Q2 2020 Wendys Co Earnings Call
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I don't have accelerated each month.
At the end of March.
As we've been executing on the growth initiatives and we had set in place prior to the onset open.
Differentiator for us as a brand is the relationship that we have with our franchisees.
Ownership across our system over the last several months, it's been nothing short of incredible.
We are confident that we will emerge from this is a stronger Wendy system.
We have had to be nimble and quickly, which we have done successfully isn't Wendy system in order to navigate these unprecedented times.
No at 98% of our restaurants open and our same restaurant sales have grown to high single digits in the U.S. for the month of July on the continued strength of our breakfast Daypart and are growing digital business.
We have taken several actions to ensure financial flexibility and enhance our capital structure as a company.
Our cash balance remained strong at approximately $275 million at the end of July after paying down or 120 million outstanding via fan.
We also added an additional $100 million of borrowing capacity in June to provide enhanced financial flexibility and now have 250 million of capacity within our VF and facilities.
Lastly, as we look to the future we remain committed to our long term growth initiatives, which are to build our breakfast daypart grow or digital business and accelerate growth internationally.
Timeline of these strategies may take a different shape as we work through the impacts of covert 19, but our goal remains the same which is to drive fission accelerated growth.
Moving on to provide more detail on our recent U.S. sales performance.
As we have discussed previously prior to Kobin, we had strong momentum in our business and this is now return we did face some challenges in the month of me with the disruption in our beef supply, but we acted quickly to move to allocations in our restaurants and shifted our marketing calendar to chicken products to alleviate pressure.
Actions worked well and supply quickly returned to normal levels within our restaurants.
As we moved into June we continue to see our sales accelerate its restrictions began to lift and his mobility began to increase slowly across the country.
Within the quarter, we have seen significantly improved customer count since the lows of coal but.
We continue to see very strong average checks as ordering sizes have remained elevated which is helping to drive restaurant margins across the system.
Within the quarter in the QSR Burger category, we grew our traffic and dollar share.
Which we were very pleased with which highlights the strength of our plans and our strong execution.
As I mentioned previously we have continued to see sales momentum in July with same restaurant sales accelerating to high single digits.
I did want to call out that we're about to begin lapping our strong same restaurant sales growth from the back half of last year, starting in August with the successful relaunch of spicy Nuggets, which maintain momentum through the end of 2019.
The pace of our recovery is ahead of what we initially expected, which is evidenced the resiliency and strength of our brand.
As we move forward, we will not compromise on offering great tasting craveable food across all dayparts at an affordable price.
We believe that we have a strong marketing plan in place for the back half of 2020 to meet the needs of our customers. We remain fully committed to breakfast. We have recently made the decision to make an incremental company investment of up to $15 million to put towards this day part in the back half of the year.
We also believe that value is going to play a key role for customers. During this challenging time, which is why we are launching a new spicy chicken value Sandwich next week, which will also be available as part of our four for four platform.
Overlaying all of this is our new Wendy's rewards loyalty program that was just launched.
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 rely on us to deliver on the quality they've come to associate with the Wendy's brand and we will continue to do so today and into the future.
We could not be more pleased with our breakfast daypart since its launch in early March despite breakfast being the hardest hit daypart in QSR since the beginning of the pandemic. Our business has continued to grow each month with sales coming in at approximately 8% of total us sales in Q2.
Our breakfast awareness levels have remained strong at approximately 50% and the second quarter.
That said, we believe that we have a huge opportunity to continue to drive that number higher.
This is why we have made the decision to add incremental dollars into advertising to further accelerate our breakfast business and capitalize on the significant momentum we have.
With these additional dollars in hand, we plan to market breakfast in a big way in the back half of the year as more and more people fall back into their daily routines.
I continue to have discussions with our franchisees and they remain very pleased with this daypart as it is providing a sales driver that they did not have previously as expected and is also proven to be profitable, especially as absolute breakfast sales dollars have continued to grow.
We said that we were going to bring America. The breakfast it deserved and we have delivered on that promise with extremely high customer satisfaction as seen through our operational metrics.
As mobility improves coupled with our incremental investment in marketing, we believe that this business has a ton upside moving forward.
Now jumping into digital.
Our digital business has experienced strong growth in 2020, as we've been able to benefit from the foundation, we laid in 2019.
In the second quarter, our digital sales grew to approximately 5% of sales, which is double the amount we had in 2019.
We have expanded both are delivery and mobile ordering businesses in the us as safety inconvenience are paramount concerns for consumers in the current environment.
We have now successfully added new breeds. So you can now order wendy's from all of the major delivery providers in the U.S.
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 recently launched our loyalty program in July.
Which is aimed at driving customer frequency and rewarding them with the wendy's products they enjoy.
We plan to drive folks ended the program by providing compelling offers and marketing this program on or packaging.
We believe that this program will drive our digital penetration even higher moving forward.
We also continue to work on initiatives, such as mobile grab and go and curbside pickup as we know that a frictionless experience is what customers will demand as we move forward in a post cold world.
And the spirit of continued growth in digital I wanted to provide an update on our technology organization.
We have made the decision to evolve our structure and hire a chief information officer that will report directly to me and sit on our senior leadership team.
With this change Chief digital experience officer, Lora tight as has the part of the organization.
We appreciate Lawrence contributions well with the brand to enhance our consumer facing technology.
Our restaurants are essential to feeding our communities and we could not do this without great leadership and support from our dedicated restaurant teams who are on the front lines.
We have opened dining rooms in many of our restaurants and as of the end of July over 70% of our dining rooms were opened for carry out and in some cases dine in services.
Ensuring the safety and well being of our customers and crew members is most important which is why we are reopening in a thoughtful phased approach. We will continue to follow federal state and local guidelines to ensure that we are in compliance and taking their lead and recommendations as the situation continues to evolve.
As the operations within our restaurants shifted primarily to drive thru and delivery only in the second quarter, we focused on delivering an exceptional experience and we delivered.
