Q2 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Wendy's Company earnings results Conference call I will now turn the conference over to Greg Women check Director Investor Relations. Please go ahead Sir.
Thank you and good morning, everyone.
Today's conference call and webcast includes a powerpoint presentation, which is available on our Investor Relations website.
Yeah, our Wendy's dotcom.
Before we begin please take note of the Safe Harbor statement that appears at the end of our earnings release.
This disclosure remind investors that certain information we may discuss today is forward looking.
Various factors could affect our results and cause those results to differ materially from the projections set forth in our forward looking statements.
Also some of today's comments will reference non-GAAP financial measures.
Investors should refer to our reconciliations of non-GAAP financial measures to the most directly comparable GAAP measure at the end of this presentation or in our earnings release.
On our conference call today are president and Chief Executive Officer, Todd Penegor will provide an update on key initiatives and our chief financial Officer, Dr., plus or view, our second quarter results and full year outlook.
After that we will open up the line for questions.
With that I will hand things over to Todd.
Thanks, Craig and good morning, everyone.
I'd like to open today's remarks with the Wendy's vision as it is important to remember that our goal is to become the world's most thriving and beloved restaurant brands.
Everything we do at Wendy's is focused on bringing this vision to life.
As we work to build an even stronger brands.
Our vision is powerful and you will see throughout our remarks today that we are executing on our plans for sustained long term growth that will help us achieve our vision.
Let's begin with a few highlights from the second quarter.
We continue to demonstrate that we are in an efficient growth company showcasing solid system wide sales growth of 3.3% on the backdrop of improving same restaurant sales and global restaurant expansion, which is translating into strong free cash flow generation.
We opened 28, new restaurants across the globe in the second quarter and have opened 71 year to date.
This is slightly ahead of our pace of openings. We had this time last year.
We also continued to Reimage, our restaurants, and now have 53% of the global system on the new image.
Company restaurant margin came in at 16.5% for the quarter down 90 basis points from the prior year and flat year to date.
We delivered another quarter of strong financial results as we achieved 8% adjusted EBITDA growth, 29% adjusted EPS growth and a 6% increase in our year to date free cash flow, which continues to give us confidence as we are reaffirming our outlook for the year.
Our formula remains simple accelerate same restaurant sales in North America, and drive global restaurant expansion with a strong restaurant economic model to fuel this growth.
With organic same restaurant sales at the forefront of driving healthy restaurant economic model, which is job number one we continue to focus on our one more visit one more dollar strategy to drive mix.
We're also making progress on improving our operations and enhancing our digital capabilities and are confident this work will help us accelerate same restaurant sales growth.
Accelerating the pace at which we opened restaurants around the globe to give customers more access to our brand is vital to our growth story and we are on track to deliver our commitments in 2019 with a solid pipeline providing us confidence.
I will walk you through the progress we made in Q2 to accelerate North American same restaurant sales.
Our balanced marketing strategy contributed to accelerated same restaurant sales on a one and a two year basis.
We began the quarter with the continuation of our piggy bag promotion and the launch of our Parmesan Caesar salad.
We follow this up with our made to create chicken sandwiches paired with our 50 cents frosty and frosty Cookie Sunday promotion.
Our major Crane chicken features three new to the menu sandwiches, which drive flavor and innovation in our chicken business and builds on the equity we established in Q1 with the launch of our May decrease the Hamburger platform.
We closed out the quarter with the return of our summer very verse sell it.
Mix in the quarter was flat as we lapped over a strong southwest avocado premium promotion from the prior year and encountered some softness in our solid business.
Our momentum carried over from Q1 into Q2, and we are very excited and confident in the plans we have in place for the back half of the year to drive one more visits one more dollar.
We continue to make progress in elevating the level of operational excellence across the system.
With our new U.S. leadership structure, playing a major role.
Speed and consistency of experience matter most in delivering our brand promise and they are getting our full attention in order to make significant strides.
On the speed from a combination of training and credit card processing improvements is paying off and the entire system has rallied around the benefits of that increase throughput can provide.
Consistency is also gaining traction as a result of training investments around high quality food.
And a relentless focus on staffing levels.
This increased focus is already starting to drive better experiences for our customers.
Our goal is simple we need to consistently deliver great experiences in every restaurant every day.
Our restaurant general managers are the keys to doing this successfully and we will focus on three initiatives to help set them up for success.
First training coaching and measuring what truly matters to customers.
Second simplifying or eliminating non value added tax.
And third building a culture within our restaurants that make them fun and energizing places to work.
Through our continued focus on operational excellence, we believe that we can deliver a world class wendys experience at each of our restaurants consistently.
We are confident that we have the right initiatives and team in place to achieve this.
We continue to make significant progress with our consumer facing digital capabilities and are on track to deliver all of our goals for 2019.
At the end of the second quarter over 80% of our North American restaurants were on a delivery platform and our footprint will continue to expand exceeding our goal for the year.
The integration of delivery into our mobile App is on track to be completed by the end of the year, which will improve our user experience and delivery times.
On the mobile ordering front, we're now activated and over 90% of the U.S. system and remain on track to be activated across our north American restaurants by the end of 2019.
The key to increase sales and success with delivery and mobile ordering lights, and increasing customer awareness and driving trial.
We have a robust playbook of promotion slated for the remainder of 2019 to build our digital awareness and ultimately drive accelerated same restaurant sales.
The rollout of digital scanners across North American system is on track and our goal remains to have these up and running in our restaurants by the end of 2019.
We believe that being successful in digital will be a competitive advantage for us as consumers are craving customization speed and convenience all of which can be enhanced through our platforms and our restaurant operating model complements this well.
Now, let's review the progress we are making to accelerate our global restaurant footprint.
