Wendy's Co (WEN) 2016 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to The Wendy's Company first-quarter earnings results conference call.

(Operator Instructions).

Thank you.

I will now turn the conference over Liliana Esposito, Chief Communications Officer.

Please go ahead, ma'am.

Thank you and good morning, everyone.

Leading today's call will be Todd Penegor, President and Chief Financial Officer for The Wendy's Company.

Todd will be taking us through our first-quarter results, as well as introducing our incoming CFO, Gunther Plosch, who goes by GP.

GP joined The Wendy's Company on May 2 and will transition into the role of Chief Financial Officer during the month of May.

As previously announced, Todd and Emil Brolick continue their transition of CEO duties in anticipation of Emil's retirement in late May.

After Todd and GP have made their comments, we will open up the line for questions.

Today's conference call and webcast includes a PowerPoint presentation, which is available on the investors section of our website, www.aboutwendys.com.

Before we begin, please take note of the Safe Harbor statement that appears at the end of our earnings release.

This disclosure reminds 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, such as adjusted EBITDA, adjusted EBITDA margin, and adjusted earnings per share.

Investors should refer to our reconciliations of non-GAAP financial measures to the most directly comparable GAAP measure.

And with that, I will now turn the call over to our President and Chief Financial Officer, Todd Penegor.

Thank you, Liliana, and good morning, everyone.

Before we begin today's call, I want to acknowledge that today is a difficult day for all of us in the Wendy's family.

Unfortunately, we are conducting today's call without our dear friend and colleague David Poplar.

On April 30, David passed away in a motor vehicle accident and was laid to rest last week.

Words can't describe how much we miss him and how profoundly he impacted so many lives.

We have shared this news with many of you individually and you have been generous in offering your condolences and support to David's family and everyone who knew and loved him.

He was a fantastically talented individual, but more importantly he was our friend with a kind heart, generous spirit, and infectious love of life.

For the time being, investor relations matters for The Wendy's Company will be handled by Peter Koumas and me and any questions may be directed our way.

As we move forward, GP and I will determine our future plans for the investor relations function.

We are grateful to have GP's expertise and leadership at Wendy's and are confident he will be a great addition to our team.

With that, I will start with a summary of highlights from the first quarter.

After a strong finish to 2015, we entered this year with substantial momentum in the business.

Our first-quarter results demonstrate continued progress towards our key growth initiatives.

Starting with the topline, our two-year North America systems same-restaurant sales performance was the highest in more than a decade.

We delivered solid growth on growth, with systems same-restaurant sales up 3.6% on top of 3.2% a year ago.

Our North America Company-operated restaurant margin improved 250 basis points to 17.2%, which reflects improvements in our restaurant-level economic model.

During the quarter, we made significant progress with our system optimization, image activation, and new restaurant development initiatives, which are key elements of our growth plan.

We will discuss each of these in more detail in a few moments.

As a result of our first-quarter outperformance relative to our annual operating plan, we are increasing our 2016 outlook for both adjusted earnings per share and adjusted EBITDA.

Our expectation for adjusted EPS is now $0.38 to $0.40 versus our prior guidance of $0.35 to $0.37.

And we now expect adjusted EBITDA to be in the range of down 1% to up 1% compared to 2015 versus our prior guidance of down 2% to flat.

As we shared with you at investor day, our future growth will be driven by acceleration in same-restaurant sales, North America new restaurant development, and, further down the line, international expansion.

Our biggest priority is to drive sales through profitable customer count growth.

We are also expanding access to the Wendy's brand through new restaurant development, and on international, we remain focused on our narrow and deep strategy and are confident this approach will deliver growth over the long term.

The Wendy's brand is grounded in our unique family culture, driven by the values of our founder, Dave Thomas.

Our culture is a differentiator, which we intend to leverage to connect with today's consumers and drive our key growth initiatives.

In the first quarter, our Deliciously Different marketing campaign highlighted our core brand equities with a relaunched a single, double, and triple, and customers responded.

Sales and customer counts increased not just on the advertised days lineup, but across the entire hamburger line.

We will continue to talk about what makes Wendy's Deliciously Different, including our Fresh Never Frozen beef, produce prepped daily in the restaurants, and sandwiches made to order.

You will see this with investments focused on the quality of our core menu offerings, as well as with LTOs that build on our brand equities with innovative ingredients and on-trend flavors, as well as compelling value offerings.

On the value front, momentum from our 4 for $4 offering continues with the addition of our Crispy Chicken BLT in the second quarter.

We believe 4 for $4 is meeting a consumer need for compelling value combined with a high-quality unique offering.

The customer count growth we are experiencing is encouraging and we anticipate continuing to use value bundles in concert with core and LTO messages to bring in more customers to experience our restaurants.

On the premium LTO front, we continue to turn out innovative product launches, with the Jalapeno Fresco Spicy Chicken sandwich and Ghost Pepper Fries being the most recent example.

Our ongoing challenge is to ensure we have the right balance of support across our core, price value, and LTO messages.

With a pipeline of innovative new products, continued core product improvements, and compelling value offerings, we believe we are well positioned to meet that challenge.

We are building a stronger Wendy's.

The focus on our core brand equities, high/low marketing strategy, and the continued transformation of the Wendy's brand is being noticed by consumers.

In the first quarter, we saw year-over-year improvements in several key brand health metrics.

Our food quality and messaging continue to resonate with consumers, as evidenced by a 25% increase in high-quality food.

Wendy's is consistently ranked the highest among traditional QSR hamburger competitors for food quality and we remain committed to finding ways to widen this gap even further.

Our focus on price value is connecting with consumers, as reflected by a 12% increase in our key value metric, worth what you pay, and our image activation program is changing consumer perceptions of our restaurants, demonstrated by a 16% improvement in the metric of having modern and up-to-date restaurants.

The year-over-year improvements we have seen in our brand health metrics are encouraging.

As we move forward, we will continue to focus on providing A Cut Above restaurant experience by delighting every customer, period.

Now let's take a look at our first-quarter financial highlights.

North America systems same-restaurant sales increased 3.6% and 6.8% on a two-year basis.

These results do not include a benefit from Leap Day, because the quarter is reported on a fiscal calendar.

We believe the favorable weather had a modest positive impact on our sales performance in the quarter.