Overall speed of service improved across the system as we continue to run our restaurants very efficiently customers are noticing. These operational improvements is overall satisfaction scores, including speed taste and order accuracy have seen significant improvements.
And outcome of all of these things has been a strong restaurant margin in our company restaurants, despite the significant headwind in sales from the pandemic.
In fact, our margin accelerated each period throughout the quarter ultimately landing at 14.4%.
We believe that we have found operating model efficiencies as a result of this disruption that will drive enhancements to our restaurant margin moving forward.
As many global restaurant companies are experiencing international markets have typically been harder hit than those here in the us due to restrictions that have been put in place.
Our international restaurants are no different but we're pleased that the majority are entering the recovery phase at this point with approximately 90% of restaurants now operating as of the end of July.
Markets, such as Canada, Puerto Rico, and New Zealand have seen a similar sales recovery curve to what we're seeing in the us.
We are particularly proud of Canada's performance, where we held a number one spot for traffic growth across QSR hamburger over the last quarter.
On the other hand, we have some high potential emerging markets, where the recovery period will take longer based on the impact of cobot.
Despite the challenges that we are currently facing our international franchisees remain committed to the brand and are excited about the future.
We have also continued to make progress towards our plan to expand into Europe and are on track to open restaurants in the UK and the first half of 2021.
We have been building a top talent team on the ground and have a strong pipeline of locations that we're currently working.
International growth is one of our three growth pillars that we remain fully committed to this growth may take a slightly different shape as a result of coven, but we know that international remains a huge opportunity for the Wendy's brand and we are excited to grow this business.
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.
The 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 with drive throughs delivery and digital to win the Wendy's way I believe that we have put ourselves in a position to continue to accelerate when customers returned to some kind of new normal and then we will emerge as a stronger brand.
As I close I want to send a heartfelt. Thank you to the entire Wendy system. After watching our company wide response over the last several months I could not be more proud to be part of the Wendy's family.
I can never say enough, but thank you for all you are doing.
I will now hand things over to GP to talk to our second quarter results.
Thanks, Todd via pleased to though a second quarter results in the context of our revised expectations. After quoted in late March our.
Our global same restaurant sales accelerated each month during the quarter on the strength of our breakfast day part that continues to build a growing digital business increased mobility around the globe.
These gains more than offset by the declines that we saw as a result of Cobiz 19, and our previously mentioned disruption in beef supply ultimately lending with same restaurant sales down 5.8% for the quarter.
Year over year company restaurant margin decreased by 210 basis points to 14.4%, primarily driven by customer accounts declines as of this out of the pandemic and labor rate increases.
The labor increases included our previously disclosed recognition pay will be increased pay two or restaurant level employees by 10% through April and may, creating 200 basis points of headwind for us.
This was partially offset by a higher average check labor efficiencies and other dining room closure related efficiencies.
Gionee was down approximately 4% due to lower travel related expenses.
Adjusted EBITDA decreased by about 17% to $97 million.
This was primarily driven by a decrease in company operated restaurant margin lower franchise royalty revenues and fees lower net rental income and the company's 2.2 million dollar investment of incremental breakfast advertising in the quarter.
As Tom noted, we plan to invest up to $15 million in 2022 funds incremental breakfast advertising. Please note that these planned investment will be smooth in our financial statements in accordance with accounting standards.
Adjusted earnings per share decreased by approximately 33% to offend driven by the decrease in adjusted EBITDA.
Excluding the $24.7 million payment related to the settlement of the financial institution case, our year to date free cash flow was approximately $37 million.
Year over year decline was driven primarily by the extension of payment terms for royalties beginning in April of 2020, lower net income and hi incentive compensation for 2019 paid in 2020.
Despite the challenging quarter, we are seeing same restaurant sales and restaurant margins sequentially improve in the head of our internal plan, which is promising as we head into the back half of Twentytwenty.
Given the continued volatility and uncertainty surrounding the future impact of Cobiz 19 on the global economy and its impacts to accompany we still unable to provide a 2020 and long term outlook.
Being tends to shift full financial outlook, when we can reasonably estimates the impact of koby of 19 and changing market conditions.
We did how am I want to give an update on a few underlying aspects of our financial outlook.
Now estimating commodity inflation for 2020 to be approximately 3% disease, a slight increase from a prior outlook of slightly north of 2% driven primarily by increased beef prices.
At this point most of our commodities are locked in for 2020 with the exception of beef will be about halfway through pricing period for the fourth quarter.
On beef, specifically, we did see significant pressure on food for the pricing, while we were going through the supply shortages, but these prices have come down dramatically since that time Ria expecting Ci in a of approximately 202 $210 million for the year.
Annual tax rate is expected to be approximately 25% to 30%.
You recall, we've previously noted that we identified approximately $10 million in choosing a savings when we issued our first quarter release.
And now expecting to realize about half of those savings primarily as the result of a slightly higher incentive compensation accruals.
Finally, due to the extension of payment terms for royalties beginning in April of 2020 that we extended to franchisees.
Only received one monthly royalty payment in the second quarter.
This created an approximately 50 million dollar headwind to free cash in the quarter.
Our repayments can you be expecting to receive five monthly royalty payments in the third quarter Sobi would expect these 50 million to flow back into next quarter.
I also wanted to note that these payments have no started to be collected and as of today, we have not experienced any material collection issues.
I also want to take the opportunity to give an update in the U.S. franchise financial health as we recently finished collecting in reviewing financials for 2019.
In 2019, our franchisee sales in the U.S. grew by approximately 4% compared to prior year.
Strong sales allowed to assist them to grow EBITDA dollars by approximately 6% in 2019.
We continue to actively part that with franchisees to drive has strong restaurant economic model and viewed that as chop number one.
We know that ensuring franchisee health will ultimately lead us to achieving our long term growth goals.
Our continued focused on the restaurant economic model has allowed the system to into 2020 from a position of financial strength with great momentum heading into the launch of breakfast as well as to help navigate the enforcing impacts of Cobiz 19.
Lastly, I'd like to address MPC, which is our largest franchisee.
As many of you have recently seen MPC filed for chapter 11 bankruptcy at the end of June.
