Wendy's Co (WEN) 2017 Q1 法說會逐字稿

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 Peter Koumas, 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 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, adjusted earnings per share, adjusted tax rate, free cash flow and systemwide sales.

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

Our conference call today will start with an update on key initiatives from our President and Chief Executive Officer, Todd Penegor, followed by a review of our first quarter results and full year outlook by our Chief Financial Officer, Gunther Plosch.

After that, we will open up the line for questions.

With that, I'll hand things over to Todd.

Thanks, Peter, and good morning, everyone.

After a strong finish to 2016, we entered this year with momentum, and we have carried that through to our first quarter results.

Starting with the top line.

North America same-restaurant sales increased 1.6% or 5.2% on a 2-year basis.

This is our 17th consecutive quarter of positive same-restaurant sales, which demonstrates the long-term strength and relevance of our brand.

We remain focused on profitable customer count growth behind a balanced marketing plan.

We are making progress towards our net new restaurant development goals for 2017.

And in the first quarter of the year, we opened 33 new restaurants across the globe and have great visibility into our pipeline for the remainder of the year and beyond.

Moving to the company's economic model.

Adjusted EBITDA margin improved by 530 basis points to 31.2%.

Our continued improvement is driven by the effects of our system optimization initiative, which was completed in 2016, and demonstrates the higher quality of earnings that we are now generating through our higher royalties and rental income, along with our ongoing focus on G&A expense.

At our Investor Day in February, we announced our goal to reduce G&A to 1.5% of global systemwide sales by 2020 and committed to providing additional details surrounding our plan on this call.

We continue to believe that we can achieve approximately $35 million of savings in G&A and now expect to realize about 3/4 of these reductions by the end of 2018.

As part of this process, we will align resources with a priority on growth, ensuring that our efforts focus on continuing to drive profitable same-restaurant sales growth and supporting our franchisees, which is critical to the brand success and to achieving our 2020 goals.

Our ultimate goal is accelerated growth, fueled by a strong brand, a higher-performing team and our exceptional and dedicated franchisees.

GP will provide more details on the timing and related costs of the restructuring later in the presentation.

As a result of our performance in the first quarter, higher visibility into our G&A savings plan and outlook for the remainder of the year, we are increasing our 2017 outlook for adjusted EBITDA.

We were able to deliver solid same-restaurant sales growth on a 1- and 2-year basis behind a strong promotional calendar.

As a result, according to NPD CREST, we were able to gain QSR burger category traffic share in the first quarter, our sixth consecutive quarter of traffic share growth.

We continue to highlight our quality differentiation by focusing our messaging on our fresh, never-frozen beef, and we are seeing that message resonate with the consumer.

We also highlighted this message through our strong social media presence that drove significant attention and engagement in the quarter.

In addition, we began our partnership as the official hamburger of the NCAA with the Drive to the Final Four, a 3-week-long road trip that celebrated fans going to unreasonable efforts to support their team, just like we do to have fresh, never-frozen beef in our restaurants.

We kept the 4 for $4 fresh and ownable by adding the Double Stack, brought back our popular North Pacific Cod sandwich and highlighted the Asiago Ranch Chicken Club, which were all part of our balanced marketing plan.

We are encouraged by our first quarter results and are excited about the opportunity to provide more access to our great food as we expand our global footprint.

Our brand has earned the right to grow, and we are executing against our plans that we talked about at Investor Day to reach 7,500 global restaurants by 2020.

We have a strong pipeline of projects to deliver our 2017 net new restaurant development growth goals of 1% in North America and 12.5% internationally.

As I mentioned earlier, we opened 33 new restaurants across the globe, with 18 coming from North America and 15 in our international markets.

Net of closures, we opened 14 restaurants globally, with 6 in North America and 8 in international.

Behind our focus on restaurant-level economics, along with our innovative designs, joint capital planning, development commitments and new incentive structure, we are confident we can build on our momentum throughout the rest of 2017 and into the future.

Along with new restaurant development, we continue to make progress towards our Image Activation goals.

About 33% of the Wendy's system is now Image Activated, and we continue to expect that the global system will reach 42% by the end of this year.

Our progress on Image Activation provided a tailwind of 60 basis points to our North American same-restaurant sales in the quarter, and we continue to expect IA to provide a tailwind of 80 basis points for the full year.

Franchisees continue to recognize the positive benefits of Image Activation.

And with our visibility into our future pipeline, we remain confident in our 2020 goal of image activating 70% plus of the global system.

Going forward, we will be providing quarterly updates on our systemwide sales as we track towards our 2020 goal of $12 billion of sales.

A balanced marketing approach contributing to consistent same-restaurant sales growth, new restaurant development and the reimaging of existing restaurants are all key factors that will enable us to achieve our 2020 target.

In North America, systemwide sales growth outpaced same-restaurant sales by almost a full percentage point, driven by the positive benefits from our new restaurant development.

Internationally, we showed great year-over-year growth of 14.1%, driven primarily by strong net new unit growth within key markets that were highlighted at Investor Day.

New restaurant development is a vital part of growing systemwide sales.

And one way we continue to strengthen our new restaurant pipeline is through facilitating Buy and Flip transactions, which also allows us to transform our franchise community.

During Q1, we facilitated 116 Buy and Flips and now expect a full year total of about 475, which is up from our prior estimate of approximately 400.