As we look at comp sales for the rest of 2016, we remain confident in our full-year target of approximately 3%, but expect Q2 to come in somewhat below our full-year target.

North American Company-operated restaurant margin was 17.2% in the first quarter of 2016, compared to 14.7% last year.

The 250 basis-point increase was the result of higher same-restaurant sales growth and lower commodity costs.

General and administrative expense was $64.6 million in Q1, compared to $59.7 million in 2015.

The increase resulted primarily from a $3.7 million increase in professional fees and legal reserves, as well as a year-over-year increase of $1.2 million in incentive compensation accruals, due to outperformance relative to our targets.

Adjusted EBITDA was $98.1 million in the first quarter of 2016, a 21.4% increase compared to the first quarter of last year.

We delivered this strong growth despite the ownership of 375 fewer Company-operated restaurants.

Note that these results include a year-over-year net positive impact of $9.6 million from a lease buyout, which was partly offset by increased professional fees and legal reserves.

Adjusted EBITDA margin was 25.9% in the first quarter of 2016, compared to 17.9% in the first quarter of 2015.

The 800 basis-point improvement reflects the positive impact of our system optimization initiative, as well as the lease buyout gain.

Adjusted earnings per share was $0.11 in the first quarter of 2016, compared to $0.06 in the first quarter of 2015.

Let's walk through the key elements of our $17 million increase in adjusted EBITDA.

We are continuing to evolve our Company economic model and improve our quality of earnings through system optimization.

In the first quarter, franchise revenues increased by $21 million, which more than offset the $16 million of EBITDA loss from owning 375 fewer Company-operated restaurants.

As I mentioned earlier, the lease buyout generated approximately $10 million of incremental EBITDA in the quarter.

Additionally, we were able to deliver $7 million of year-over-year restaurant EBITDA improvement, including the benefit of image activation.

Finally, G&A increased $5 million, due primarily to higher professional fees, legal reserves, and incentive compensation.

These items more than offset the benefit we saw from our system optimization and G&A alignment initiatives.

We expect to see continued G&A savings from these initiatives over the course of 2016 and into 2017.

Now I'll walk you through the key components of our $0.05 improvement in adjusted earnings per share.

As just described, our adjusted EBITDA performance contributed $0.04 of growth in the first quarter.

We have repurchased nearly 100 million shares over the last year, which added an additional $0.03 of accretion.

And depreciation has declined year over year, due primarily to the sale of Company-operated restaurants, which resulted in another $0.01 of growth in the quarter.

Partly offsetting this growth is the $0.03 of dilution from higher interest expense, due to the balance-sheet recapitalization we completed in the second quarter of 2015.

We continue to return significant cash to shareholders through dividends and share repurchases.

During the first quarter, we repurchased 4.9 million shares for $48.2 million and we have approximately $308 million remaining on our existing share repurchase authorization as of today.

We remain committed to repurchase shares with excess cash and as we receive proceeds from system optimization.

In addition, we estimate that our approximately 18.5% interest in Arby's has a fair value of about $260 million, which may drive additional cash flow in the future.

We ended the first quarter with $313 million of cash and we continue to believe we have the optimal capital structure in place that gives us the ability to return cash to shareholders while still investing in our business to drive growth.

Our system optimization initiative is proceeding as planned and we are on track to complete the third phase by the end of this year.

During 2016, we expect to sell approximately 315 restaurants to franchisees, including 55 restaurants that were sold in Q1.

The planned sale of these restaurants follows the sale of 826 restaurants in 2013, 2014, and 2015.

Going forward, as part of our ongoing system optimization strategy, we will continue to facilitate franchisee-to-franchisee restaurant transfers through our buy-and-flip strategy to ensure restaurants are consistently in the hands of strong operators who have demonstrated a commitment to growth.

During the first quarter, 113 restaurants were transferred through buy-and-flip transactions.

System optimization is all about building an even stronger system.

It is also serving as a catalyst for growth by driving new restaurant development commitments and accelerated reimaging.

We are making significant progress with our image activation initiative.

In 2016, we expect the Wendy's North America system to open 110 new restaurants and reimage 430 restaurants.

More than 24% of the Wendy's system is currently on the new image and we expect that number will rise to approximately 30% by the end of this year.

The evolution of image activation and the improvement in our restaurant economic model is also enabling us to make progress with our restaurant development goals.

During the first quarter of 2016, the North American system opened 25 new restaurants and we expect to deliver the first year of net new restaurant openings since 2010.

We have evolved our reimaging program in order to further elevate the customer experience and support our restaurant economic model.

Our refresh and standard designs can be tailored to the trade area to deliver what matters most to the consumer.

Franchisees can reimage their restaurants with an investment of approximately $300,000 to $500,000 and add customizable upgrades to compete in their market.

We are continuing to see sales lifts in the mid single-digit to low double-digit range, with minimal closure time.

Profit flowthrough in Company-operated restaurants has been in the 40% to 50% range.

Our reimaging strategy is delivering on the economics and ensuring that Wendy's remains relevant with today's consumers.

Our strong pipeline for future reimaging gives us confidence that this momentum will continue.

Now let's take a look at our 2016 outlook.

As a result of our first-quarter outperformance relative to our annual operating plan, we are increasing our outlook for both adjusted EPS and adjusted EBITDA.

Our expectations for adjusted EPS are now at $0.38 to $0.40 and we now expect adjusted EBITDA to be down 1% to up 1% compared to 2015.

We continue to expect full-year same-restaurant sales growth of approximately 3% for the North America system, restaurant margin of 18.5% to 19% at North America Company-operated restaurants, capital expenditures of approximately $135 million to $145 million, and free cash flow of approximately $50 million to $75 million.

We now expect commodity costs to decrease approximately 3% compared to 2015, a reported tax rate of approximately 38% to 40%, and an adjusted tax rate of approximately 32% to 34%.

We now expect general and administrative expense of approximately $245 million to $250 million in 2016, primarily due to higher incentive compensation accruals and increased professional fees and legal reserves.

We remain committed to our previously articulated goal of approximately $230 million in 2017.