During the second quarter, we opened 28, new restaurants globally with 20 coming from North America and eight in our international markets, which was in line with our plan.
We remain on track to accelerate net new unit growth in 2019 to approximately 1.5% with about two thirds from North America, and one third coming from international.
Our global footprint is expanding and we continue to make great progress on building our foundation to support long term growth as we grew our international system wide sales again by 10% in the second quarter.
We look forward to sharing more with you on our international plans at our Investor Day later this year.
In North America, we continue to utilize the tools, we have put in place.
Which are foundational for strong growth.
We are very pleased with our groundbreaker incentive program that culminated in June .
We had very high franchisee enrollment with about 400 restaurants committed under the program and over 200 of these being incremental new restaurants.
This adds another wave of growth in 2019 and beyond two are all healthy development pipeline.
Our work with franchisees remains vital as we partner with them to ensure strong economics behind a line showing capital plans.
We continue to be confident in our global footprint expansion in 2019 and beyond and we will continue to ensure we have a wendy's restaurant wherever our customers are looking for one.
As I close I want to bring us back to the Wendy's way, we remain focused on delivering our brand promise of delighting every customer period.
In order to bring the Wendy's way to life, just like Dave did when he opened his first restaurant almost 50 years ago, we will stay laser focused on investing in the quality of our food.
Providing great value delivering exceptional service and elevating our restaurants.
We will accomplish this through our focus on enhancing the customer experience through our digital platforms and driving operational excellence to ensure customers have a great experience at all of our restaurants.
We will continue to provide more access to the brand around the world through our global development plans and create a place customers love to go through our Reimaging program.
We are making progress against all elements of the windies way and we look forward to sharing even more details on how we plan to play a different game into the future at our Investor Day in October .
I will now hand things over to GP to go over our second quarter financial results and 2019 outlook.
Thanks Todd.
We are pleased to be though quarter two results on the backdrop of improving same restaurant sales and global restaurant expansion, which is translating into strong free cash flow generation, let's dive into the results.
The increase in the trusted revenues was primarily due to an increase in company operated restaurant sales, which were driven by the acquisition of restaurants as part of our ongoing system optimization strategy as well as positive same restaurant sales.
I trusted revenues were also driven by $10 million of pass through payments related to stop leases as part of the new lease accounting standard.
Year over year company restaurant margin decreased by 90 basis points to 16.5%, primarily driven by lower than expected seamless than sales growth of 0.8%.
Our year to date west on marching through quarter two.
Lets to the prior year at 15.8% and via now expecting company restaurant margin to decelerate slightly in 2019 versus the prior year.
Gionee increased to approximately $51 million compared to $49 million in 2018.
This increase was primarily driven by the timing of employee compensation expenses and investments in building, our digital experience and international organizations.
Partially offset by lower salaries and benefits as a result of our achieve savings initiatives.
Adjusted EBITDA grew by 8% $218 million.
This was primarily driven by an increase in franchise royalties on the strength of accelerating seamless to end sales and new restaurant openings.
As well as net rental income.
Adjusted earnings per share increased approximately 29% in the second quarter to 18 cents due to strong adjusted EBITDA growth.
Fewer shares outstanding as it was held the first share repurchase programs and lower depreciation expense.
Year to date free cash flow increased 6% $225 million driven primarily by our strong earnings growth.
I also wanted to take the opportunity today to give you an update on our franchisees financial health as we recently finished collecting and reviewing the financials between the 18.
In 2018, our franchisees sales in North America grew by approximately 2% compared to the prior year.
Sales growth allows us to system to overcome and marching rates decline is that EBITDA dollars came in flat compared to the prior year.
As strong restaurant economic model remains chop number one and actively working alongside our franchisees to drive.
We remain confident that our franchisees will be able to deliver on that various commitments, which will ultimately lead us to achieving our long term growth goals as the Brent.
One of the keys to our ability to invest back into our business and return cash to shareholders.
He is a flexible capital structure and we recently improved by refinancing a portion of that in the second quarter.
We refinanced approximately $850 million into two trenches has seven and the 10 year and the blended rate of approximately 3.94%, which was slightly lower than the existing seven year notes 4.8%.
As it was held at this refinance our securitized debt is led up nicely with attractive fixed rate below 4% and we increased our weighted average life of that to over seven years.
Our pro forma leverage ratio at the end of quarter tool was 4.7 times down slightly from 4.9 times in quarter, one primarily due to strong EBITDA growth.
We continue to expect leverage ratio in the range of four and a half to five and a half times in 2019 and beyond.
As I close today I want to review, our 2019 outlook as we are reaffirming or our financial targets.
Global system wide sales grew by 3.3% in the second quarter and via confident that our marketing calendar digital initiatives and global development plan will continue to drive strong system wide sales and profitable growth in the back half of the year.
As a result of our strong system wide sales growth. We continue to expect that we will meet our adjusted EBITDA growth target for 2019.
Lastly, we remain on track to deliver free cash flow of approximately $230 million to $240 million.
Please note that we now expect the proposed settlement of the financial institution case to take place in early 2020 as opposed to late 2019.
As Todd mentioned earlier in the presentation, we are pleased with our quarter two results.
Our roadmap remains unchanged, we an efficient growth company that is showcasing strong system wide sales growth on the backdrop of positive same restaurant sales and global restaurant expansion, which is translating into significant free cash flows.
I will now hand things over to Greg to talk about our upcoming Investor Relations calendar.
Thanks, GP, we would like to remind you that we will be holding an investor day at our restaurant support center here in Dublin, Ohio on October 10, 2019.
We will be discussing our long term strategic vision for growth as well as providing additional long term guidance.
Due to limited capacity attendance will be by invitation only.
Now, let's turn to our upcoming IR calendar.
First up.
GP, Abby and I will be doing a road show with Bank of America in Boston on Tuesday August 13th.