We are continuing to have regularly interactions with MPC team is working through these bankruptcy process.
Four of Mpcs Marine these restaurants currently remain open and continue the trend we perform in line with though you assistance.
MPC has remained cohen with their continuing obligations to Wendy's and doing this system.
We will continue to stay closely coordinated and support them moving forward.
In closing I'd like to discuss our capital allocation policy, which remains unchanged.
First priority remains investing in profitable growth disciplinarian investment choices and via always focused on ensuring a strong financial return for our franchisees and for us the franchise or.
If we recently done so with the announcement of our incremental advertising investment for breakfast.
We announced today the declaration of a quarterly cash dividend be kept though dividends to same as the prior quarter at five cents per share payable in September we will continue to evaluate our dividend payment on a quarterly basis as the business impacts from core with 19 continue to evolve.
Lastly, we plan to utilize excess cash to reduce debt and repurchase shares we announced today that we intend to resume share repurchases in 2020 to effectively manage dilution.
In addition, our board of Directors has approved and the extension of our existing hundred million dollar share repurchase authorization by one year, which now expires in February of 2022.
We continue to believe that who will return to being an accelerated efficient growth company that will showcase strong system wide sales growth on the backdrop of positive same restaurant sales and global rest on expansion, which will translate into significant free cash flows I will now hand things over to Greg to cope.
With that.
Thanks, GP due to the ongoing travel restrictions in place as a result of covert 19, we have made the decision to shift all our investor meetings for the remainder of 2020 to virtual event.
We will be doing three virtual mdrs. After earnings first on August Twentyth with Barclays. There will be focused on the Boston market.
West Coast NDR with a day focused in la with Wedbush and a day in San Fran with Cowen September 23rd and 24th respectively.
We will be attending one virtual conference, which will be the Goldman Global retailing conference on September 10th.
Lastly, we will be hosting to virtual calls with Telsey and BMO on August 18th and 26, respectively.
If you're interested in joining us at any of these events. Please contact our respective sell side analyst or equity sales contact at those from.
With that we're ready to take your question.
Thank you as a reminder to ask a question even need to press star one on your telephone.
Your question press, the pound or Haskell Queens formed by where we compile the kuni right. Okay.
And your first question your comes from the line engine Charles with Cowen and company. Please go ahead. Your line is now open.
Great, Thanks, guys and congrats and the momentum.
Wanted to ask just.
Within the 5% digital sales mix that you broadly scenes pandemic can you help bucket the size and digital sales collected via when did that relative to sales selected to third party delivery marketplaces.
Obviously is doing quite well just getting the halfway to your 2024 target and we are just given how steady state of the last four months can you talk about how this three channels between marketplace and two in Europe have trended.
As long as Charles bypass for is a mix of sales they end up again.
Good morning, Andrew Yes, you're happy with it.
Digital mix, we have achieved there's about 5%, it's kind of double to what we had last year.
Maturity Allstate's mix is really coming from our delivery business. As you know we have accelerated to really OFFO delivery services across all major national delivery players. So they are clearly the lions share of our FFO delivery business now with the launch of loyalty in the middle of July.
Do belief that mobile ordering is going to increase this year all state of the digital mix again want to point out both ordering channels delivery and and mobile orders very profitable for us since both has.
Above average checks and still looks through it and with any cost to fill those orders.
And that's helpful and no one thought GP, what's the board need to see to return to the normalized 12 cents a share quarterly cash dividend from the five cents that's been paid up last two quarters.
Yes, you have just kept the dividend at five cents really there's too much volatility stealing the marketplace. As we said on the prepared remarks, we're going to to look at this again for the fourth quarter and if we need to see a little bit less volatility related to two colgate and therefore, a little bit more.
If you could stability on financial results.
Cash cash positions Endoleaks.
Hey, guys. Thank you.
Your next question comes from the line of Eric Gonzalez Keybanc capital markets. Please go ahead. Your line is now open.
Hey, Thanks, and have everyone's doing well, maybe if you could discuss how the other dayparts performed in conjunction with Brexit the mass seems to imply low single digit growth for the other day parts, but I was wondering if you are seeing maybe to seeing strength at dinner as some of your competitors. Thanks.
Yes, Thanks, Eric as we talked about on the prepared remarks, very pleased with breakfast is adding additional layer of growth for us and we do think it is largely incremental to to our base business.
You think about the the pace of the pandemic and when things early.
Half into our business, we did see some impacts during the dinner daypart and in that late night.
But those have largely normalize since we've gone through the quarter. So we are seeing with our acceleration here in June and into July.
That we're getting back to that mix that we had pre pandemic across our dinner daypart in our Lake day late night Dayparts. So.
Thanks or start to normalize a little bit.
And then you mentioned operating model efficiencies in your prepared remarks can you give more specifics about what initiatives and perhaps quantify those savings or quantify how much savings is sustainable and to host Koby 19 world.
Yes, I think there's a couple of things Eric clearly is as we've gotten to a dining.
Drive through model, we've seen lower ways, we've seen utility improvements seen lower maintenance, we've seen lower security costs.
Some of those things will continue and as as we manage opening dining rooms smartly, along the way, but we did a lot of things to social distance in the restaurant to and really help folks in position in the restaurants, which has created an efficiency. We spent more time getting rush ready to make sure that we can handle those big peak dayparts during the day.
Okay and with the work that we've done around.
Some of the recognition pay it also drove lower turnover in our restaurants, which certainly helped us.
Have our best business people in position to what to help us. So there's some great learnings there and then we'll have to watch longer term.
How things around.
Insurance in Workers' comp play out as we've got less folks come in the restaurant, we're clearly seeing less accidents consumer or employee and those could be some benefits overtime to.
Thanks appreciate it.
Your next question comes from the line of Chris could true with RBC capital markets. Please go ahead. Your line is now open.
Thanks, and good morning, so on the elevated check that you're seeing how did that trend through the quarter and given what you've seen in July according to date.
I have said do you think you can hold onto this higher average.