And finally, we continue to expect to achieve the following North America system goals by the end of 2020 -- average unit sales volumes of $2 million, restaurant margins of 20%, a sales to investment ratio of at least 1.3 times for new restaurants, restaurant development growth of 1,000 new North American restaurants and approximately 500 net, and the reimaging of at least 60% of our North American total system restaurants.

Now I would like to introduce Gunther Plosch, who will take over as our Chief Financial Officer later this month.

I had the pleasure of working closely with GP during my days at Kellogg and I am confident he will be an excellent addition to our senior leadership team.

He has a wealth of financial leadership experience from the food and consumer packaged goods industries and a proven track record of driving growth and margin expansion, which will serve both the Company and our franchisees well.

We are eager to benefit from his contributions to the brand.

Now, here to tell you a little more about his background is GP.

Thank you, Todd, and hi, everyone.

I'm excited to have the opportunity to speak with all of you today in only my second week on the job here at Wendy's.

As Todd mentioned, I have come to Wendy's from the Kellogg Company, where I have spent the last 15 years in various finance roles, most recently as Vice President of Global Business Services.

Before that, I was Vice President and Chief Financial Officer for the $9.5 billion Kellogg North America business, a role I took over in 2010.

I began my career with The Procter & Gamble Company in Austria, which, as you may be able to tell from my accent, is my native country.

I spent nine years there before joining Kellogg in 2000 as the finance director in the United Kingdom division.

I still have a lot to learn, but I am excited for the opportunity to join the leadership team of this great brand.

As Todd will share with you in just a minute, we have a robust investor relations calendar over the next quarter, so I am hopeful that I will have the opportunity to meet with most of you over the next few months and I look forward to taking an active role in our second-quarter conference call in August.

And now, I will turn things back over to Todd.

Thank you, GP.

Please note that we will be returning scheduled calls with the sell side for the remainder of the day, but if you need to reach us, please email Peter Koumas at peter.koumas@Wendys.com or leave a message at 614-764-8478 and we will get back to you as soon as we can.

Before we open the phone line for questions, I would like to review some upcoming events on our investor relations calendar.

On Friday, May 20, GP, Leigh Burnside, our Vice President of Finance and Planning, Peter Koumas, our investor relations manager, and I will visit the Kansas City market on a one-day road show hosted by SunTrust.

A few weeks later, on June 6, we will be hosting a reception for the investment community to meet GP and several members of our finance leadership team at the 21 Club in New York City.

GP, Leigh, and Peter will remain in town to attend the Goldman and Stephens conferences on June 7 and 8. On June 13 and 14, GP, Gavin Waugh, our Treasurer, Peter, and I will travel to the Los Angeles market to conduct a joint equity and debt road show sponsored by CL King and Guggenheim, respectively.

And then on Wednesday, August 10, we will release our second-quarter earnings and hold a conference call.

And with that, we are now ready to take your questions.

(Operator Instructions).

Matthew DiFrisco, Guggenheim Securities.

I got two questions, actually.

I was just curious if you could give a little bit more color on the guidance and why the slower comp outlook than the full year and obviously implying a deceleration from what you just did in the first quarter.

I heard you say weather in the first quarter, so I wonder if that is all of it or is there somewhat of a later Easter effect as well, dampening, in there, and if you could just put that in the context of is this a Wendy's thing or is this an industry thing, so you are still holding the share in that guidance?

And then, I just had a question about the Junior Bridgeman sale, color on what type of role you might play in that and what that might mean for the year, if that is implied in your guidance at all as far as revenues generated from some of those brokered transactions.

Great, thanks, Matt, and good morning.

Yes, on the guidance, we are seeing a bit of a softer overall category in April, so it did -- the category did soften modestly in April relative to what we saw in Q4 and in Q1.

But we remain confident with our plans.

Our high/low strategy continues to resonate with consumers.

We feel good on the high-end messaging, feel good about how 4 for $4 continues to perform, and for us, the differentiator is really it's not just what you pay, it's what you get, and at Wendy's you get the quality of our food and we are very proud of that.

As you think about the pacing and sequencing throughout the year, we have talked to an approximately 3% full year.

We are absolutely confident on that.

That's a 6% two-year comp, and as you think about how the quarter lines up, overdeliver the 3% in Q1.

We are saying we'll be slightly below that 3% or somewhat below that 3% in Q2.

We feel good about the back half of the year in our plans, and as you guys know, we have to lap our launch of our 4 for $4 in the fourth quarter, so that would be our toughest comp.

So you will see some ups and downs relative to that 3% throughout the year, but feel good about where we are on a full-year basis.

Relative to Junior Bridgeman, Junior continues to look at opportunities to diversify his portfolio.

It was announced that he is becoming a Coke bottler.

We expect that transaction to close during the 2017 calendar year.

So we have some time to work with Junior on his succession plans.

So, more to come on that.

If Junior decides to do something different than having that owned by his family, then we could potentially help on that transaction, but we've still got some time to work through our future plans with Junior.

He has been a fabulous franchisee and is highly supportive of the Wendy's system and we will continue to partner with him on his ultimate plans.

How many of his stores have been reimaged?

We don't get into specific reimaging for an individual franchisee and very rarely even talk about what their total restaurant levels are, Matt.

But Junior is moving along nicely on his reimaging plot, along with the requirement to have 10% of his restaurants reimaged every single year, and he has been and will continue to be a leader in the system.

Thank you.

Matt McGinley, Evercore ISI.

I have a question on the restaurant-level labor.

Your Company-owned labor remained flat year over year, which is pretty remarkable, given what we are seeing with wage inflation across most restaurants.

Is there something specific that you are doing there that you are able to keep that flat relative to the pretty high inflation we have seen across this space?

Yes, Matt, I guess a couple of comments on labor.

The nicest thing is we are seeing some nice operating leverage within our restaurants, so clearly the 4 for $4 promotion, as well as a high message and having those both going, are bringing in more customers more often to our restaurants.

So that's the nicest tailwind that you can get to managing labor input costs.

If you look at where just pure wage rates have gone year on year, first quarter last year to first quarter this year, we are seeing about 5% to 6% inflation.

Some of that is driven by minimum wage.

Some of that is just driven by demand to access good labor.

So we have got that as a headwind, but we have also made a lot of adjustments from a guide perspective.

Bob Wright and the team did a lot of work last year with our labor guide.