The next day on Wednesday August 14th we will travel to New York City for a roadshow with Oppenheimer.
If you are interested in meeting with us at any of these events. Please contact the respective sell side analyst our equity sales contact at the host from.
Finally on Wednesday November six we plan to release, our third quarter earnings before market opens.
And host a conference call that same morning.
With that we are now ready to take your questions.
And if you would like to ask a question. Please press Star then the number one on your telephone keypad. If you like to withdraw your question press the pound key again Thats star one to ask a question, we'll pause for just a moment to compile the Q and a roster.
And you do have a question from the line of Chris I'll call at Stifel.
Yeah. Thanks, good morning, guys.
GP are tied to enter the domestic system has been opening stores at a pretty healthy rate. The closures have also been a drag on net unit growth and.
I guess for a little higher than we expected this or higher this quarter than last year can you just remind us what percentage of the closures or openings are relocations and whether you expect closures to be greater this year than last year.
Yeah, Chris Thanks for the question on enclosures.
From a full year pacing, we see it consistent with what we've seen in the last couple of years is kind of steadied into that 60 70 closure a year.
Which has been kind of a healthy number based on where some of our trade areas have evolved about a quarter of our restaurants are relocations as we as we work through those figures, but remember.
As we close restaurants were closed in restaurants at about a million one ASV and the new openings are at about a million eight so we're really driving a much healthier mix and really trying to make sure that.
Got restaurants that are vibrant so we continue invest in future growth.
That's helpful and then just.
Hi, I'm surprised with the slower company owned store comp performance and it sounds like you might expect this performance to improve given the margin outlook.
For the year, so what are the issues, causing the softer comp performance.
I think there is a couple of things Chris one if you think about the wet cool spring it did impact our company restaurants, a little bit more with our footprint and where those restaurants are located versus the system and from a company perspective since were 81% Reimaged already we don't have that big tailwind from from I like the rest of the system does is about 50 points or 50 basis points of tailwind for my eighth floor for the system. So I think those are the two biggest deltas that you'd really see on a full year basis, we would expect both company and and the system to grow in line with one another.
And we're really focused.
With with a dedicated leader for the company restaurants, we continue to up our game around all of our operational next metrics.
Focus on speed focus on consistency being two of the biggest.
And I know Deepak and the team are going to continue to drive a lot of connection to the customer that way going forward.
Great. Thank you.
And your next question comes from will Slabaugh of Stephens, Inc.
Yeah. Thanks Jack.
You bet to lap over some of the softer matson quarters in the past few years I was wondering how you're thinking about the promotional cadence in the back half of the year and and in reference to your comment around being confident plans for the second half I was wondering if you could give any more additional color there.
Yeah, well I think if you think about our calendar year right. We are lapping over basically a flat back half of the year, which which gives us confidence we on we're really looking at.
Just start to this year and if you look at the last three quarters, we've continued to accelerate our our two year stack comps. So we've been encouraged about that and I think you'll really see us to continue to play our game on one more visit one more dollars going forward.
You are seeing that out there right now with a great Bacon Fest promotion. That's on air you're also seeing is trying to leverage some of our digital assets as we've now got mobile ordering and over 90% of the system.
We're now offering a a a free JVC with any with your first mobile order. So we're driving awareness on on that front.
So I do think a lot of it is the just the natural programming that we have to talk about what's the best the Wendy's right at Bacon, all about fresh oven baked smoked applewood Bacon, we already talked about the spicy chicken nuggets coming back. So we'll have a lot of fun with that so thats already a known item out there and we'll continue to make sure that we got the right balance between the one more dollar and the one more of visit messaging in the back half of the year.
But it's really going to come down to create and consistent experiences delivering great food and continuing to.
Create more speed at the drive thru, which we've trained on heavily in the first quarter and starting to see some of those benefits into the second quarter, and we'll see that into the back half of the year.
Great and a quick follow up if I could on the company operated margins they slipped a little bit for you this quarter and it looks like commodities provided most of that pressures. So if you could confirm that and if there was anything else that pressured you as it relates to either higher year over year discounting or higher than expected labor or anything else.
Good morning, where you have your head of commodity inflation of about 2% in the quarter and labor inflation of about 3.7% in the quarter. So in the face of to you now.
That actually created.
Decent amount of pressure for us.
Pricing action that we had to be able to offset some of it's and obviously also some of the cost mitigation actions you talked a little bit as well. So again as we said in the prepared remarks when it when the year to date basis. So, yes, let them play yet.
Great. Thanks, guys.
And our next question is from Gregory Francfort of Bank of America.
Hey, guys just thanks for the franchisee cash flow flow data that was helpful.
Just a clarification is that per franchisee or per store and then and then another question just on.
I think you touched on speed to service a little bit now that's becoming a bigger initiative for you guys I can't tell if thats going forward or if it's been something you've been ramping up focus on but given that mcdonalds has kind of made a big push there.
And it seems like it's maybe a bigger focus for the industry are you gaining traction and what have you been doing and kind of when do you expect to gain traction. Thanks, a lot appreciate it.
Morning, Greg onto this franchise profitability question, Yes, you do it on a per restaurant basis, so to speak to that I want to paint for you we.
Profitability was slightly down in franchisees restaurants, and little bit less down than actually what we've seen in company restaurants combined with the 2% sales growth that you've seen in the system is basically lets tools like absolute profits.
Second part of that sort of scope yeah, Greg on the speed front as we talked about in the past we did a lot of training in the in the first quarter. This year really around staffing around positioning about being ready for peak day parts.
And a lot of that had started to pay off here into the second quarter. We did see some improvement sequentially on our speed of service.
Our staffing levels have been as good as they've been in a in a long time in our restaurants, which which certainly helps.