Buy and Flips ensure we are putting restaurants in the hands of well-capitalized franchisees that are committed to long-term growth, which will provide great benefits to our system going forward.

Everything at Wendy's centers around delivering on our brand promise of delighting every customer, period.

In order to achieve this, we have to be focused on providing great value, investing in the quality of our food, delivering exceptional service and elevating our restaurants.

We talked at length during Investor Day about all of the work we've been doing around The Wendy's Way, initiatives like the system's $30 million investment to move to smaller chickens, making the fillets more tender and juicy; our focus on customer service, with customer experience playbooks and training rolled out to the system; and our continued focus on providing great value, whether that's the fresh, never-frozen North American beef that is served in our restaurants daily, the 4 for $4 or other promotions that span our entire menu.

When we do right by the customer, we bring our brand purpose of creating joy and opportunity through our food, family and community to life.

All of this work is paying dividends.

At Investor Day, we showed you this slide.

And we were proud to say that at the end of 2016, 13 of our key brand health metrics were improving year-over-year.

Today, I'm even more proud to say that at the end of the first quarter, that number has increased to 21.

This is validation that our brand is on the right track, and we will continue to focus on The Wendy's Way to benefit our brand, our customers and our franchisees.

And now here is GP to take you through our first quarter financial highlights.

Thanks, Todd.

Company restaurant margin came in at 16.7% in quarter 1, a slight decrease compared to the first quarter of 2016.

The decrease was primarily a result of higher labor cost, partially offset by lower commodity cost, which were both expected and part of our 2017 plans.

G&A expense was $52.4 million in quarter 1 compared to $64.7 million in 2016.

The 19% year-over-year decrease was mainly due to lower professional fees and legal reserves, lower incentive compensation and savings from our system optimization initiative.

Adjusted EBITDA was $89.2 million in the first quarter of 2017, a 9.1% decrease compared to the first quarter of last year.

Our 530 basis point improvement in adjusted EBITDA margin exemplifies our higher quality of earnings resulting from our system optimization initiative.

Adjusted earnings per share was $0.09 in the first quarter of 2017 compared to $0.11 in the first quarter of 2016.

Our year-to-date free cash flow was $23.8 million, a doubling of our cash flows generated in quarter 1 of 2016.

The majority of this increase was driven by reduction in capital expenditures.

We are proud of our first quarter adjusted EBITDA results as we were lapping over some significant headwinds from the prior year.

The combination of increased franchise revenues, along with significant G&A savings, helps to overcome the $20 million of sold restaurant EBITDA.

However, our solid operating performance was more than offset by the $12 million lease buyout gain recognized in 2016.

Even with the year-over-year decrease in adjusted EBITDA, we were able to continue to improve our adjusted EBITDA margin, which is a testament to our improved quality of earnings.

Switching now to adjusted earnings per share.

The main story of the quarter was the year-over-year decrease in adjusted EBITDA, which drove $0.02 of dilution.

The positive benefit from our ongoing share repurchase program offset $0.01 of dilution from a year-over-year increase in our tax rate.

Now I would like to provide more context on our G&A savings initiative.

We have done a lot of work since Investor Day getting our plan finalized, and we are now able to provide additional details on the cost associated with this initiative as well as an updated time line on when these savings will be achieved.

As Todd mentioned, we remain very confident in our ability to achieve approximately $35 million in G&A savings, and we now expect to achieve approximately 3/4 of the total savings by the end of 2018.

Our updated 2017 guidance reflects some G&A savings being realized in the second half of this year.

As far as costs go, we expect total cash expenditures to be around $23 million to $27 million, which will start to be incurred in the second half of this year and finishing in 2019.

About half of these cash expenditures are expected to occur in 2018.

We are confident that the steps we are taking will enable us to be an efficient growth company and will provide us with a great glide path towards our long-term adjusted EBITDA margin target of 38% to 40%.

Returning cash to shareholders remains a top priority for us.

Following the Board of Directors' authorization of our new $150 million share repurchase program, we began repurchasing shares in late February.

And by the end of quarter 1, we repurchased a total of 1.3 million shares for $17.8 million.

In addition, we estimate that our approximately 18.5% interest in Arby's continues to be valued at around $320 million, which may drive additional cash flow in the future.

We ended quarter 1 with $193 million of cash on our balance sheet, which, along with continued free cash flow growth, provides us the ability to effectively and consistently return cash to shareholders.

We continue to believe we have the right capital structure in place, giving us the ability to return cash to shareholders while still investing in our business to drive future growth.

As you know, all of the funded debt within our capital structure is made up of fixed-rate instruments, and we continue to be comfortable with our leverage in the 5 to 6x range.

On a trailing 12-month basis, our leverage ratio currently sits at 5.5x, right in the middle of our range.

Now let's take a look at our 2017 outlook.

As a result of our performance in the first quarter, higher visibility into our G&A savings plan and outlook for the remainder of the year, we are increasing our adjusted EBITDA guidance.

We now expect adjusted EBITDA to come in around $400 million to $406 million, up from our prior guidance of $396 million to $404 million.

This represents growth of 2% to 4% when compared to 2016, which is something we are proud of considering the significant headwinds that were generated last year from selling around 300 company restaurants as well as the $12 million lease buyout gain.

After finalizing our G&A savings plan, we now expect G&A to come in at the low end of our previously issued guidance of $210 million to $220 million.

Due to a headwind in beef prices, we are now expecting commodity inflation of approximately 1.5% to 2%.