We have been able to create some efficiencies on labor across the restaurant to offset some of that headwind, and we will continue to invest in technology with things in the front of the house and consumer facing, like customer self-order kiosks, mobile order, mobile pay.

And as we talked in the past, we will continue to invest in the back of the house, so where can we take out non-consumer-facing labor around things like temperature controls and checking, scheduling, and the like in the back of the restaurant.

So we continue to use all of those tools to mitigate any of the inflation that we see on the wage front.

My second question is on the trend that you had in the value menu since you have launched it.

Has that remained pretty consistent as a percentage of mix or was it stronger out of the gate and then it faded as people became more aware of the offering?

You guys were one of the first ones to have that program launch and then you had more competition that did the value menus later in -- or earlier in 2016.

I'm just wondering if there was any change in your mix of that as the quarter progressed.

No, we feel good that throughout the first quarter that the mix continued to hang in there exactly as we had expected and consistent with how it performed during the launch.

So there is clearly a need and a want and a desire by the consumer base to have a high-quality, affordable value offer, and we think the 4 for $4, which featured the Jr.

Bacon Cheeseburger in the first quarter, not only delivers on price, but it also delivers on quality, as that is a great tasting offering.

And then we created some news as we went into Q2 with the addition of the Crispy Chicken BLT to continue to make sure that we kept the offer fresh and relevant and to make sure that we keep it ownable to Wendy's as a bundled value play.

Okay, thank you.

Chris O'Cull, KeyBanc.

Todd, the Company made a pretty sizable change to its G&A guidance over -- only after a few months of providing it.

I know professional and legal reserves were up about $4 million, but G&A was expected to be down substantially this year.

Was there any timing shifts in planned cost reductions?

Yes, Chris, so a couple of comments on G&A.

So, originally we guided to approximately $235 million.

Based on the performance that we are seeing across our key metrics, we do have to take our incentive accruals up greater than 100%.

That's the way that the guidance would have been planned.

So not only within the first quarter, but throughout the rest of the calendar year, we're going to have to fund up for above plan performance in our incentive accruals.

And then, we had some unusual items that happened in the first quarter, so the work that we had on the ongoing credit card investigation.

We've spent some money with private forensic investigators around professional fees, and then we looked at all of the cases that we have out there from a legal perspective.

We don't comment on any individual case, but we did bolster up our legal reserves to support all the activity that our legal team continues to work against, and that hits in Q1, and we believe we have got all of those elements now covered in our full-year guidance of $245 million to $250 million.

But it is really important to note that we are not coming off our $230 million commitment to G&A in 2017.

So we look at some of these things as unusual and we still have our eyes focused on the $230 million.

And you will see G&A over the course of the year continue to come down as we work to sell restaurants off.

So some of this is the pacing and the sequencing of the sale of SO3 restaurants.

Okay.

And then, I know there was a $10 million gain recognized on a lease buyout during the first quarter.

I think that was the increase year over year.

Given you guys didn't adjust that gain out of adjusted EBITDA, I assume it is going to continue.

Can you help us understand what your adjusted EBITDA guidance assumes for these type of gains?

Yes, so these type of gains would be -- this one is a bit unusual at the $9.6 million year on year, so $11.6 million in total.

It was a lease buyout in New York City.

Last year, we had a couple of lease buyouts, which were about $2 million, so if you had assumed what is in our outlook and future guidance, there would always be a couple of million dollars of lease buyouts.

It could be an individual landlord that wants us out of a particular location.

It could be a franchisee that wants us out of a sandwich lease and has an opportunity where they think they could negotiate better than the Company, so they might want to buy us out, which was the case last year.

And there could be instances where we want to buy out of leases so we can control things to manage our IA, which actually could be a headwind at some point in the future.

But to answer your question specific, Chris, I would assume it is very -- on an ongoing basis, it would be fairly consistent with what we saw last year, a couple of million dollars year in and year out, but the pacing and sequencing of that will always be choppy, depending on what the individual instances and circumstances are.

Great.

Thanks, guys.

Jake Bartlett, SunTrust.

Thanks for taking the question.

My question builds on that last, which is, what was built into guidance?

Was this sale -- was the lease buyout expected in guidance?

And building on that question, I'm trying to understand how you are outperforming versus your prior expectations.

What is driving the incentive comp a little higher, given that it looks like most of the guidance, operating guidance, stays the same?

Yes, Jake, I guess a couple of things as we think about what has really changed.

So the incremental gain, the $11.6 million, was not contemplated in our guidance.

Those things are opportunistic.

What we are really seeing is we are recognizing the gain upfront, so if you think about what we lose is the operating income from that individual restaurant that was closed, and in this case that would have been a restaurant that is in the New York market that we would have sold later this year.

So we would have had a rental income stream based on a spread probably on the sandwich lease, because that would have been a lease property.

So, it was nice to recognize that cash up front.

As we think about what's driving the higher incentive comp, clearly we moved our EBITDA guidance up on a full year, so down 2% to flat to down 1% to up 1%.

And as we continue to drive our same-restaurant sales towards our approximately 3%, we do have a field incentive plan that is really driven on continuing to driving customer counts.

And the nice mix on price value, as well as the high message, continues to bring in more folks into our restaurants more often, and that's one of the contributing factors along the way on that.

Great, thanks.

And the next question is the acceleration you are implying from the second quarter into the back half, I know you can't spell out your exact plans, but anything you can tell us about whether you expect some meaningful changes with your value platform or anything that can give us confidence that even as the compares get more difficult, you're going to be able to accelerate comps?

Maybe playing into that, whether you have seen any increase or improvement in the last couple weeks in trends, anything you can help us gain comfort that you're going to accelerate in the back half.

Yes, Jake, I wouldn't want to -- beyond the start to the quarter, I wouldn't want to comment any further on near-term trends.

But as we look at our calendar throughout the year, we test a lot of things on both the value side of the equation, as well as the premium side, and we feel good that we have a very strong lineup of core support, a very strong lineup of LTOs that will come throughout the year, and a nice mix across our total portfolio as we bring news around hamburgers, around chicken, and around salads.

And we feel good on price value.

As I said earlier, the mix continues to hang in there nicely.

We have created some news with the variety of the Crispy Chicken BLT.