We continue to put more tools into the restaurants to make sure that that we're measuring speed consistently across the restaurant. So we can coach and in health, but we don't want to sacrifice the great hospitality that we know needs to also happen with speed.
So a nice progress trend on that front and then we were a little bit slower than a lot of the industry on credit card processing and we made some software changes during the second quarter were actually seeing some improvement on credit card processing. We know we still have more opportunity to be even faster on or processing teams working through that so those are items that will continue to drive opportunities on speed of service into the back half of the year.
And any any quantification on how much faster than the speed service times, you're seeing and kind of when that's changed.
Yes, I wouldnt want to get into the specifics. Greg has then you'll be asking me every quarter, how many seconds, we peeled off and how much does it actually translate into sales, but but it was a nice improvement from from the trends, which were going in the wrong direction.
Through the outside.
Last year.
So were going in the right direction, we're getting faster.
And our customers expect speed and throughput to be part of a great experience in our restaurants. Thank you.
And our next question is from Eric Gonzalez of Keybanc.
Hey, Thanks for the question.
In the past you've said that the company margins are a good proxy for franchise margin. So just wondering if theres any one time issues that may have impacted the company margins versus the franchise margins.
Or is it or is that delta purely related to the comp delta. Thanks.
Good morning, Eric noted most not most any onetime effective was sitting in a company marching the only burden that to be heading the company restaurants grew less than the system and as a result of it obviously had a little bit less leverage and talk talk's talked about why the company restaurants grew a little bit less is a little bit more headwind on bandwidth and office, leaving the company with phones on those benefiting from the Tailwinds of image activation.
Thanks, and if I could just slip in a quick model question on the franchise support another cost I think they were a little lower than expected due to the cost of the scanners not hit this quarter or is that for the back half I think the incremental $10 million you mentioned.
In the past.
Yes, so the Scana has not hit in the first half is going to still keeping equal portions into suit into fourth quarter. The reason to buy you see favorability on this line versus prior year remember.
Last year in the first half and the second quarter.
Reinvested some of our take savings into gold, which investments its franchisees. It was it was a couple of onetime investments we made to feel lifting this quarter.
All right. Thanks.
And you have a question from Matt Difrisco with Guggenheim Securities.
Thank you just a quick follow up on that and then a question I guess was that benefit 10 million will be evenly disbursed sort of in the third and fourth quarters.
Matt that would be correct.
And then my question is with relation, but as it relates to your chicken sales.
Have you seen over the years or if you can compare sort of your your mix now is it shifting more towards chicken and is that helping.
I'm just curious on what your mix looks like and given the promotional of the promotional activity. It sounds like you called out a lot of.
The craving the chicken side driving that has your percentage of chicken gone up.
Over the years, we haven't seen a big mix shifts between the amount of hamburgers that we sell in the restaurant the amount of chicken has stayed fairly consistent there has been some trends around chicken into handheld and we had tenders and weve had discontinued tenders from a restaurant, but we feel good about a healthy mix between the options that we have in the restaurants with.
With our Hamburger business, and our chicken business and made to crave.
Certainly as a opportunity to continue to create news for both.
To do it operationally simple using ingredients that can translate across both hamburgers and the chicken sandwiches.
To ensure that we can continue to have speed, but also trade folks up into great tasting variety.
And you see that those are platforms that we can keep alive, you think about the hamburger side of the business.
We just discontinued the peppercorn mushroom melt and brought in the Bacon jalapeno. So we're able to keep that freshen and healthy and we'll continue to do that on the chicken site to throughout the year.
And then I guess as far as how does that relate to the mix going forward I know you sort of the salads were a little soft which pulled down the mix a little bit is that sort of corrected for the second half as you look out.
Yeah, we're not worried about our salad business. We we've got some some some great salad news that we'll have in the in the back half of the year, we struggled a little bit with the cold wet wet spring.
We had the farm Caesar salad that was out there, which was a replacement salad. So it wasn't an incremental new for a spicy chicken Caesar salad that was out there.
And Barry burst.
So with the cold weather and be in year, two just in time didnt resonate as much as it had in the past and some of this is a function of what we're lapping last year, we had the southwest avocado salad and the sandwich that were chicken sandwich that were promoted together.
And those performed quite well so we feel great about the quality, we create great about the news.
And we feel great about the variety so it'll it'll continue to be an important part of our quality message and create and choices in our restaurant.
Excellent. Thank you.
And our next question is from Brian Bittner of Oppenheimer.
Thanks, guys.
I know restaurant margin or not.
Component.
Of your EBITDA.
But it is a component keep your EBITDA outlook in place both temper your restaurant margin guidance can you.
Point out anything more cross selling.
And how long you keep that EBITDA guidance in place despite the growth from Merck.
Yes, Brian .
The reason vivier of you're able to actually.
Mid teens EBITDA outlook is really to to your point, it's a fairly small portion of our earnings makeup and again for clarity about what's driving EBITDA growth EBITDA guidance.
Really.
Our royalty growth behind to 3% to 4% system sales growth.
Do expect absolute restaurant profits to be up on prior year. So we have a little bit of headwind from a profitability point of view, but we have a tailwind because of having more restaurants, possibly because we build restaurants, and we consistently fixed or from last year and this year.
That's driving earnings growth so the combination of Stifels.
Yes.
Nicely within the guidance range.
Okay, Thanks, and follow up to your see your food sales during the first half.
Very healthy pursuing or a little bit above its obviously hard not to be loaded.
Your comparisons get so much easier in the second half.
Great I'm, a little bit more Harley.
Second half sales terms, maybe talk about how you expect this volume environment.
Play out in the second half.
Good afternoon.
I'm confident we will go home.
Last.
Well Robert for extra.