The higher commodity cost outlook is driving our company-operated restaurant margin guidance lower to approximately 18.5%.

The rest of our guidance remains consistent with what we disclosed at Investor Day, including adjusted EPS, which was not increased due to a headwind in shares outstanding from an unanticipated dilution driven by the increase in our stock price.

Now I will hand the presentation back over to Peter before we open up for Q&A.

Thanks, GP.

I'd like to quickly review some upcoming events on our Investor Relations calendar.

On Wednesday, May 24, GP, Lauren Cutright and I will be in New York for a 1-day road show hosted by Will Slabaugh of Stephens.

On Tuesday, May 30, GP, Lauren and I will be visiting the Mid-Atlantic for a 1-day road show hosted by Dennis Geiger of UBS.

Later that same week, on Thursday, June 1, Todd, GP, Lauren and I will be in Boston for the RBC Consumer and Retail Conference.

If you are interested in meeting with us at any of these events, please contact the respective sell-side analysts or equity sales contact at the host firm.

And finally, on Wednesday, August 9, we will release our second quarter earnings and host a conference call.

With that, we are now ready to take your questions.

(Operator Instructions) Your first question comes from the line of Sara Senatore of Bernstein.

I wanted to see if I could ask a little bit about the competitive environment and then perhaps the implications for margins and cash flow.

First, on the competitive environment, what are you seeing in terms of pricing?

You've talked about inflation in beef and -- pressuring margins going forward.

So I suspect that means you're not looking to take price up with inflation.

So if you could talk about that as well as some of the initiatives that you're seeing other companies doing.

Obviously, fresh beef is not something that McDonald's is talking about.

So that's kind of point one.

And then related part 2 is just, I think your cash flow outlook had, at some point, anticipated $2 million AUVs and 20% restaurant margins.

Is that still necessary?

Is G&A an offset if you don't get there?

And is it fair to assume that we can still see a pretty nice step-up in cash flow in 2018 given that, that's I think a big part of the Wendy's story?

Thanks, Sara.

I guess a couple of comments, and I'll start with the consumer, right?

The consumer continues to be very responsible even with growing discretionary income, right?

You're seeing saving rates just continue to increase.

You see them paying down debt.

And they're still managing higher costs like health care, rent and student loan debt.

So what you're seeing in the competitive landscape is a lot of work on not only talking about the core but a lot of work around continuing to bring focus in on the value side of the menu.

So the competitive landscape continues to be out there.

You're seeing a lot of value messaging from the competitive set.

And that's why it's been so important for us to continue to run our High-Low and balanced marketing calendar.

We continue to scream from the rooftops, we have a key point of differentiation, fresh, never-frozen North American beef, but we also complement that with great offerings like our 4 for $4, all embedded and grounded in the quality messaging that we have to set ourselves apart.

As you think about where the landscape's going, we've been very disciplined on price for the last several years.

So we feel like we really preserved our pricing power, and we wanted to preserve our pricing power at a time when the gap would start to close on food away from home and food at home.

And it's closed a bit, but it's still very, very wide, so we continue to look at the consumer economic model.

But we're going to pull all of the levers to manage our margins.

Bringing in more traffic is clearly the first thing that we're focused on, very excited to continue to grow customer traffic share in the burger category.

In the first quarter, we were up 0.6 share point on traffic in the burger category, but we'll also look at, how do we drive mix?

Where do we take selective pricing?

We'll continue to be focused on driving Image Activation to get a nice tailwind.

And later in the year, technology will continue to help as we work that tailwind.

So we'll keep reacting to that.

You made a comment around the competition talk about fresh.

Well, clearly, it validates that fresh tastes better.

We've been serving fresh beef in -- on all of our menu items in all of our restaurants since 1969, and we'll continue to leverage that point of differentiation for a long time to come.

I'll turn it over to GP to talk a little bit about free cash flow.

Yes.

Sara, on cash flow, right?

At Investor Day, we removed the $2 million AUV from our goal set and repositioned our growth goal.

And as part of this, we issued our free cash flow guidance, right, and the guidance is unchanged.

For '17, we are continuing to guide $160 million to $185 million, so it's $140 million improvement versus prior year.

The way to think about this, remember at Investor Day, we had not included any cash flow impact out of restructuring charges.

So the way that you have to think about this is a slight headwind on cash out related to restructuring 2017 as obviously a tailwind and offset as we've increased our EBITDA guidance.

So the net-net effect was unchanged.

Hence, the reason why we didn't improve or change our guidance for 2017.

Quick recap for 2020.

Remember, between '17 and 2020, we said we are going to grow cash flow by another $100 million or 17% CAGR, driven by earnings growth and further reduction in capital and core working capital reductions.

Debt outlook remains intact.

Your next question comes from David Palmer of RBC Capital Markets.

A question on the discounting environment and your own strategy.

It feels like we're coming to the end of the deflation cycle, yet we're in this final flurry of the -- sort of a summer of discounting.

And how do you see this transitioning from here, perhaps the environment, perhaps yourselves?

Do you see the appetite for discounting decreasing among franchisees as you get into inflation?

And do you see yourself being able to wean yourself off of this 4 for $4 with the Double Stack and not having a fallout on the sales going forward?

Yes, no, David, we've got a lot of support from our franchise community.

And it's really driven by the fact that having a balanced calendar, both high and low messaging, is bringing in more customers.