Yes, no there we continue to watch the higher average check.
Hung in there pretty darn well throughout the quarter Youre seeing larger order sizes is more meals are being brought home.
So you are seeing that that mix benefit in average items per transaction increasing nicely.
But we'll have to see what happens is still a little too early to call what's going to can say in what's going to continue to happen in the back half of the year. There's just so many variables with coal bid in school bus potentially be and virtual and the like that are going to have continued impacts on that averaged yet.
Okay. Thanks, and then you mentioned the importance of value moving forward and how it's going to play a larger part of your plan in the back half of the year. So curious to hear how value offerings mix over the course of the Twoq you in July in any detail on that would be helpful.
Yes, I think what Youve side. During this courses second quarter is value actually mixed a little bit lower we had a big focus on our premium offerings. We had two for five we're really focused on on our on our chicken products. We saw a lot of a lot of combo in premium through the quarter that said, we do know that as we continue to work through this and the consumer gets a little.
More challenged that value will be important so we'll stay true to our one more visit one more dollar strategy.
We did talk today on the prepared remarks about adding a.
New spicy crispy value sandwich to our menu, which which would be good play into our four for core which is a great value offering.
So we'll continue to make sure we got that right balance on the calendar moving forward and feel like our plans are laid out that way for the rest of the year.
Great. Thank you.
Your next question comes from the line of Brian Bittner with Oppenheimer <unk> Co. Please go ahead, Sir your line is helping.
Thanks, Good morning, congratulations on the momentum you're seeing your business in the third quarter, thus far.
Okay, well profitability you managed to store level margins, probably this quarter and you alluded to some new efficiencies in your prepared remarks, but thats your store level volumes.
Pre cobot levels in Italy.
Higher margin breakfast Daypart, how should we think about the restaurant margins moving gord, perhaps you could give us.
Some color on the margins or any thoughts you have about the go forward.
Good morning, Brian, Yes, actually quite pleased with our margin performance in the second quarter remember I've company restaurants were still.
10% in sales so they actually post a 14.4% margin if you actually obsessed out.
The rest of recognition pay you really end.
18.4% margin just basically line.
With second quarter. So we have done a really good to chop.
On on managing effectiveness inefficiencies in you know restaurants. The go forward basis is tough to estimate as you know the biggest lever for restaurant margin for sure a sales growth. So hopefully as sales growth continues to happen and will definitely be a tale of info margin performance.
On the commodity side as we said to year to date actually commodities were up 2%.
The year be expecting a 3% inflation, we really expect spike into third quarter third quarter commodity inflation is going be hi meets to mid to high single digits, and then kind of flattish into fourth quarter. So it gives you a little bit off.
Okay.
Showing that the shape that you expect and labor inflation is clearly going to BDNA there around 4%.
Clarity divest on the commission a that was a headwind for us into second quarter has been stopped so it's not going to be headwind for us for 10 years ago.
Okay. Thanks, TPN my follow up is just on the breakfast advertising.
You, obviously talked about the 15 million that you're spending in the back half of 2020 no. Your breakfast sales are obviously tracking very well and ahead of your internal expectation so.
This move in the back half that 2020 more more of a response to the expectations of competitors ramping up their advertising or any additional color. You have there also is there a plan in place yet for corporate AD spend per breakfast in 2021, you can give us some color.
Yeah, I'll talk a little bit about 2020 of our opportunities to continue to drive awareness as you think about the impacts that have been out there around mobility people being out of their morning routine.
We we opened up the start of our breakfast journey with about 50% awareness, we've been able to hold that.
Throughout the depend MX, but we see a huge opportunity to continue to increase awareness no matter what folks from teens are we are seeing folks come into the breakfast day part a little later than normal routine would be.
But but we are seeing folks come to our restaurant for breakfast Nonetheless.
Our operational metrics are super strong at breakfast or faster, we've got great tasting products to social metrics are really strong folks are feeling very pleased about how our breakfast day part is managing.
So we want to play to that strength and continue to create awareness in the good news as what we've seen as we advertise breakfast.
Does help halo to rest today, because we're really focusing on.
Hi quality messaging that we have.
GPU on talk a little bit about 2021.
Our thinking around breakfast really hasnt changed right to the always said that it's going to take said, we'll use to ingrained a habit.
So good definitely committed that we will spend incremental dollars in 21 and in 2022 as good original plan.
The right amount is going to be to be question for us and you're going to make this decision on investment levels within the context of outperformance competitive environment and doable pieces environment Thats out there.
Thank you very much.
Your next question comes from the line as John Glass of Morgan Stanley. Please go ahead. Your line is now open.
Hi, Good morning, I, just wanted to come back on.
On the current costs of 8%.
Mixed at 8% is it too simplistic to say before the company's breakfast in the rest of the today is essentially the rest is essentially flat reserve.
Is there are different dynamic going on here for example, historically breakfast checks have been lower than the rest of the day, but this is that in normal times. So.
Right.
Good luck.
Sales mix anything you can help understand that dynamic between the breakfast contribution and the rest today contribution to the comp would be helpful.
Yes, John.
When we say Forex breakfast represents 8% of sales don't forget to be had a little bit of breakfast in the base. So so the year over year.
Contribution to Esso cease below 8% so that gives you.
It will be the for sense, what happens in west the state.
Okay.
I guess.
The majority of sales right. This breakfast drag, let Jack I'm, just trying to understand that dynamic a little bit better is there.
Is there where you can talk about breakfast checks, maybe pressure and check or percentage transactions versus sales.
Yes, clearly breakfast is bringing in a lot of transactions, but we've got an offset on the rest of the day, where transactions have been a little bit weaker that were and then offset by that much higher average check.
If you think about the breakfast daypart. It does have a slightly lower average check, but but a higher margin. So it is playing well too.
To the financials in the economics of the restaurant.
Margin.
Moving moving forward and what we're seeing in the restaurants today.
So you do see this new layer coming in the same restaurant sales growth with breakfast and then we're quite pleased that we're able to on top of that continue to grow even with the headwinds that we're seeing the rest of our day business at lunch and dinner.