As we said last year, we said we tested a lot of different value bundles, so we have a toolbox of value bundles available to continue to keep the news fresh and ownable, but we will never rest on the past and we will continue to test what is relevant to today's consumer.

So we will continue to test during the course of this year to make sure that even as early as the back half of this year, late this year, that those tests are working out well.

Maybe there's some other opportunities to continue to drive messaging, whether it be on the high or on the low end of the menu.

So it's really a lot of the work that we have done in the past to really ground the framework on the pacing and sequencing of our calendar.

And I think most important is really what the consumers are saying about us, the perception of high-quality food going up, the perception of worth what you pay, and the perception of modern and up-to-date restaurants.

That is a differentiator that is going to bring in more customers more often.

That's a nice halo to all the ongoing activity that we bring forth on the calendar.

Great, thank you very much.

Michael Gallo, CL King.

Todd, I was wondering if you could delve in a little bit in what you saw in terms of, even in relative terms, how much of the comp came from traffic versus ticket?

And now that you are six months into 4 for $4, if you can give us more specifics on how you have improved your value transactions and whether you think that's bringing a new customer into the Wendy's restaurant or whether that is bringing some of your existing customers more frequently.

Thanks.

Yes, thanks, Mike.

As you think about traffic versus ticket, we talked a lot in the fourth quarter that we saw more customers more often coming into our restaurants, so customer counts were up.

That trend continued in the first quarter.

Customer counts are up.

And as we have said in the past, we have taken very little pricing, so we are only taking a little bit of pricing in some of the minimum wage markets, and other than that, we haven't taken pricing.

So you can assume from all of that that a lot of this is driven by customer counts.

And the good news is as we think about having a high and a low message, there are largely two different consumer bases out there and we're trying to make sure that we meet the needs and serve both.

On the value side, it gave us an opportunity to bring in more folks, introduce them to the quality of our food, bring them in especially during that lunch daypart where we were trying to solve for that $4 to $6 price point, and then through the food and the customer experience continue to keep them coming back, which is what we have been able to do.

And at the same time, wanting to continue to keep news on the high end.

And you think about the Deliciously Different campaign and all the quality attributes that we focused on and really driving more folks into Dave's Single, Double, and Triple and then coming back with Jalapeno Fresco Spicy Chicken sandwich and the Ghost Pepper Fries.

Those are things that bring folks into the premium side of the menu, and really keeping that balance between the high and low is very important because it really manages the average check to an area where we want it to be and where the franchise community feels good.

Thank you.

Alton Stump, Longbow Research.

Just to tail on a few other questions so far as it pertains to product mix, it was quite impressive to see how much you grew four-wall margin in the first quarter year over year, even with obviously a stronger value message.

So can you just talk about, even if it is not specifics, but just generally, what you are seeing in terms of how many customers might be trading down to the 4 for $4 versus actually new customers coming in?

Yes, the way we are looking at it, we are not seeing a ton of trade down.

We are looking at this as actually driving an incremental customer into our restaurant.

And as we've said this in the past, the one spot where we knew we had an opportunity was at that lunch daypart in the $4 to $6 price point.

So our opportunity was to have a compelling offering on the value side with the high quality of Wendy's to get back into the routine.

That heavy user during the lunch daypart is in the restaurants basically for lunch every day during the workweek, and the opportunity is to get into the routine with that heavy consumer, but also bring in that lighter consumer.

So we do see this largely being an incremental customer into our restaurants.

We see more trade up from right price, right size into the bundled meal, which is nice because it does manage a full meal and a check and a margin, but we don't see a ton of trade up from value into premium.

But we don't see the vice versa of that, either, a ton of customer is trading down from premium into value, because we do think that there are largely two different customer bases that you are trying to service in our restaurants day in and day out.

That's very helpful, thanks.

And then one quick follow-up and I will hop back in the queue, just on the pricing front, rate pricing front, a bit surprised there hasn't been more pricing taken either by Wendy's franchisees or at Company-owned stores, just given what is, as you mentioned, a mid single-digit higher labor costs.

How much of that is just the desire from a system to keep pricing down, obviously focusing on value, and as look ahead in coming years if you think that you can keep on holding rate pricing flattish in what obviously is a rising labor cost environment?

I think we are very focused on making sure that we stay accessible and affordable, so as a Company we continue to lead and try not to take a whole lot of pricing.

We would like the consumer to actually manage their own price by trading up from right price, right size into 4 for $4 or trading up to an LTO offering and let them decide and drive more of the price from a mix perspective than price.

There is pressure on labor and, as you would imagine, the franchise community does take a look at food and paper as a percent of sales and price as labor moves up.

But the good news is we are seeing a much better commodity market to try to hold that in check.

In the first quarter, we saw about a 7% increase in our commodity market basket.

We guided on a full year to 3% and recall we were lapping high beef prices in the first half of the year, and then that gap tightens in the [end of the year].

But that's a nice tailwind that the franchise community has, so you have a nice balance between commodities and labor.

Over time, if commodities did start to move, that's why we are working so hard to find efficiencies across the restaurant to manage the labor pressure.

All the technology initiatives that I talked about earlier in the front of the house and in the back of the house will be critical to make sure that we continue to provide a new QSR experience, but at traditional QSR prices, to bring in more customers into our restaurants.

That's great.

Thanks for the help.

Jeffrey Bernstein, Barclays.

A couple of questions, just first on the comp.

Todd, I think you had noted that the first quarter seemed to hold up well, but then QSR as a whole maybe slowed a little bit in 2Q.

I am just wondering why -- what drivers you might think caused that slowdown for the industry and whether, despite the slowdown, you were able to maintain your differential and leadership versus industry or maybe there has been some change in terms of market share just in terms of that most recent deceleration.

And then, I had one follow-up.

Yes, thanks, Jeff.

As you look into Q2 [softness], it is really hard to pinpoint what had happened in the industry, and we had seen the nice acceleration in real terms for the category.

It had been growing at about 1% to 2% in Q4 and in Q1.

Our guess is it probably softened to flat to up 1%, so still healthy relative to the long-term trends, but the consumer does continue to be cautious.

There has been little or no wage growth.

You got the general election uncertainty.

So it has been hard to really pinpoint what's driving that.

We have a higher concentration of restaurants in the Northeast.