And bringing in more customers is driving operating leverage and is helping them, at the end of the day, drive penny profit and more money to the bottom line.

So we feel like that's a great plan not only in the short term but in the long term.

If you think about 4 for $4, we've always talked that we're going to keep it fresh and ownable.

And we made an evolution and did some innovation last year.

We brought Double Stack in this year.

But our value play isn't just all about 4 for $4, right?

Think about the things that we did during the course of last year, things like $0.50 Frosty.

Those things get folks excited to come into the restaurant.

And QSR continues the place to be, right?

We serve a basic consumer needs: speed, convenience, affordability.

Where we feel so proud is we can continue to differentiate on the quality of our food, fresh, never-frozen North American beef, which we've been screaming from the rooftops for the last 18 months.

The Image Activation creating a better environment in our restaurants, making sure that the food is forward, so everybody understands that it is prepared fresh when you come in.

It's made to order.

It's got full customization.

So we think having that balance always will continue to bring in both good and bring in the high-end consumer as well as the low-end consumer.

And we don't see that changing.

We see that continuing to be the playbook that we're going to need to continue to run.

As I said earlier, we have preserved our pricing power, so we have that opportunity if and when we choose to take it.

And we've been much more disciplined over the last 2 years than a lot of the competitive set, so we start from a better spot.

Your next question comes from Matthew DiFrisco of Guggenheim Securities.

Can you give us a little bit of an update on the digital side and when we could expect to have a national rollout?

Is that still on schedule for mobile order and pay?

Just looking at some of your peers out there with Burger King and McDonald's, I guess, targeting some pretty near-term rollout to that on a national basis.

Yes, Matt.

We're excited about where we are going in technology.

And as we've talked for a while now, it really starts with moving our system to a common POS.

That's the platform to allow us to then ramp up and scale up fast on everything that we do.

We've got over 90% of the system now on a common POS.

The bulk of the rest will be completed here in Q2.

And we're still on track with what we've talked about earlier this year at Investor Day, to have half the system up on mobile ordering and capable by the end of the year.

We're testing a loyalty program in the back half of the calendar year.

We still have strong demand for kiosks, but you'll see that coming more in the back half of the year and still committed to 1,000 restaurants having kiosks.

And we're testing other things like delivery, so we got a delivery test in Columbus and Dallas right now with DoorDash.

We're learning and understanding what the consumer expectation is around that.

So across all of these initiatives, because we've created the platform, we're ready to scale up quickly when we need to.

And it really is then making sure that all of the elements are working, so when we want to drive awareness to the consumer, we make sure that they understand we're serving or solving for a consumer need and really complementing why we exist in QSR: speed, convenience and affordability, and making it easier for them to have access to our food.

So all on track.

Your next question comes from Will Slabaugh of Stephens.

Had a question on beef, and I realize that's had a pretty rapid move upward here in recent weeks, so we'd expect some near-term pressure there.

But it seems that most are calling for beef to come back down through year-end and then through '18 as well if you look at the future.

So I'm curious what you're hearing out there and if the guidance at the restaurant level coming down is just you being more conservative or if there's a reason we should think about beef remaining at these levels and then kind of getting to pricing on that, how that might impact your pricing outlook with your franchisees.

Thanks for the question.

So beef clearly is inflationary at the moment.

We have high demand for beef, which is good.

Consumers want to eat beef.

We are slightly constrained.

We are exporting a little bit more and importing a little bit less.

So overall, it puts the beef market under pressure.

We are cautiously optimistic that commodity inflation is not going to get out of control on the beef side.

So that's why we have only increased the guidance to about 1.5% to 2%.

And as Todd said, right, we have been extremely disciplined on our pricing model.

We are taking into account the consumer economic model and our own restaurant economic model.

And once the time is right for us, we're going to take a pricing move, not quite yet.

And Will, as you know, we're into that cycle with summer holiday starting up where you would normally see a little bit of pressure on beef moving up.

And with the cost of inputs still being light, you're starting to see a lot of the cattle folks holding onto those steers and cows a little bit longer because they can afford to.

So we hope once we get through some of this cycle that it provides a little bit of less pressure as those animals go to slaughter.

Your next question comes from Gregory Francfort of Bank of America.

Maybe just one quick one.

The 75-store increase in the Buy and Flips, are any of those pulled forward from the 200 you're expecting in 2018?

Or are they all incremental to what you previously expected?

And then just going back to Sara's question on the value side, are you seeing any changes in the value mix of items on your menu or any changes in how customers are using you from the value side?

Yes, Greg.

I guess, on 2 pieces.

One, the additional 75 Buy and Flips, not a pull-forward from next year.

We still expect into the future about 200 Buy and Flips for the foreseeable future.

It's just, one, we've got a long-tenured franchise system, and as -- we've got a lot of tenured franchisees looking at what do they want to do in the next chapter of their life.

We've created a lot of interest for folks wanting to get into Wendy's and created a very liquid market.

So it gives them the option, if they want to move to that next stage of their life, to do so.

And we're here to facilitate.

And as people learn more and more about that, it gives them the opportunity to involve us with the Buy and Flip activity.

When you think about the value side, we're not seeing any change in mix.

We've been running a very balanced message on the high and the low, and we continue to see things mix out similarly year-on-year.

As we start to lap all of the 4 for $4 activity from a year ago, you do see some different dynamics on mix on our check as it would have been all new into the base with the compares a year ago, now it's already in the base as we continue to lap in.