At this rail, but just one quick follow up you mentioned three priorities our digital.
The international unit growth and breakfast you Didnt mention us unit growth that has historically been somewhat of a priority has that changed rate. That's just not in the top three right now how do you think about the opportunity for us growth plus cobot.
Yes, when we talk about unit growth, we talk about it global international as a subset of of of the global obviously, but but the U.S. is still an opportunity where we continue to provide and can provide more access to the brand.
We do have a nice strong pipeline in the us at the moment on on new restaurants development.
We did offer up to our franchisees as part of the.
Cold relief package that does they could differ and extend their development agreements by an additional year that said.
I do believe that we will still be a net positive grower in the us business. During the course of of this year. We're ahead of our plan to to start the year. We've got openings, we got a net new openings.
The pipeline looks looks good.
Especially in light of the strong economic performance at a lot of our franchise, they're seeing that gives them some more confidence to continue to invest in growth into the future.
Thank you.
Your next question comes from the line of Jeffrey Bernstein with Barclays. Please go ahead. Your line is now open.
Great. Thank you very much.
Two questions. The first one just a follow up Todd on the operating model efficiency comments that have been made already just wondering whether you'd bucket. The majority of those within the restaurant level, which obviously is important for franchisees and your 5% ownership, but just wondering how much of it maybe at the corporate level.
There are any big wins in terms of cost efficiencies that can be sustained maybe within the DNA guidance. You gave for this year or just something more sustainable going forward anything at the corporate level from an efficiency standpoint, and then I had one follow up.
Yes, I think at the corporate level, we've learned a lot around meeting efficiency, how much traveled do we really need to do how well can we manage things.
Virtually.
So that those are efficiencies that we will continue to to leverage I think theres been efficiencies in our productivity.
And a virtual world the burn on time and on time and we've seen very good at making decisions. We've also learned a lot around how do we go out and manage our restaurants, what support do we need to provide how do we coach how do we train.
To support our restaurants across a across the globe learned that some of that can be done digitally and all doesn't have to be done in person. So those are all efficiencies that I think we'll continue to to learn from and leverage into the future.
Got it and then as we think about the second half outlook, just kind of pulling together some comments you've made obviously the tougher compares are pretty clear.
15 million breakfast advertising investment since a good idea and higher beef inflation, especially on a third quarter I'm. Just wondering just directionally your thoughts on EBITDA or profitability.
It seems like there's incremental headwinds in the back half of the year I just wanted to make sure sizing that up right or whether there are any potential offsets to those those incremental pressures.
Yes. Thank you got a little bit of they are the color around labor inflation and commodity inflation from GP rate, we're not guiding to add to the full year. We do feel like we got a really good marketing calendar for the rest of the air we talked about our value messaging with news within spicy chicken sandwich coming on for for four.
We'll continue to support our core offerings, which the customers really love.
Were seeing a lot of good operational efficiencies, which will continue to provide some momentum when you think about overall satisfaction improvements and taste speed and accuracy. So those are all positives.
Digital will continue to be a nice tailwind so even though we've got tougher compares we've got plans in place the incremental $15 million on breakfast will be will be nice to continue to support the momentum on that day part.
You will see some news from us.
During the course of the rest of the year on on some of our core products too.
Great. Thank you.
Your next question comes from line of Jeff Farmer, Let Gordon Haskett. Please go ahead. Your line is now open.
Thank you you introduce loyalty program strategy I think back in October.
Your analyst day, but can you provide some color on how you tested that program and what you saw or hope to see in driving visit frequency moving forward.
Yes be actually booked on this for a long time.
Because we wanted to make sure that executing these correctly as you know this is a huge opportunity for us.
Help us unlock frequency, we view that the big opportunity that we have come from a growth point of view here in the United States.
We looked at all of a lot of competitive programs and learnings and obviously this past month piece in small parcels United States.
So the results to be wanted and now obviously, we are ready to execute wed be prepared for it to I'd be rollouts came as a way the last year. It wasn't already in preparation for for that experience. So we may be fit kind of step deporting motion really last year from an execution point you few tickets.
I'd, it's to be clear I'd say, so dollar based on the program. So we are rewarding dollar spent with us and walk like visits made with us and and so that attractive proposition. So franchisees and obviously so consumers. So we think it'd be a really great opportunity to drive frequency obviously.
If you're in the Wendy's out today, you're not only loyalty members. So we've got a lot of folks already in starting to earn points, which.
We will create some opportunities for frequency and then our opportunities to drive awareness to drive more folks into the app and into loyalty program and as we talked about in our prepared remarks, we'll start to advertise on our packaging and and continue to bring awareness of this new program.
Thank you for that and just as a follow up what percent of the U.S. system has a drive through right now and what have drive through restaurant same store sales looks like.
Relative to the balance of the system without a drive through.
Yes, so where we are today as we got about.
70% of our restaurants that are fully open.
We've got about 30% of the dining rooms that that are still close. So if you think about the dining rooms, where we've opened that that business.
We're mixing largely about 90% still drive through traffic. So that means we've only got about 10% coming into the dining rooms, and the majority of the dining room traffic as takeaway business versus dine in so that should give you a little bit of flavor, we won't give us a specific metrics on how we're growing but we're still driving a lot of growth right through through the drive through.
And dose based on where we stand today and and we do believe it will take some time for the customer to get fully comfortable to come in and sit in the dining rooms over time. So we do expect at that.
The the growth in dining room traffic will be slow over time.
Thank you.
Your next question comes from the line of lowering Silberman with Credit Suisse. Please go ahead. Your line is now open.
Thanks.
Yes.
Yes.
The first.
Our second.
Sorry.
And then what's the risk of potential sales that mission or is that largely mitigated, but it can't redemption program.
Yes, the way it isn't points based frequency I don't think we'll see a lot of a lot of dilution from the program going forward I think it's it's really a frequency play on we'll watch and see what happens on average check ins as we're driving more visits back into our restaurants.