Yes, well I think you'll see a natural step up just on the one year comps as we lap over the easier last years year to date, we're at 1.4% same restaurant sales growth our guidance is one and a half to two and a half.
Between the the comp.
The balance on one more visit one more dollar.
The news that we can continue to create around made to crave. The news that you're hearing out there as we talked earlier around Bacon Fest and spicy chicken Nuggets coming back.
All I'll lend to help us continue to compete for the battle for share of stomach.
The work that we're doing on our operational side of the business to continue to drive speed more consistent experiences.
Those will continue to play in and then the digital initiatives, we don't see a huge tailwind from that in the back half, we think thats going to take a while to drive awareness and ingrained, but we will see some tailwinds. So that gives us confidence that in a in a category and we saw this in the second quarter. The restaurant category was flat from a traffic perspective.
That we can continue to to compete to drive traffic.
Into our restaurants.
But really have a balance between.
Price mix and traffic and if you think about where we tried to balance things out you know, we talked about traffic being down significantly in Q1 sequentially traffic got a lot better in Q2. It was still down slightly I would expect traffic to be down on a full year basis.
And but I do think it's a nice.
A balanced and rhythm that we're getting into between the the one more visit in the one were dollar.
And we feel good about it from a from the economics of our business and for the support we provide our customers with great offerings.
Thank you.
Any idea on my question from Andrew Charles of Cowen.
Great. Thanks.
Todd I'm curious what your brand and so I'd say about plant based proteins, given the impact of heavy industry and how they fit in the Wendy's higher quality brand positioning and I also have a follow up.
Yes, clearly there is theres growth out there in a plant based proteins and we believe it is a trend that that will be here to stay and folks are looking for options and we have talked a lot about the flex its aireon consumer today.
It's still a small portion of the overall servings and in the restaurant space.
But but we know it is growing.
We're taking a hard look at what the options would be for us in the restaurant as you know we had a great tasting black bean Burger several years ago.
It did well in some markets didn't perform so well and others, but it was operationally complex. So we would want to do with the Wendy's way something that's unique to wendy's something thats not overly complex and our restaurant.
But something that really hits for the consumer with the appropriate nutritional profile and and something that the consumers delighted with.
But our operators are equally as happy with so we'll continue to look and our culinary team continues to look at a at various options and probably something that will need to look at and we'll look at into the future.
That's helpful. Then GP I wanted to ask about the dynamics of franchisee profitability in 2018, you caught up flat EBITDA from 2% sales growth.
Company margins declined by about 100 basis points last year can you talk through the dynamics of the offsets of how EBITDA was preserved.
Again on the on the food line.
About inline with US we have a national system waste levels about the same referring to a few just performed a little bit better than the company most on the labor line.
Occupancy cost line.
Ever so slightly but the variance between.
The margin decline of the system and the company does not really big.
Simple simple.
Several basis points okay.
Thank you.
Your next question is from John Glass of Morgan Stanley .
Hi, Thanks can you just drill down a little bit more on the North America comp it sounds like traffic was slightly negative less negative than last quarter.
You said mix was flat and so I assume the does the comp was price. So can you confirm that and do you think you did better than the industry and what on what metrics and then finally on comp I thought mix growth was going to be a big driver. This year and a lot of other brands are getting a significant amount of mix growth was it just the salads that maybe hurt the mix this quarter, what's the dynamic or what.
Prevented you from growing mix further this quarter, maybe and maybe Ed did you have a target of higher mix this quarter.
Yes, John So few things to make sure you got the confirmation as you know we don't give out the exact composition of our same restaurant sales growth, but I can give you. Some additional color. So we did benefit from pricing actions that were about in line with the with the food away from home inflation.
And this was partially offset by by some customer count to slight declines.
And and our mix in the in the quarter was flat. It was more of a function of lapping over some really solid mix last year with the strength of the southwest avocado chicken sandwich and salad promotion and the Baconator promotion.
And then this year, the salad business being a little bit softer.
We saw a nice mix in the first quarter with the one more visit one more dollar focus in the back half of the year and things like Bacon Fest that are out there right now we continue to see some some healthy mix for the for the remainder of the year.
Sequentially. The traffic did did improve so the declines were a little steeper in Q1, we saw them just being down slightly in in Q2. So we're really working to make sure. We got the right balance between the high messaging.
And the and the little messaging.
Our expectation would have been probably to have a little more mix quite honestly here in in Q2, we didnt expect our salad business to to be as as soft as it as it was this time around we had two great offerings with the farm Caesar salad the summer very burst.
Sometimes the timing of the salads with with.
The weather and the patterns just don't play into the strength.
But it does give us some good insights that were going to have to continue to keep our salads fresh and bring news to continue to create variety and not in the innovation platforms moving forward to create excitement for the customers.
Thanks for that and then they're not digital in specific delivery you talked about awareness is still the opportunity there.
Is it getting more challenging to get awareness in delivery given there's just been more brands using more delivery third party delivery agent. So maybe there is spending more on advertising can you talk about what the breakthrough strategy is there and I think you're the only one of the big three that it's only using one delivery party right now is that an option to increase awareness and reach by having a second or third party.
Yes, I think couple of things.
Weve, we probably haven't done as much consistently as we need to we've done it in spurts, we've seen some great support from door dash with some free promotions driving awareness to Wendy's and we always get rate placement in the App that continues to drive awareness with the word ash, we've talked a little bit about it with some of our national advertising, especially as we get into some of the big Sporting events that you can have your food now delivered well, we just got to stay consistent with some of that messaging because awareness still is quite low that wendy's actually delivers food to be a combination of wendy's messaging door das messaging, we're very happy with with the ore to ash they've continued to build out their delivery footprint for us and we've got over 80% of our restaurants now serviced by door dash.
We got an annual contract with them.