So that would probably be the only different dynamic we see today.

Your next question comes from John Ivankoe of JPMorgan.

The question is on CapEx.

I think this year's guidance was $80 million to $90 million, of which you did approximately $15 million in the first quarter.

So I mean, can you talk about where $65 million to $75 million of CapEx will be spent in fiscal '17?

And that -- put that in the context of the $65 million, I think, that you are expecting to spend in fiscal '20.

And I know the company is going through a lot of best-of-class benchmarking versus a lot of your broader peers.

But your CapEx to EBITDA still remains fairly high relative to a lot of those peers in the out years.

So just wanted to get a sense of if there's any flexibility on these numbers.

Yes, you're right.

In the first quarter, we spent $15 million in capital.

So yes, if you analyze it, you would think that we are going to be lower than the $80 million to $90 million range.

It's kind of typical for us.

We are kind of low in our capital spending in the first quarter.

It's going to ramp up in quarters 2 and 3. So we still have full visibility and reconfirmed that the $80 million to $90 million guidance range is the right range for us.

And as we said previously, we have kind of 3 buckets of capital.

It's development capital, IT capital and maintenance capital.

And as we are sloping down to what we think is a reasonable number, the $65 million by 2020, kind of all buckets are going to contribute to the $20 million reduction, probably with IT being a little bit more than the fair share.

So overall, still confident on both guidance elements, the 2017 guidance element and the 2020 guidance element.

And could you remind us where you are on company store Image Activation?

I mean, is that still an active project?

I mean, I can't imagine it continues all the way through 2020, but when does that roll off if it hasn't already?

Well, we're at 73% Image Activated across the company restaurants.

So over the next several years, built into our capital outlook, we continue to reimage.

We've got the system reimaging, about 10 a year.

We're being smart about when and how we reimage those restaurants, and we're getting to the ones that we think we can get the biggest lift and the biggest return first.

And then we'll sequence them out within the capital commitments that we made to our board and our shareholders.

And for both of you, is -- I mean, is CapEx to EBITDA something that's a metric that you look at?

Have you thought of it?

Is that something that may be important even longer term that you start to approach some of your peers?

John, it's actually a metric we don't look at.

We do kind of a bottoms-up plan to make sure we stay proactive on our maintenance, making sure our restaurants are in well order and making sure that we have our commitments to actually build our fair share of new restaurants.

And when you add it all up, we feel like that $65 million range that we have for 2020 is the right range for us.

Your next question comes from John Glass of Morgan Stanley.

Todd, can you maybe be specific, when McDonald's tested fresh beef in Dallas, did that negatively impact your sales?

Or I guess you could also flip it around and say, with a competitor talking about fresh beef, does it drive awareness and actually help sales?

Yes, John.

As we looked at where they were testing, we're very conscious of what they were doing, and we didn't see material impacts to our business when that message was coming out.

And as you know, as they came out with their announcement, we had some fun in the social landscape and the social media with that announcement because it does create more awareness, and it does create some credibility to what we've been saying for almost 48 years: fresh, never-frozen North American beef tastes better, and the consumer prefers it.

And they must be seeing the same thing if that's where they need to go.

But remember, they're not -- they're talking about it in the future, sometime in the middle of next year on just one of their hamburger lines.

So we'll continue to stay true to the message that we've had consistently for the last 18 months, right?

Fresh, never-frozen beef sourced so close to our restaurants, it never needs to be frozen.

Fresh is for now; frozen is for later.

And then our latest messaging about going to unreasonable efforts to make sure that we have fresh beef in our restaurants.

That's all helping us, you're seeing in our brand health metrics.

You're seeing it in the consistency of our growth, and you're actually seeing it in the share gains that we're seeing in the hamburger category traffic share on numbers that we track.

Okay.

And GP, just 2 follow-ups for you.

On the Buy and Flips, can you just confirm what the incremental revenue you expect for the 75 and the fees you're getting?

And do you expect that -- does that flow through?

Or do you have offsetting expenses?

Just remind me of that dynamic.

And then on the $35 million G&A savings, what -- is that 2016 as a base?

Or is an adjusted '16 as a base?

Just remind us what the base of the $35 million reduction is off of.

Okay.

John, on the Buy and Flips, we are earning a technical assistance fee per flip of $40,000.

And then the other thing to point out is we are going to incur third-party expense.

These third-party expenses are sitting in other operating expense.

In the past, up and down some system optimization, those costs for Buy and Flips were actually kept outside of adjusted EBITDA in the system optimization line.

As of 2017 and including our guidance, we have like the cost of those Buy and Flips sitting now as part of adjusted EBITDA.

In other operating expense, you can expect about a 50% margin we are making on that.

In terms of G&A, the sort of $35 million reduction is really with the goal to get us to 1.5% of systemwide sales.

So that's an absolute level of $180 million in 2020, and that represents a $35 million reduction versus the midpoint of the 2017 guidance of $210 million to $220 million.

Your next question comes from Alton Stump of Longbow Research.

Just a quick question on the flip guidance being raised by 75.

Is any of that a pull-forward?

Or could that potentially mean that we could see higher numbers in coming years than what you have in the past talked about doing?

Yes, no, based on what we see right now, the actual 75 additional Buy and Flips isn't a pull-forward.

It's all incremental activity as folks have come to us to help on the Buy and Flips.