The Northeast had a little tougher spring weather, so that could be a small contributor to it, and we continue to watch the gaps in food at home versus food away from home inflation and that gap has widened recent, and that's why we believe it so important to have a compelling price value message to make sure that we bring folks from food at home into our restaurants as that's our biggest competitor and still our biggest opportunity.

So it's those factors, but hard to really pinpoint, and we will continue to dig in to get a better read as we get more information over the upcoming weeks and months.

Understood, and then just on the cash flow side of things, whether it is the refranchising or the return of cash in general.

On the re-franchising side, it sounds like you did 50-plus units in the first quarter.

Just wondering your visibility, your confidence, I guess, in that 300-plus for full year, whether those are all locked in and they are just spaced throughout the year.

And as it relates to that, if we should assume from a share repo standpoint that you would use the full $300 million that is under authorization and expires at year-end 2016, or it might not happen.

Yes, Jeff, our plan is to fully utilize our remaining $308 million share repurchase authorization.

We continued to be in the open market during the first quarter.

You can do the math between what we spent in the first quarter and the remaining authorization of $308 million.

So we continued to buy back shares into the second quarter.

And our commitment and expectation is to fully utilize the cash that comes in from the proceeds of the sale to the restaurants to be in the market to repurchase shares.

We sold 55 restaurants in Q1.

In the Q, we talked about 86 are held for sale, so that means that we have basically got the books and the deal out there.

But we remain absolutely confident that we will have all these restaurants sold by the end of the year.

As we sit here today, about 150 of the restaurants have already been awarded, of the 260 that remain to sell, which then will leave us with two major markets, about 110 restaurants to go, and we feel good that there is still strong interest from existing franchisees, as well as new franchisees, and we will have all those restaurants sold by the end of the year.

Great.

Thank you very much.

David Palmer, RBC Capital Markets.

Just to follow up on that with regard to the re-franchising, do you expect that 260 to be front weighted, then, as far as the remaining quarters, a big chunk of that happening in 2Q?

Yes, David, good morning.

No, it would be more spread towards the summer and the later part of the year is the way the deals would get done.

And we have pace and sequenced each of those deals, as we have said in the past, to make sure that we have got an absolute clean handoff to the new franchise owner from the Company.

And we're also trying to pace and sequence all of the SO3 activity against the ongoing franchise-to-franchise transaction.

So in the first quarter, we spent a lot of time on 113 restaurants, a franchise-to-franchise transaction that involved a handful of markets, which took a lot of time and energy from the team.

And as we have said in the past, we would expect this year about 200 franchise-to-franchise restaurant transactions to happen, and we see just on the visibility of the system that 200 to 350 could happen for the next couple of years, and that's going to take time and energy from our team to execute those transactions.

It is the same group that is working on selling the system optimization three restaurants as works on the franchise-to-franchise transactions.

Thanks.

And just to follow up on the EPS change in your guidance for the year, I was wondering if you could zero in on why that's going up by a few cents.

It looks like your higher G&A is maybe a $0.03 to $0.04 drag.

You've got the tax rate and food cost may be a couple pennies boost.

You have the lease buyout net of legal costs; maybe that is $0.01 or $0.02 boost as well.

So it feels like we're back to zero, a wash, before you consider anything else in the operations, but it looks like your guidance is largely unchanged sales and re-franchising wise.

So, maybe my math is wrong.

If you could help about why you think that guidance is going up.

Thanks.

Yes, David, so on the G&A front, it is about $0.03.

We have got a range of $245 million to $250 million, so if you take the point estimates, that's about a $0.03 headwind that we are managing.

And the lease buyout, which wasn't in our original guidance of the $11.6 million, was about a $0.03 tailwind, so those two largely wash.

The updated tax guidance is about a $0.02 favorable item for us.

We have got some favorable tax audits at the state level that have been completed and we have had some adjustments to the valuation allowance as we work through what states we ultimately are going to end in with our final footprint.

So that was the drivers of that $0.02.

And then when you look at our overall EBITDA guidance, we are up from down 2% to flat to down 1% to up 1%.

So there is about $5 million of overall EBITDA growth, but between the restaurant EBITDA growth within that restaurant margin range of 18.5% to 19%, as well as some additional rental income that we are seeing.

So our rental income is coming in a little more favorable than anticipated as we work through the sale of the Company restaurants and get in the middle of these franchise-to-franchise transactions.

The net of all of that delivered to you about another $0.01.

And do you think you can keep that tax rate down in 2017 or should we go back to the historical tax rates?

Yes, it is a little early to give guidance for 2017.

Some of these things would be one time when you get into favorable state tax audits, but some of these other items around valuation allowance changes and others could hold.

So we will continue to work to drive our effective tax rate.

So you could see it come back up slightly, but we will give a lot more guidance later in the year on that, David.

Thank you.

Keith Siegner, UBS.

Just to switch gears a little bit, one of the questions that we get from the investment community most often has to do with the 2018 free cash flow guidance for $200 million to $250 million, and one area that we just haven't had a chance to really hear from you folks on is when you think about the cash flow from operating activities and some of the adjustments there, non-cash rent, share-based compensation, what D&A looks like in 2018, maybe working cap.

Todd, if you could just give us a little color about how we think about those line items.

I am sorry for reaching out a couple years, but it really is one of the single most frequent questions we get, besides near-term comps, how we think about a couple of those line items against your $200 million to $250 million free cash flow guidance.

Thanks.

Yes, Keith, so a couple of things as you think about 2018.

Over time, we start to see our EBITDA growing at about 10% as you get 2018 versus 2017, so you start to see some nice growth in the four wall of our restaurant, which will drive some nice cash flow.

And we feel good.

We will have a footprint of about 315 restaurants geographically dispersed, but we will own the property under just over 50% of those restaurants, so a really strong economic model for the core restaurants.

You will see CapEx come down dramatically.

We have guided to about 80 to 90 as you get into the out years.

A big chunk of that is really on the build-to-suit program, so once we get through the build-to-suit program in Canada, which we said was about $25 million in 2018, you could see that cash -- CapEx start to come down even further when you get into the further out years.

But we feel good.

We got cash trapped up in Canada; we can't get it back tax effectively.