We're working hard to get delivery fully integrated into into our Pos to make sure that we drive order accuracy, we drive a better experience for the drivers a better experience for our.
Employees, and ultimately get the food to the customer faster and more accurate.
All of those things keep driving experiences and it'll help complement the awareness strategy that we have so.
I think it's just a slow and steady build to continue to drive awareness that you can get delivered food from from a wendy's and stay true to having that messaging out there consistently.
In staying on one third party delivery platform is the strategy for now.
For now and we'll continue to look at options to best serve the customer base to make sure. We've got the right coverage and and ultimately make sure that the economics work well for us for all parties, both the consumer and the.
And our operators.
But we've been very pleased with the partnership that we had with door to fashion with our footprint being more suburban and urban theyve been great partners really growing out that support for us.
Great. Thank you.
And our next question is from Sara Senatore of Bernstein.
Thanks, and just a couple questions on them.
Digital initiatives.
First on the.
The delivery question you mentioned the awareness is the.
Real headwind, but do you see any evidence that maybe the fact that you are passing through a bit more of the delivery cost to the consumer.
And some of your competitors might be.
Inhibiting it do you have any sense of like price sensitivity around the delivery fees and service fees versus just kind of the flat delivery fee and then on the.
Yes, the DNA side do you see any evidence that you have.
You know opportunities to invest more heavily in technology. It just feels like a theme that's been emerging.
Across this earning season people are kind of picked up the.
Picked up the the estimates from whether it's the opex or capex, so and given that I think we've heard a little bit less from you about some of these investments is is there any reason to think that those might offset some of the DNA savings that you haven't please thanks.
Good morning, Sarah so on delivery.
You are absolutely right devices, we have chosen to pass on the fee so to our consumers view, obviously booking consumer satisfaction very very closely and consumer satisfaction remains high.
So the consumer is happy with the experience and these happy with the growth would have a metric that they're playing back to us. So so far so good but you're absolutely right that something in the context of to consume economic model Thats out there is something that would be a booking but for the time being we see no need to make any change on our model.
As far as China is concerned I think the headline for you east of the stocked with you still finalizing the cheating a restructuring plan that will be filed in may of 2017 that goes to plan will be the first headline the second headline yes, we definitely said that.
Beginning or do you have you made investments of about $5 million between international and digital experience lab those investments are rolling through the Pinedale.
So and by the way. It's a reminder, that smokes. The only features of investments we are making you're making the onetime investment of about $10 million on scana and in our capital budget, we have about $15 million seating and investment accenture.
Hello.
Red Sox, our digital capabilities.
And just to make sure that via competitively.
Focus on that the question.
Well, we'll go.
And your next question is from David Palmer of Evercore ISI.
Thanks, Good morning.
This last quarter I did you run that 50 cents frosty promotion a couple of weeks longer than you did and was that a drag to check was that a contributor to the check particularly given that.
The benefit on that.
Two of traffic.
Perhaps wasn't as much of a lift as you would have helped with that cold weather and then looking ahead to third quarter.
I think you'll be lapping that app download incentive you did last year I think it was a June three junior Bacon cheese is that do you have that right and how much of a drag to same store sales and perhaps even your restaurant margins was that last year. So that we can look forward to a positive comparison this year.
And David on the 50 cents frosty the timing was a little bit different within the quarter year on year, but the number of weeks was it was about the same and.
It was something that as we've now done it several years in a row. It just didn't seem to resonate as much this time around with the consumer as it has in the past whether that was weather whether that was other competitive dynamics or it was there. It was just wear out it's something that we continue to look at so that at.
A little bit of a against our internal expectation a little softer than we would've thought did that have a nice change in customer count trends, but we didn't see as much as a nice check at end or as much of the incrementality as we would have would have hoped for this time around.
We did have that data that free app download last year.
But you will still continue to see a lot of different things in the digital space that really drive folks into.
Into the App, So right now you've got the free Bacon Junior cheeseburger with any mobile order out there we're going to have to continue to drive at AAP acquisition through offers.
Were now to continue to drive that acquisition to offers to get them to mobile order is going to be part of how we create a great consumer base.
It wasn't a material drag last year won't be a material drag this year, but it's going to be part of the toolbox and things that we're going to continue to do.
To get folks comfortable using our digital properties moving forward.
And just on the second quarter, the the industry comp I think it was much better than the first quarter and you are fairly consistent in that 1% to 2% range.
Are you.
Are you looking at that industry trend and thinking that some major adjustments.
Any sort of.
Adjustments to your value strategy or innovation strategy are you talked about throughput.
But is there how much soul searching are you doing about that market share trends in the quarter.
I guess, if you look at market share is within the Hamburger category, our Burger category from a traffic perspective, we again held share so.
Lee, but we continue to look at folks driving a lot more price mix realization than we have.
So we continue to look at our calendar to make sure do we have the balance right. We have the balance between premium with things like made to crave and Bacon fast.
Appropriately set with with value.
We have some great value offers in the forefront for bundled meal and the the $5 Piggy bag do we have it exactly right on the under $4. All the cart. We'll continue to look at all of those things will continue to test and learn make sure that we have the balance right because we do see some additional growth out there and we want to make sure that we achieved some of that growth.
But doing a healthy fashion between.
Nice balance on check and and mix.
And our price and mix to get good check as well as bringing in customers and more restaurants, more often and don't forget we still got a lot of re imaging to do in front of us So were 53% reimage. So as we continue to reimage that continue to be a nice tailwind to bring back lapsed consumers and bring in new consumers.
Thank you.
And our next question is from Nicole Miller of Piper Jaffray.
Thank you. Good morning, just one question for me you were talking earlier today about speed and accuracy in some of the training initiatives to improve both metrics.
My question is how are you aligning incentives in terms of the in terms of the bonus structure.
And then once you.
