again on our second quarter call in August have a great to everyone. You may now disconnect.
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