We made a commitment to drive growth, so going from 350 restaurants to about 500, so we see a nice cash-on-cash return for utilizing that cash in Canada.

You also start to see all the net new development that starts to come through and the benefits of that, which will flow through on the cash flow front.

We will start to work through all of our tax loss carryforwards over time, but -- so you will start to see cash taxes creep up and you will see depreciation and amortization start to come down, but not as dramatic as might appears.

We have done a lot of work around the core restaurants.

We will be 85% reimaged on the Company restaurants here by the end of this year, so we will have to depreciate that piece out over time.

And then, you have things like the foreign tax credits that we will continue to see some benefit onto that even out into the 2018 calendar year.

So those are the big drivers of why we feel so comfortable of $200 million to $250 million of free cash flow in 2018.

Thank you.

Sara Senatore, Bernstein.

First, just my condolences on Dave.

I agreed with everything you said.

He was a wonderful guy, so I am so sorry about that.

But I also wanted to -- on the topic of the business, I wanted to ask about longer-term guidance as well.

Basically, the targets that you've laid out for 2020, still a little bit of a ways away in terms of AUVs and margins and pretty close to industry leading in terms of those volumes and those margins.

So, this is a question on each of those pieces.

One on the margins, obviously a very nice lift this year, but it looks like a lot from commodities, potentially, so I don't know if that's something you are assuming will persist.

And then on the volumes, what do you need to see, given that image activation is coming in at lower comp lifts than when you first started the process?

Do you still feel confident that you can achieve those kinds of targets in 2020, given where we sit right now?

Yes, Sara, thanks for the comments on Dave.

We appreciate that.

And on the longer-term guidance, 2020, if you think about how we're going to grow the business, same-restaurant sales growth of approximately 3%.

If you just take that from the AUVs that we have in the system today, that does get you to about $1.8 million average AUV by 2020.

And we feel through all the messaging around quality, having a balanced high/low message, continuing to do things around consumer-facing technology to better connect to the hearts and minds of the consumer, those are all drivers that will continue to bring in customers into our restaurants.

Clearly, we see a nice tailwind from IA, which would be in that 3%, and we're going to have a very consistent 10%-plus of restaurants get reimaged every year that starts to give us that tailwind.

And then, the other important thing is for the system we have got this commitment of 1,000 new restaurants that will open, and if you recall, new restaurants are opening today at about $1.9 million AUV, so those restaurants will start to grow from that much higher base.

But we also said we were going to be about 500 net restaurants, so the restaurants that we are closing along the way are restaurants that are probably in trade areas that have moved on, which would be lower AUV.

So, that drives some of the mix to get ourselves up to that $2 million AUV.

And the way we have laid out our long-range plan, the math works to that, and we're working on all the initiatives to make sure that we connect to the hearts and minds of the consumer to continue to bring them into our restaurants.

On the margin front, we have made a lot of progress.

The Company had 18.5% to 19% guidance this year.

Traditionally, the systems had a little higher margin than the Company as they have got a different benefits structure, different wage structure, a little slightly different pricing structure, so we are well on our way towards that 20%.

We have got a lot of restaurants that are today over $2 million AUVs and then would be at over 20% restaurant-level margins, so leverage is the key on those restaurants.

So we feel absolutely confident that we can manage those things.

Commodities, hopefully, they -- we don't see them as a huge tailwind, but hopefully they are not a big headwind.

We know we need to manage labor and that's why we need to continue to do things around technology, around the front of the house and the back of the house, to do things around labor studies and how we best position labor without impacting the consumer experience in the restaurant.

And we still have opportunities to drive folks in across different dayparts -- late afternoon daypart, dinner daypart, late night, those are all things that will help contribute to customer count growth, which will ultimately contribute to operating leverage and margin expansion.

Okay, and just one follow-up.

Could you just talk about how the new prototypes that you told us about in February -- they are lower cost.

Again, typically what we have seen is when you have invested a little bit less, volumes have come through less.

Do you anticipate that you can still generate the same kinds of volumes and margins in the lower-cost prototype?

Yes, so too early to declare victory on that.

We have got the Canadian smart design that has been open since the beginning of the year.

We continue to see nice lifts, nice returns, so we haven't seen it move to a lower side of the lift.

I don't want to give specifics on one restaurant since it is early, but that's the only restaurant of the smaller prototype design that is out and open today.

We will have the US smart design with our first restaurant open down in the Orlando area in July.

So, more to come on that.

But we feel good that all the elements of that design really are elements that still will wow the customer, make sure that they feel good that we have an urban contemporary design and they want to come into our restaurants, especially as you got a mix of two-thirds to the drive-through and one-third in the dine-in.

Great, thank you so much.

Jason West, Credit Suisse.

Just one on the sales momentum you have seen the last couple quarters.

Can you talk about how important you think the 4 for $4 platform has been for driving that versus maybe just the broader industry trends?

And is this 4 for $4 platform, is that here to stay or are you guys going to be flexing off of that and then back on over time?

I just wasn't clear if that's a permanent item now.

Yes, so we will continue to push 4 for $4 as long as it is relevant to the consumer.

That's why we have brought variety in here in Q2.

It's why we tested a bunch of value offerings in the middle of last summer, so we think there is a unique opportunity to drive the customers in through that value offering.

And when you think about two-year comps, fourth quarter for the system at 6.4%, first quarter at 6.8%, those really healthy two-year comps were really driven by shoring up the leaky bucket that we had in the past, which we had talked about for a couple of years being the value side of the equation.

So, clearly we have brought those consumers back into our restaurant, and as we think about where we are going moving forward, I know we have got an easier second-quarter comp from a system perspective at 2.2%, but we have a strong two-year comp of 5.4% in the second quarter when you think about 2015 and 2014 that we are up against.

And the key for that is to continue to bring in incremental customers, and we think our messaging around high, both on the core and the LTOs, is well with making sure that the bundled meal message remains relevant today's consumer will help us continue to drive growth on growth on growth.

Okay, and then just a follow-up around the technology piece, and I know that's got to be important in terms of maybe protecting you on some of the labor inflation as we move forward.

Do you have any updates in terms of what the usage is on things like mobile payment in your system?

Are customers really using that in any meaningful way yet?

And then, what about things like kiosks?