I have gotten this through the system, what's the lake improving same store sales are asked otherwise.
How quickly can guest satisfaction scores rebound. Thank you.
Yes.
Nicole in terms of speed of service, we don't have a direct linkage. So we don't have a metric to say like if you speed up the X. second so you will get a payout.
Compensating them and see if the performance is the ultimate outcome of.
For us so thats, how we are linking.
Kind of outcomes to performance and a is kind of the answer to your first question and what was the second question is it.
When you think about the impact that this will have how quickly might we see that and performance. So as you've worked on this in the past, there's probably a lag right where you do this for what Q3 months six months nine months at what point do you see the topline improvement that you're looking for.
Again for their behavior point of view it will take time.
You took us that.
Quite some time to go a little bit slower it will take us a little bit of time to get faster from a pure behavior point of view into drive through on things like technology. So wouldn't be said look we shaved off time on the payment process Thats, obviously that those levels as we can but we can push actually much faster, which much more direct impact. So I think it's a mixed bag, but behavior as usual over six months ago.
Thank you.
And our next question is from John Ivankoe of Jpmorgan.
Hi, I wanted to get a sense.
In terms of capital deployment, and obviously asked this question in terms of your cash that you currently have on the balance sheet, which I think is 426 million you have 187 million remaining on your authorization, which actually expires fairly soon.
In March 1st and you bought back 20.4 million of stock in the most recent quarter. So you obviously have a lot more capacity than you're currently using both on your authorization and your cash that's on the balance sheet.
On the debt side of your balance sheet is in good shape.
I mean, I think it will be pretty normal to try to look for some signaling indications in terms of why you haven't used more of that buyback faster and.
And if I can I do want to ask the question in terms of potential international investments, whether any potential international investments.
Would be included in that fiscal 20 free cash flow number that you've given or if any potential international investments would occur and 21 or later.
Hey, John you got all the key facts right Youre right were sitting at about $426 million of cashew you need on a daily basis is about $200 million. She was even more than we need.
And so the cash outflows to think about it from the current balances.
About $45 million in dividend.
We do have to satisfy beginning of 2020.
Hi settlement with about $20 million, a cash out after tax and we'll continue our track record.
Infinity, Joe share repurchase authorization, which is making going to make it extend into our cash balance was about on that 87 million to go. So the plan is in place the cash balance is going to come down.
In terms of your specific question of international.
Please be patient with us if you want to.
Talk about the whole international cost as part of Investor Day.
Well I think even that point that you just made is important I mean should we expect that authorization to be fully utilized obviously given market conditions and other types of technical factors, we assumed by March 1st that entire $187 million for the stock has been bought.
Yes, you have a solid track record on share repurchase authorization. We have finished all of them in the past I see the reason why we shouldn't finished as well.
Okay. That's helpful. Thank you.
And our next question is from Jeffrey Bernstein of Barclays.
Great. Thank you very much.
Two questions. One just following up on the comp discussion I think you had knowledge at the second quarter, two year stack accelerated from first quarter, which accelerated from the fourth quarter.
Just wondering if you can offer any color on trends you saw through the second quarter and maybe into July .
Clearly it was brought up earlier, but.
There is a divergence versus your largest peer I know you were doing some some looking but I'm wondering what you think at this point is the biggest opportunity to close that gap. What do you do you think it's more on the value front or premium or maybe it's a certain day part do you think you might be lagging.
And then I had one follow up.
Jeff I won't get into inter quarter trends, we haven't gotten into that in the past we talked about we've got a nice promotion out there right now.
But that's all contemplated in our guidance without with Bacon Fest and.
In the free JVC offer with any mobile order purchase I think that what we need to continue to do is make sure. We've got the premium and the value mix appropriately balanced we've talked about this a lot in the past and change the word for us from high low to one more visit one more dollar.
And do we got that right, especially when it comes to all the cart value.
We've got work to continue to do on that front, but we feel great that we've got great value offers at four for four and $5 Biggie begs a nice trade up options.
With things like the Frosty Cookie Sunday and made to crave offerings across the restaurant.
Got it and then just in terms of the recent management changes and I'm wondering whether there's any change in strategy or what you see as maybe has been the biggest benefit whether it's better visibility or line of control or whatnot. Just wondering how you think thats played out thus far in terms of the biggest strategic benefits.
Yeah, Great question, Jeff I think some of the biggest things. It's just in the world of of moving a little faster on everything that we do I talk a lot about speed with discipline to make sure that we better connect to the system, we have better connect to the.
The franchise community and ultimately deliver better solutions to bring in more customers more often.
Making sure that you got the cross functional alignment of a team unified across the US the same on international.
It's allowing us to to make decisions quicker and ultimately test things faster, which will ultimately allow us to bring it to market quicker. We've also been out doing a lot of town hall meetings with the franchise community.
And it really gives us an opportunity to reflect on what's working and what's not and as we step back and really look at what do we need to do to drive speed, what do we need to do drive consistency within our restaurants, how do we make sure its fast and friendly and and we really have great tasting food delivered every single time.
We've got some great things to look at how do we do those things even better into the future.
Great. Thank you.
And your next question is from Jeff Farmer of Gordon Haskett.
Thank you Im just curious how has the five dollar piggyback sales mix or trends Mac transaction mix.
Compared to what you're seeing with the four for four just again curious which has been more popular with customers.
The good news is.
When you think about those as our value obviously, both in very popular four for four continues to resonate with the consumer and we continue to see steady mixed trends on that front $5 Big Big One promoted was set was nice trade up in an incremental opportunity. So they both played a role on our value proposition.
And have connected to the consumer and like we said in the past the $5 Piggy bag as a nice any profit trade up from four for four so those were well.
But it hasnt traded down significantly from from the premium offerings and with the news that we continue to have around made to crave on hamburgers and chicken I think we got that balance right.