I was us the opportunity to add to drive more value through through mobile offers in our loyalty program rather than elsewhere on the piano also I think all of those things play too to continuing to make sure that it's a good margin play for us.
It will take some time I mean, we've we've just starting to have folks earn points and we're starting to learn what their behaviors are so it'll be throughout this year I'm sure that we'll continue to accumulate data.
And and start to figure out how do we.
Impact consumers behavior is moving forward, obviously, the heavier users in the end the bigger loyalty customers, we'll learn more on first silicon impact those folks, but but we need to continue to grab that data and it will take a little bit of time.
Thanks, just a quick follow up on the cadence of cost in July are you willing to give any additional commentary if you're seeing sequential weakness acceleration consistent trend and then what do you think contributing the acceleration in July versus Janet primarily the central nature.
A lot either any other factors.
Yes, I think Theres a couple of things I think breakfast business continues to to perform well for US which has certainly helped into into July and you know is mobility has improved a bit and still got a long way to go to improve its certainly helped across all of our dayparts as folks got a little more comfortable to get out.
It all the pantry loading early on in the quarter I think folks are looking for some normalcy in their routines and looking for some meals away from home.
And we play a great opportunity great role when you think about speed convenience and affordability, which we've always talked about quality is a differentiator, but the safety of of the drive through windy a window.
With the speed improvements that we've been making I think all of those things are playing into the business and the momentum that we have.
Digital continues to help us along the way. So I think it's a combination of all of those things and people have learned to trust at Wendy's is a great affordable convenient option for them in their routines to to help supplement meals at home.
Are you willing to speak to the cadence thereafter.
Weekly.
Yes, we're not going to get into Weeklys I only we've given you a lot of information on on the on the pace of of monthly and if you start to look at other months have gone clearly been a nice increase from the 5.1 in June to the 8.2 in July but we've got to continue to watch right. You've got a lot of hot pockets in spikes and Covance Doug.
Going and you do see some impacts and those.
Areas of the country is restrictions start to increase again, but by and large we continue to build momentum.
Yes.
Okay.
Your next question.
Yes question comes from line, Chris Ocull with Stifel. Please go ahead. Your line is now open.
Thanks, Good morning, guys.
Todd I was just wondering what gives you confidence that the 15 million dollar investment in breakfast advertising is sufficient to compete against some other chains that have plans to spend significantly more to really start their breakfast.
Yeah, Chris I think there's a couple of things one you think about a $15 million flight. That's that's like a big LTL. So that's that's really good pressure from a from a wendy's perspective, and I know our team we'll do some great work on the creative to make sure that a truly breakthrough, but we also continue to supplement it with a with all of our great social.
You know messaging that's out there. So we can be very efficient and very effective to complement kind of the mainstream media messaging.
And then we got to God, a great word of mouth out there. We've got a lot of consumers that are coming into the wendy's restaurants that are trying our food.
And we're seeing it in our overall satisfaction metrics.
At breakfast, they're very pleased with the experience and and they're talking about it on their social media channels and I think all of those things really bode well and if others want to start talking about the breakfast day part.
No mobility is down so much if we can get some more folks out and about a little bit.
It's a really drive some more breakfast business I think we'll participate quite nicely and all of that.
That's helpful.
GP based on in Pcs bankruptcy filing it sounds like they intend to sell some of their wendy's locations. If they are able to sell those locations what fees would wendy's likely collect from the transaction.
Good morning trace so from a somewhat view not really involved in that transaction.
Hi, it's somebody else to help then sell those restaurants.
The only role that view playing use the classic grown as franchise or to basically approve to by us, but for that activity view and not collecting any fees.
So if there is a new franchisee that takes over those stores at the end of Youre not collecting just a traditional franchise fee related to a new agreement.
No not like a new agreement need to be put in place mostly agreements will just be taken over and assumed is is that new owner moves on.
Okay perfect. Thanks, guys.
Your next question comes the line of aging Celtic with being BMO. Please ask your line is now open.
Good morning, Thank you.
Excuse me two questions for me.
First.
A couple of your peers have talked about pruning underperforming stores kind of taking an opportune opportunistic approach in this environment.
Excuse me is that something that you've looked at I know Wendy's has done a fair bit all of that over the years, because that's something that you've looked at it and is that something that we should expect and then second.
If you could talk a little bit about drive throughs throughput and Weve loyalty.
What's your level of confidence that that would not created deterioration there.
Are you looking at any opportunities maybe to mitigate some of that are pretty good drive through throughput further from here. Thanks.
Yes on the on the low performing restaurants, we continuously look at our low performers and we've got challenges in those restaurants will work with the franchise owner to either improve those restaurants or if they need to.
Closed them and relocate them to a better trade area. If you look at our US business I would expect closures to be in that 80 to 90 range. So I don't see a big spike up at the moment Theres still lot of optimism with the incremental layer of breakfast getting layered on that even the low performers have another opportunity to continue to improve profitability and growth.
And we've seen a lot of momentum as you see in in our results with strong margins that the franchise RC and so I think there's a lot of confidence that that we can continue to truly be the strong that survives and continue to perform well into the future, but what we're looking at that but I don't see us doing a wholesale closure play.
Because we've got a lot of strength across all of our restaurants, especially in the U.S.
On the throughput side.
We were really driving our our loyalty program through through mobile ordering so the more folks that we can get into mobile ordering year automatically getting your loyalty points along the way so that would be a natural opportunity to drive speed of service at the drive Twoq you don't get slowed down at the order station. If you actually order and then have to scan today.
Yet your loyalty points at the end, there's a slight offset to it but it's really efficient and just click a button and got a quick scan. So we don't see that's slowing us down much at all.
Great. Thank you very much.
Your next question comes from the line of Dennis Geiger with TBL. Please go ahead. Your line is now open.
Great. Thank you I wanted to ask a bit more about new your customer base and then perhaps any new customers that you feel you picked up between breakfast the added delivery partners and just by virtue of having drive through in the current environment, just wondering with a sense for that.
They are those new customers going forward.