Are you guys rolling that or are you still in tests in a limited number?

Just not quite sure where you guys are on that one as well.

Yes, so on kiosk, we have made the comment that we will make it generally available to the entire system in the back half of this year, so we have had it in test.

We feel comfortable with the direction that we are moving on the kiosk, and for the folks that really want to have it in their restaurants, you will start to see that roll out in the back half of the year.

On mobile ordering, mobile payment, we've still got the four test markets rolling, so it's only in about 100 restaurants today.

Results are really too early to really make any meaningful read on because we haven't really turned on a ton of media pressure in those markets.

But we are absolutely committed to be able to do mobile order, mobile pay by the end of this year as we move the entire system onto a common POS platform, Aloha, which will be the enabler for the future.

So once we have that up and rolling, we can then actually have mobile order, mobile pay in all of the restaurants, and then we can provide some support to drive awareness and then really get a sense of how does it connect to today's consumer.

Great, thank you.

Joseph Buckley, Bank of America.

Just a couple of quick ones.

In the labor costs, is there anything unusual going on with benefits or medical claims or anything of that sort that benefited that ratio?

Yes, Joe, in the first quarter, no unusual items than would have come through in the restaurant margin line.

Okay, and then a question on the change in the way you are going to treat the reimaged restaurants for same-store sales.

You indicated it had no impact on the first quarter.

Is that because so few fell into the comp base in the first quarter or whether you reimaged sales lifts is for some reason a little bit lower on the stores that would have held you to the comps in the first quarter?

Yes, Joe, we really don't see a meaningful impact moving forward from the new same-restaurant sales methodology.

It probably would have been more meaningful if you had to go back and restate back into 2013 and 2014.

What we really wanted to do is simplify the reporting methodology and better align it to industry practice.

So, today, we have got as soon as they are reimaged, they come back into the comp.

We have some partial closures where we don't have to completely shut down the restaurants as we become more efficient on the reimaging, so during that phase it would stay in the comp, too.

And no change on new; they come in after 15 months.

If you recall in the old days, it was five weeks of closure period while it was being reimaging.

Then it was out of comp for 13 weeks on the grand opening, and then out of comp when it lapped those 18 weeks.

And we are no longer seeing those big closure periods and we are no longer seeing those huge grand opening lifts that have to overcome.

We are seeing nice, steady builds up to those 5% low double-digit comps and continues to build from there.

And now that we are looking at a system number with a 10%-plus coming in of reimages every single year, you really don't see anything that materially impacts the comp.

So more of a simplification and industry practice than anything else, Joe.

Okay, and then just one last one.

The franchisee-to-franchisee interactions, is the system going to end up being much more concentrated in the hands of larger franchisees?

Yes, if you look at where we have been going over time, Joe, probably three years ago we were north of 450 franchisees in North America.

Today, we are under 400, so you are seeing some consolidation, and I think it's a function of a couple of things.

As we sell Company restaurants, sell complete markets, some of the folks in those markets end up getting consolidated by the bigger guide.

It is all in the spirit of growth.

The folks want to ensure that they can control their local advertising, they can control their local pricing; but, most importantly, they can control their local development so they don't have to worry about encroaching on anybody else.

And we do have a long-tenured franchise community.

Some have great succession plans and others are deciding now is the time to monetize as there is a lot of interest in entering the Wendy's system.

The ongoing franchise-to-franchise transactions, that isn't about consolidation.

As we get in the middle of transactions, that is about getting restaurants in the right hands of the right operators that are focused on growth, that are really committed to driving the system forward.

In some cases, that could be consolidation.

In other cases, that could be bringing in some fresh blood.

So, it will be mixture moving forward.

Okay, thank you.

John Glass, Morgan Stanley.

I just wanted to add my condolences for Dave.

I think like a lot of us on the phone, that news hit hard.

He was a real fixture in a lot of our professional lives for many, many years, so I just wanted to acknowledge that.

As far as comp-store sales go, is there a regional difference?

I think some smaller QSRs have noted that Texas had gotten weaker.

Texas hadn't been weaker for fast food for a while.

Have you noted that?

I guess thinking about why things would weaken, it may be a general consumer issue.

Is it -- can you just talk about the competitive intensity?

Has it lessened?

And maybe some demand industrywide had gotten pulled into the first quarter, maybe if there has been lessening of intensity, therefore that explains why some of this demand slack?

Maybe you could comment on that, please.

Thanks, John, and thanks again for the comments on Dave.

Yes, on the comp stores, the regional differences, you do see some impacts in the oil providences in Canada and the oil states here in the US.

You do see some things that would have a little tougher growth scenarios than the average across the country.

That said, in those markets we have got very active franchisees that have been absolutely leading the system in reimaging, so they have been able to manage through that by bringing in more customers through improving the asset base and then keeping them coming back with the experience.

Now as you come back to what are we seeing from a competitive intensity, it is always competitive, as you know, John, in our industry, and there's a lot of messaging on the value side out there, especially as the gap between food at home and food away from home widens.

So I think that has probably continued a little longer than usual.

Usually, we see a lot of that activity in the first quarter and it balances itself out as the year goes on.

But we feel good that we have a message that continues to resonate with today's consumer and we feel even better that the quality of our food is a real differentiator beyond price.

So we feel like we're really well positioned on that front.

The rest, I think, is more just a little bit of skittishness in the consumer as they think about election.

They see gas prices moving up a little bit, but that's not that material.

They don't see any real wage growth.

So, our hope is that is more of an aberration, but if the business is only growing at 0 to 1% into the future, we have initiatives that we have in place both on high and low that will help us continue to grow share and deliver our commitments.

Just as a final, very quick follow-up, did you give color or would you give color on your comp of in the first quarter traffic versus ticket?

Was it more of a traffic driven with less check, given the value offerings, or was that not the case?

No, that would be the case.

If you look at it, we haven't taken very little pricing in the Company restaurants.

There probably would have been a little more pricing taken in the franchise restaurants.

But a lot of our growth across the system would be driven by customer counts first, and then price and mix second.

Got it, thank you.

Ladies and gentlemen, we have reached to the allotted time for questions and answers.

We thank you for participating in The Wendy's Company first-quarter 2016 earnings conference call.

You may now disconnect your lines and have a wonderful day.