We got to make sure we've got the yellow card value also balanced appropriately to moving forward.
And just a follow up and using that as a segue to this question just can you share some customer response to the made for crave.
Line, especially relative to your expectations.
Yes, all performing in line with the expectation that the consumer is trading up more often and bringing flavor bringing variety.
And doing it in a fashion that creates easy builds for our restaurant operators, but creates a great tasting food on our premium offerings as a good combination. So the feedback has been good.
We will continue to look at the number of which offerings are on the major crave Hamburger in the chicken lineup and we'll continue to bring news as appropriate to keep it fresh and to keep it ownable and you've seen that here in the third quarter with the Bacon jalapeno, replacing the pepper core mushroom Melters, we talked about earlier.
All right. Thank you.
And you have a question from Peter Saleh BTI G.
Great. Thanks for the question I, just wanted to come back to the conversation around delivery.
What do you guys see in terms of your delivery times as more brands.
Our adopting this capability our delivery times are are they getting worse.
And just sort of metrics would be helpful.
Yes, I won't give you the specifics as we we haven't talked about specific times, but I'll give you. Some some general comments you know we were we were running pretty fast and overall delivery times, we know of critical numbers to be under 30 minutes, and we're probably running slightly north of that.
Through the first part of the last last six months, we've made some improvements to trend closer to that 30 minute Mark.
But remember we still got.
A process, where a door dash order has to come and get in line make the order and then ultimately get it to the consumer and as we get things integrated into our Pos will be able to shorten that ordering time create more accuracy and ultimately get the food to the customer even faster.
So it's we're in the ballpark of the sweet spot of where we need to be on delivery times.
Great and then.
Kiosks company stores any change there in terms of the adoption.
Franchisees.
Yes, Peter you have about 400 kiosks in the system. So we have built a little bit.
So the conclusion these.
Kind of penetration of kiosk system is due to the relatively slow probably slightly below expectations. So you still can.
That the 200 kiosks will be of a company restaurants.
Can we turn to investments by a slightly check increases.
And.
Leave us savings over time, so thats, what we are trying to advertise to franchisees to improve penetration of that excess.
Great. Thank you very much.
And our next question is from Andrew Strelzik of BMO capital markets.
Good morning.
You're clearly seem confident in the ability to hit the unit growth target for the year and excited about the pipeline can you provide a little more color on that pipeline, where it sits today versus where it normally would this time of year and maybe whats driving some of that confidence in hitting the number for the year and related to that I believe the expectation has been that the closure rate would come down and doesn't really seem like we've seen that materialize, especially after a big number last quarter. So when should we start to see some of that come to fruition.
Yes. So if you think about the pipeline, we're very comfortable with the pipeline. We think we had a strong pipeline and it's only getting stronger with a lot of the commitments. We are getting from the ground breaker percent incentives those are a little further out but if you think about where we are at this stage of the year with either open or open or under construction, we're probably a little bit ahead of pace from where we were and in prior years.
From a closure perspective remember, we did close a in international market, which which had an impact on the closures in the first quarter small ABS and not much of an impact to our financials.
And as we talked about earlier, we've got some relocations that we'll continue to work through on the on the closure side. So there will always be a healthy clip of.
Of closures like we mentioned earlier on the call.
I think it's going to be fairly consistent into the out years, what you'll see is the acceleration of the openings traditional restaurants and non traditional locations.
Great. Thank you very much.
And your final question comes from Catherine already it's Goldman Sachs.
Thank you.
Wondering if you could give us a little bit of update or anything you're seeing.
That has changed in the quarter by the incumbent Incrementality in ticket lessor on delivery.
And then on that point, if you could give us any kind of context about how you see the economics.
Deliver a playing out.
As you are going to be rolling out delivery and your ads and what that would look like relative to drafting customer said to our dash website.
And really kind of curious how do you think that mix will look over time. Thank you.
Okay, Catherine on delivery economics, you fellas.
Actually.
Very steady trends, we see higher check sizes than a regular non diluted with water and.
Well, if we get out of it hey, it's consistent over previous quarter right. So that's a trick to build this delivery businesses to improve frequency through and is driving strategy.
So in terms of economics again, the economics for the for the consumer is not going to change in App vessels was out of that we are continuing to.
Two actually.
Pass on all the cost that we have through the consumer.
So would you do have.
The payments the payment costs related to the App is going to pull down slightly.
Because these won't use credit cost if the vessels are using I actually attracting a fairly high fee.
It needs to be paid for so economic model overall.
Slightly improving.
No the mix change, but the one reason by by view really investing.
Is to really get to know the delivery cost them a much much better seems to be going to collect all the data and demographics.
I guess on that point is at its very helpful would you consider or do you have plans to charge a lower price to the app than you would if the customer would go through the door dash site itself.
Yeah again at the moment of not contemplating days.
As we are working through the final details is obviously an option.
Remember right.
The consumer price insensitive right.
They are not.
Getting the sticker shock when to get the tickets because the growth would have payment tweak it gave a favorable on favorable on that type of quarter.
Okay, Great and I just have one final question.
Yeah with Mcdonalds rolling out dynamic yield on drive-thrus more directors this week.
Have you guys thought about potentially investing in technology that would integrate decision logic into their drive to process for you guys or how do you view the potential opportunity there.
Again, you, putting the finger on it on the big opportunity right the big opportunity in the digital age how do you unlock the drive through right.
The helping with mobile ordering but what are the tools you have to improve drive through speed and overall experience is.
Two thirds of outcomes you must go through the drive through that into active menu boards to mcdonalds is investing in east might be on low.
Thank you everyone for participating this morning.
We look forward to speaking with you again at our Investor Day in October have a great day, you may now disconnect.
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