And based on what we know today and based on all the joint capital planning and our dialogues with our franchisees, we still are very confident and comfortable that the 200 that we'll see each year into the next several years is a good number to plan around.

But we don't control it, right?

We get a lot of franchisees thinking about where they are on their journey.

And if they want some help to move on to the next chapter of life, we're here to help.

Makes sense.

And then just want to follow up, and I'll hop back in the queue.

Just on the commodity cost front, with that starting to turn the corner now into at least a modest inflation or it's clear labor costs are also going up for everyone, are you getting more of a push from franchisees on their end and just think about it -- taking more pricing sooner rather than later now that we are seeing not just labor but now also commodity costs moving upward?

Alton, our franchisees feel good about the economic model, right?

There is pressure on wage inflation, and we're starting to see a little bit of pressure on commodities.

But we know that the first element to continue to drive a strong restaurant-level P&L is to drive in more customers more often.

And that's where we've been focused the last couple of years.

We continue to see that we're bringing in more customers, and it's actually allowed us to preserve our pricing power.

So we have a lot of levers that we can pull as we go throughout the year.

We got selective pricing.

We have a great, strong, balanced High-Low calendar for the rest of the year.

We do believe that we can continue to drive some mix at the restaurant level, and we're seeing some nice returns and lifts still really driven on customer count traffic from Image Activation.

So those are all tools that are out there, and we're really playing this game for the long run and doing what's right for the economic model, not only in the current quarter but for the much longer run, to continue to delight every customer, period.

Your next question comes from Jason West of Crédit Suisse.

Just one quick one on beef.

If you guys could just maybe offer what your guidance implies on beef inflation now versus where it was before.

And then a bigger question on store growth.

It sounds like you guys are saying 1% net unit growth this year in North America, which I think is around 60 stores, and that number needs to ramp significantly as you move towards 2020.

So I think about 150 a year, something in that range.

So just maybe you can update us on how those conversations are going with franchisees, and as you're asking them to remodel and to build these stores, it just seems like a lot to ask for the system.

Yes.

I guess first question on beef, we haven't given specifics on what the beef inflation is, and we did say that beef was inflationary at the beginning of the year with the deflation in chicken, outside of the $30 million of investment that we had to make in the smaller birds.

So what we're saying is it's just become a little more inflationary than what we had in our base plan.

And all told, the commodity basket is up 1% to 1.5% (sic) [1.5% to 2%]inflationary now for the latest outlook.

On the development front, we -- you've got the numbers right, and it does take a little bit of time to build up a development pipeline.

When you think about where we are, in the late last year at investor -- or at our convention, we announced a new incentive structure, our new development.

We got a lot of folks excited.

We've talked a lot about the new incentive structure at Investor Day.

And we're doing all the joint capital planning.

So we're starting to really build up that pipeline.

And that's why we feel really confident on the openings that we think we can do in this calendar year.

And we're also building a strong pipeline into 2018 because that's what a development pipeline needs to just have in place to continue to deliver growth year-on-year.

So we feel good about where that's going, all progressing.

The economics on the restaurant continue to be strong, right?

We continue to work to take down the investment.

The smart design is an opportunity that's about $300,000 less than our older design and can get onto smaller footprints, so a half acre or less.

So we can provide more access to our brand.

All of those things are healthy and fueling that pipeline on the North America front.

As we continue to create a stronger company economic model at the -- or a stronger restaurant economic model, that also helps us mitigate closures over time because those restaurants continue to become stronger performing, might give us a chance to do something around reimaging those restaurants to continue to bring in more customers more often.

So we feel good about both fronts, the openings and the closures, and feel really confident that the guidance we've provided is solid guidance for 2017 and beyond.

Your next question comes from Michael Gallo of CL King.

My question is on international.

I was wondering if you could speak to what you're seeing internationally where you're obviously ramping up the unit growth, how the Wendy's First Kitchen stores are doing and then also just kind of geographically, how you're seeing the model there nationally evolve.

Yes.

Thanks, Mike.

On international, we're still in the really early innings of our focus strategy.

And we've talked about being disciplined on new market entry and looking at another 2 to 3 over the next markets that we'd enter over the next several years.

But really focused on the core 7 markets that we highlighted at Investor Day.

And we're seeing that focus pay off.

And when you start to think about where the net new development is really coming from, clearly, Japan is driving a lot of that net new development.

We're now up to 14 restaurants open in Japan.

On a calendar year, we think that we could do 15 plus on those conversions of Wendy's First Kitchens.

And we're seeing a nice economic model working for our partners in that region of the world.

So we feel good there.

We've seen a lot of openings happening in Indonesia, smaller AUVs, so less of an impact on the business but still a positive that we continue to provide more access to the brand.

And we're confident that our focus strategy around really scaling up the markets that we're in as well as being disciplined on new markets that we would enter is -- are going to continue to pay dividends.

So we're seeing more openings.

We're seeing less closures.

And at the end of the day, that's healthy and really going to drive this 12.5% net unit growth story that we've built into the plan for this year.

Your next question comes from Jeffrey Bernstein of Barclays.

Two questions.

Just one on the comp side of things, the 1.6% in the first quarter, I'm just wondering whether you'd offer any kind of sequential trend worth noting or color into the second quarter.

It seems like you're still confident in the 2% to 3% for the full year.

I'm just wondering -- obviously, that's clearly an acceleration.

I'm wondering, other than easy compares, what gives you that confidence especially as your largest competitor is seemingly expecting a similar uptick.