Yeah hard to hard to really tell 'em Dennis on what we're seeing you know we if you look at our breakfast Daypart at largely follows kind of the rest today from a from a demographics age.
Profile, there is some slight nuances, but but a lot of that is just so early we haven't driven a ton of awareness at the moment.
If you think about you know a co bid world and and folks trying to bring some more meals back to the home.
I'm sure we brought in some folks that hadn't been at Wendy's in a while as they've gotten tired of other options for food that at a at home.
But that but we haven't seen a ton through our data on how many are actually new users versus lapsed users versus existing users I think we're getting a good combination.
Across all of those and were great great experiences. So hopefully we can continue to bring those all those folks back more often in the future.
Great and then just a quick follow up thought if I could I think you mentioned with respect to international how international growth may take on a slight slightly different shape because of Kobin is that just with respect to timing is there anything else that you're referring to there and then anything to add kind of on the existing international franchisees, how they're thinking about growth or any new.
Discussions with partners at a high level that you're able to share. Thank you.
Yes, I really just the timing thing I think you start with our growth into the UK. Originally we thought we're going to be opening some restaurants at the end of this year, it's really into the first half of next year. So thats one element.
You go across most of the globe Theres been a lot more restrictions in the cobot environment, which has put a little bit of pressure on a on temporary closures.
Our franchise community is very confident about the future. They had a lot of momentum internationally at the back half of last year and into the start of this year between before the restrictions started.
I do think it's more just have a timing right. How do you get the base business to come back have you started to add to drive the profitability that they were seeing in that base business before you jump start a lot of that.
International growth again, so thats when we talk about that the pacing and timing I think it's just a little bit of a delay based on the current environment in many of those countries.
Thank you.
Your next question comes from the line of Sara Senatore with Bernstein. Please go ahead. Your line is now open.
Okay. Thank you.
A follow up on on brackets, and he's done a lot im not talking about it I appreciate that.
Then a quick question on labor market and just in terms of breakfast and that she has been very stable at 8%. After initial I think and mid teens next but it's really held at 8% even as and yes. Overall sales have improved I guess in the past we have seen that sort of dynamic play out for others have lunch day parts, where it's just been a very.
Just can't walks.
After the first.
Couple of weeks.
Weeks or months and yes to the extent in good spend a little bit more on breakfast and in the past month, I mean deep because you see it moved the needle is there any risk that you sort of had identified your customer base and and and then that doesn't really move very much from here I am. So that's just a question on breakfast sort of in historical kind.
Next or industry contacts.
And then on the on the Labor market, you mentioned that recognition pay is going away, but you're still anticipating a 4% wage inflation. So I'm trying to square those two things I mean, do you think the labor markets going there remain.
Tight and that's why you have to you'll see the continuation placement.
Or is there an opportunity to retain people and or see less wage inflation, just because kind of the silver lining of the current economic environment is as you know much lacquer in terms of on employment. So those two questions.
Yes, Sarah on on breakfast I mean, it's way too hard to really tell what the mix is going to land at with.
With mobility down so much morning routine. So disrupted we were never really had a chance to launch this thing the way that we thought we were going to launch it.
We did have pressure on on on breakfast, but but less pressure than we thought through the launch period, we haven't drove awareness to its full extent, which we talked about a little bit earlier. If you look at the rest of our day business coming back. So strong right now the mix has ticked down a little bit on on on breakfast as a person.
And as sales, but the absolute dollars continue to main remained very strong and and continue to grow.
Thats why we think it's just an opportunity to continue to drive awareness continued have messaging around breakfast and really in grain breakfast as a as a habit.
And your morning routine and to get Wendy's into that rotation and that's why it's not just some investment in in the back half of this year its investment into 2021 and and beyond as we talked about earlier on the call. Because this is a long term game, but when you think about the start and the customer side.
Satisfaction and and the chatter I think that only bodes well that will continue to build from here.
So we feel very confident about breakfast into the future with the start we've had especially in the environment that we're seeing today with the breakfast day part being the hardest hit through the whole pandemic GP on labor it with wanting Sarah on Labor I mean, 4% planning assumption is really a function also on the scheduled minimum leave a rate increase.
This is that if you're seeing across the country Andy's what do you need to pay at the moment during the year over year basis. So actually stuff you restaurants, we okay and successful in stuff ago restaurants, no Doom and gloom scenario.
If unemployment stays very high end or unemployment benefits gets reduced cooked at provide.
Kind of.
Lets inflationary environment is possible.
Planning on that on that level.
Planning for the moment.
Thank you.
Your next question comes from the line of Brett Levy with MKM Partners. Please go ahead. Your line is now open great. Thanks for taking my call.
When you think about practice I know, we access a number of different permutations, but do you have any sense as to where consumers are coming from what level of frequency you're seeing from existing.
And really how your to have the how they're using it in terms of.
Regular pricing versus promotional and then if you could just I'll follow up the second question on assets.
Yes, Brad I'll try a couple of the pieces right. We havent had to promote a ton on breakfast, we had some news out there with the.
By when get one for a dollar and that perform quite nicely.
But we haven't had to do a ton of discounting we've had mobile offers and some coupons and those are all normal trial vehicles that that anybody would be putting out there at this stage.
Frequency, probably a little too early to tell to get good does sense of of repeat and frequency. So we'll continue to watch those things.
And just going to be hard to get a good read in today's world with mobility and routine so disrupted at the moment. So it will take some time to to work all of that out from a sourcing perspective, I think we source a little bit from from everybody in the industry being the new player in there on so.
As we look at it.
The big players, we sourced from the small players we sourced from as you think about local it's just another opportunity.
To to create a new routine with some great tasting offerings that we provide so.
More to come on that overtime, as we learn more and more.
And as we get to a some kind of more normal environment. So we really understand how that breakfast daypart plays in people's routines into the future.
And on the asset side.
Heard a lot from those that are doing better about either consolidation within the franchise community or interest from outside of the core partners.
What do you think you need to do in terms of their existing portfolio, just you've been aggressive in upgrades over the years, but what do you need to do on that and what are you seeing interest from your existing or external partners. Thank you.