And then I had one follow-up.

Yes, Jeff.

So if you think about kind of the year to go, our comps do get a little bit softer.

And we've got a lot of the early excitement from 4 for $4 behind us from the fourth quarter last year and the first quarter of this year.

And we've been out in the market testing a lot of things, testing a lot of interesting items that we feel very good about, that lend us confidence that we can continue to deliver that 2% to 3% growth on a full year basis despite whatever the competitions throws at us.

And it will be this balanced High-Low message that we'll continue to put out there.

It'll be keeping 4 for $4 fresh and ownable.

It'll be bringing in other value promotions in as appropriate.

And there's other things that we've tested that we feel good about that we'll bring to the market that I wouldn't want to talk about on today's call.

But we have a very disciplined testing regimen.

We're out testing a lot of stuff.

And we're really looking out in 12 to 15 months ahead and making sure that we continue to fill our toolbox with news to continue to bring in more customers more often.

I won't comment specifically on the start to 2Q.

We tend not to do that.

A lot of folks are out doing their own channel checks, but we continue to remain confident in our full year guidance of 2% to 3%.

Got it.

And then, GP, just on the EBITDA margins, I know at the Analyst Day, you talked about 600 basis points of expansion.

I think it was over the next 3 years.

I'm just wondering, with the G&A incremental savings you're seeing here, I mean, how much of that 600 basis points would you say is in your control and identified presumably within the G&A if, for whatever reason, you didn't hit the top end of your 2% to 3% comp guidance range?

Yes, Jeff.

What we are seeing -- you're right, right, between '17 and 2020, we are committed to expand margin by 600 basis points, and we have 3 levers, right?

The one lever is growth, growth in North America and international.

That's a portion of it.

The second portion is get to a 20% margin, so that's not too much for us.

And then last but not least, G&A is a lever, which is -- you can do the math, is about 250 to 300 basis points.

As you know, we are transitioning to a very resilient and predictable economic model.

So if SRS is going to go down by 1%, it doesn't significantly impact our margin targets.

The point that I want you to take away is that we are committed to achieve the 38% to 40% margin target, and we are well on track on it.

Your next question comes from Jake Bartlett of SunTrust.

I had a question on the 4 for $4 platform and the Double Stack, and seems like a very deep value to me, and you've been running it for now 5 months.

Seems much longer than would be typical.

How concerned are you that coming off the Double Stack will be a pressure?

Or do you think that you can stay with the Double Stack and kind of keep that as a kind of a consistent promotion?

Yes, Jake.

I wouldn't want to give you our specific plan on when and how we're going to come off of the Double Stack and the 4 for $4.

But we continue to think about, what do we put in the 4 for $4 and what is our plot to come out of it?

And that's why we've done a lot of work testing other value propositions over the course of the better part of the last 18 months to 2 years.

So we've got a big toolbox that'll give us the confidence that when we want to come off of that, if we want to come off of that, that it will allow us to come off of it smoothly and move into something different without having an impact to the business.

Things like the $0.50 Frosty give us confidence that there are other value propositions that can bring in more customers and continue to bring in nice check growth for us along the way.

So we feel like we've done the diligence, we've done the research, and we feel good about the plan going forward.

If you think about the history of Double Stack, right, a while ago, it was at $0.99.

It moved up dramatically from there.

So we've come off of things in the past, and we'll manage that plot as appropriate if that's a decision we decide to make into the future.

Okay.

And then in this environment, this promotional environment, it's been -- other concepts have had trouble or less success promoting more premium products.

I'm curious how you're doing on that front.

I know you're employing the High-Low strategy, but something like the mozzarella chicken sandwich or -- and the mozzarella salad, is that mixing okay?

Or is this still an environment where something like that's not going to resonate very well?

Yes.

I wouldn't want to comment on the second quarter and where promotions are at this point in time.

But if you think about what we've done on our calendar, it's become much more balanced over the course of the last couple of years.

So we do sprinkle in LTOs, but we're sprinkling them in at less of the rate than we might have 2 years ago.

And that really helps us be our best selves.

It brings in incremental consumers.

It brings in news, but it allows us to be our best operators that we can be as we train in and then discontinue LTOs.

But what we really want to continue to do is continue to scream from the rooftops our unique brand positioning around fresh.

And you can see that we've been very consistent the last 18 months around fresh, never-frozen North American beef.

We really continue to talk about our freshness message of everything that we do in our restaurants every day with whole heads of lettuce and fresh-chopped vegetables every single day and absolutely committed to continue to upgrade the quality of our food.

We did it on hamburgers 1.5 years ago with moving back to the original buns, the original mayo, putting in into a foil wrap and just extended the foil wrap to our chicken sandwiches, made a big investment in chicken to go to the smaller, lightweight birds to make sure that those fillets are tender and more juicy.

And we're going to continue to up our game on the quality of food.

And consumers are voting with their feet and are seeing it in our brand health metrics.

So we feel good about -- that, that message continues to connect, so it is a balance.

And we feel like we've got the balance right.

Great.

And then lastly, in connection to the Buy and Flips and the increased target there, did those come with commitments and increased commitments?

And maybe on that front, if you could sort of just outline what kind of commitments you have currently for the -- with your store growth.

I think, by my math, it was roughly about 40% of the targeted was already committed to.

But if you could just run through that, that would be helpful.

Yes.