Good morning, Brett.
Historically, we have consolidated all franchise base quite dramatically right for five years ago. The average franchisee would only like 11 to 12 restaurants now be up to 17 or 18 restaurants.
I think what's going to happen. These we are happy you have a diversified franchise base you have to smaller operators, 50% of a franchise base is still operating less than five restaurants.
We see continued interest in our system franchise, including by pipeline is healthy.
We have not seen anybody CHMP ship and body stays in the process.
And we are running them through obviously as in Pcus throws up for sale as yet another opportunity to potentially make sure that also fresh club becomes comes into the system, but there's no dramatic intervention or change that via pursuing from it kind of make up of our franchise base.
Your next question comes from the line at Nic.
Bush caring. Please go ahead your line is now open.
Hi, Thanks sort of question.
Can you please remind us if you're collecting royalties on the breakfast sales and if you're collecting apps on contribution on the breakfast sales.
Good morning, Nick.
Yes, we are collecting royalties on the breakfast sales, but have you are not collecting marketing fund contributions on breakfast sales, we have suspended that for 2020 with the play into obviously restock that in January of 2021, and do you want it to basically make sure that our franchise base.
Yes.
Remain to be a.
Kind of really interested in multi weighted in that they part.
One of the actions we took it is one of the reasons why we were able to lower that breakeven points by about 35%.
Got it.
Hi.
Just given the economic and the trajectory of the unit economics.
And then also you know the opportunity on real estate et cetera. How are you thinking about you domestic unit growth of 21 relative to the pre Corbett domestic unit growth guidance.
Yes, still too early to tell a Nick but those are all positives right. As you start to think about the resiliency of our brand in the the ability to continue to drive our model as a is that drive through model complemented by all the digital initiatives in a new daypart.
Those all play into the excitement of a have a potential growth opportunities and to start to think about potential more real estate, becoming available conversions less competition. You know those all could be opportunities to add to continue to provide more access to the wendy's brand, but at this point down a little too early to tell them as a as a whole fran.
Chase community just continues to watch and see what might happen in the back half of the year feeling good about what's happening today on the restaurant economic model, it's really what happens with an extended.
Covance push out what happens with a wave two into the future.
And those are the things that are just going to be kind of wait and see.
But I think there would be a lot of positive energy once we start to get to the other side of this thing.
And then just lastly, any early visibility on the impact of the end of the incremental unemployment benefits or at least just general thoughts in the near term around it.
Yes still too early to tell you know clearly.
The $600 a week unemployment benefit even going back to the stimulus checks on those are all discretionary income things that certainly help our business along the way.
You know, we will start to see as folks come back to work you know employment in.
We will certainly help as folks come back and start to turn the paychex that way, but you're also seeing a lot of other offsets right you start to think about all the other thing spokesmen discretionary income on sporting events concerts summer camps for kids.
You know airplanes crews is all of that stuff nobody spending money on those things. So there are other discretionary offsets.
Have we seen any impacts in the near near term here still way too early to tell.
Those things are just the $600 it just stopped.
And we'll see what happens in the next round of the stimulus Bill here and continue to watch it moving forward.
Thanks very much.
Your last question comes from the line as David Palmer with Evercore ISI. Please go ahead. Your line is now open.
Thanks, Good morning, and could you comment on franchisee profitability in the quarter, how to compare versus your cash flow.
And I have a follow up.
Good morning, Dave.
Unfortunately been not collecting famous profitability on a monthly or quarterly basis. So maybe just don't do it is something that we want to do into future, but I would say.
The the company restaurants clearly good.
Representation on what is most likely happen in the system.
Also probably worth saying that most of the franchisees will not have taken DXJ and off during the call. It the rest of the commission pace with a 10% increase that we have invested in so they will definitely in ups from an absolute margin point, if you will be will be probably better better than those.
Couple of it they have enjoyed significant benefits of PPP, which as you know we have elected.
He wants to pursue so the combination of those fixed goes I would expect that franchisees profits and cash flows OK strong and David don't forget our restaurant footprint right. So their sales has outperformed our sales when you think about franchise versus company and we have a big concentration in areas that are more heavily restricted metro areas in Boston.
In New York in Chicago.
As well as a lot of restaurants down in areas like Orlando, which round tourist locations, where traffic is down so you've got some of those deltas playing.
But the franchise sediment is quite strong they're feeling very good about the restaurant economic model by and large.
Thanks, and and on breakfast advertising contribution you mentioned, the 15 million in the second half of the year, which I guess from your comments GP years are going to be sales weight accrual basis as in other words more threeq and Fourq you now that youve made that official but but that total I, which I guess.
Now 17 million for the year for 2020, because he had the 2 million out of the way.
That's significantly lower than your original thinking for this year correct and if so why and then broadly speaking how would you decide about the necessary advertising contribution into 2020 want to beyond things like franchisee profitability. The scale. This breakfast in the self funding nature of it would be.
Things that I would think of but also you might be thinking of competitor or consumer awareness factor. So any sort of ways that we should think about how youre thinking about that would be helpful. Thanks.
Yes lots of questions are well above that so.
So the spending for this year is going to be $15 million. So you can expect the of 2 million behind us in the second quarter, because we made the decision in June you can expect it to be.
Showing about six in the half million dollars per quarter in quarter three in quarter for us with this whole thing, it's an up to about $50 million.
As far as far as.
2000.
2021 than 22 is concerned.
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Again, we do expect it obviously, our breakfast sales are going to increase in 2021, why we have obviously full year was 43 weeks.
It will help obviously fund marketing contributions and absolute contributions because of higher sales and then we have to see how is the awareness levels. How is though sales publication and vehicle to watch our financial returns to be want to make sure that.
The financial business case to be made to the board.
Going to stay intact. So that's one factor and competitive ER is probably the second sector.
Alright, thank you.
Thank you Dave that was our last question of the call. Thank you Todd and GP and thank you everyone for participating this morning.
We look forward to speaking with you again on our third quarter call in November I have a great day you may now disconnect.
And ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
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