So anytime we do a Buy and Flip, if the market should have more Wendy's restaurants, and we've done all of our planning within that trade area, as we move on with a franchisee that's exited the market and bringing on a new one, we will put a development and commitment in place.

And it's really dependent on the market, so it's hard to predict on average which market and how many development commitments is more a function of the sale of which markets are happening.

But if you go back in our history, right, from SL 1, 2 and 3, we got commitments when we sold those almost 1,100 restaurants of 237 new development commitments between 2015 and 2020.

From all of the Buy and Flips that we've done to date and what we had in our original guidance, with the 400 that were out there, we thought there'd be about 74 commitments to Buy and Flips.

The company was going to do 10 a year from 2015 to 2020, so that's 70 over that 7-year time frame.

And then just other negotiation commitments, roughly around another 20 commitments that we have.

So we have 400 commitments right now for new development against the goal of 1,000 in North America.

Your next question comes from Matt McGinley of Evercore ISI.

So thanks for the detail on the reductions in the G&A.

That's really to model out the free cash flow inflection for the company over the next few years.

So the question is on -- from an organizational standpoint, what does getting to 75% of that long-run goal of $180 million look like in 2018 and 2019?

I think at the Investor Day, you had alluded to both headcount reductions and productivity over time.

So I'm just kind of curious as, what's in that number over the next few years?

Yes.

So Matt, how we thought about G&A, non-people G&A reduction behind our zero-based budgeting initiative is part of the $35 million savings plot.

And then the remainder is clearly clean sheeting of our organization and prioritizing in terms of our departments, with clearly a focus on making sure we're protecting growth and earnings growth.

And by doing this, we think we are getting it right by not being the best-in-class company from a cost point of view but basically sitting in the second quartile.

So we get the best of both worlds being fairly efficient but having a great ability to support our franchise community and support our growth.

We worked through it.

We really spent the time to make sure that we not only looked at it as reductions, but we made sure that all of our resources were put in a spot to better support our franchise community and to better enable our growth going forward.

And as we work through any G&A initiative, it's always a challenge with our internal employee base and with our franchise community.

And we'll continue to do it in the spirit of our values and treat people with respect and do the right thing.

So we've got a lot of great folks that are committed to our brand, but they do understand that our cost structure needs to continue to evolve to be competitive but to do in it in a fashion that supports growth in the future.

Got it.

And a follow-up question is on the -- you did not have a lot of change in the guidance for the year in this quarter.

So I guess this is a question that's a little bit more on the nuances.

But you dropped the restaurant-level margin guide by about 60 bps, which would be about $4 million on our calc.

But then you guided your G&A a little lower, so if you do the kind of midpoint math, that's probably a push between those 2 items.

So the question is, what bumped up the EBITDA guide by a little?

Is that just the increase in Buy and Flips?

Or was there something else implied in that increase in EBITDA?

You got it, there were 3 levers, right?

So we had the headwinds because restaurant margin came down, and we had 2 tailwinds.

The one tailwind, the incremental 75 Buy and Flips and the tailwind on guiding to the low end of the G&A guidance.

If you mix them all 3, that basically gave us the visibility to increase our adjusted EBITDA guidance with confidence.

Your next question comes from Jeff Farmer of Wells Fargo.

Just another follow-up on wage rate inflation.

So what strategy is beyond menu pricing have you guys been pursuing to mitigate at least some of the system's continued labor cost pressure?

So as we said, right, we -- at Investor Day, we are expecting labor cost pressures of about 4% in 2017, and we are pulling all levers that we can to actually overcome this.

And what are the levers?

Fore and foremost, drive traffic in our restaurants; secondly, clearly, investing in technology on the front end of the house behind mobile ordering and the rollout in kiosks; and then further tightening of our labor guide and back-of-the-house automation.

So these are the levers that we pull.

As we said, right, we need to protect the consumer economic model and the restaurant economic model.

We have been clearly very diligent and disciplined not to take price, and we have preserved the pricing powder.

Once it is right for us to make the choice, pricing is becoming obviously an additional lever for us, which we have not yet contemplated.

And just finally, you mentioned the 4% wage rate inflation for 2017, which, again, you guys have guided to for at least a few months now.

But looking forward to 2018, just from a supply/demand perspective with that employer force or employee force, is there any reason to believe that potentially, you do see wage inflation ease in '18 or I should say the segment could see it ease in '18?

Any silver lining out there in terms of what the labor picture looks like?

As we think about our longer-term guidance, we kind of assume that there's going to be continued pressure on labor, whether it's mandated or just demand.

But that's been contemplated in our long-term guidance, and that's why we're working so hard on all of the initiatives to make sure that we can create a better customer experience first but then continue to make sure that a lot of the consumer-facing stuff that we spend time, energy and effort on and labor, we find a smarter way to work through some of those things.

So we're assuming that in the outlook, and we'll continue to manage against it.

And something else happens, it would be a benefit.

Your next question comes from Andrew Strelzik of BMO Capital Markets.

Wanted to first ask about dayparts.

I know at the Investor Day, you guys outlined some strategies to really grow the afternoon and focus on the afternoon daypart.

Are you starting to see that come through?

Or is that something that's still on the come here?

And then secondarily, if you could just talk about the pace of unit closures, with the refranchise is largely complete and things like that, should we expect that the pace of closures is going to start to moderate or will it remain somewhat unpredictable?

Yes.

I guess 2 pieces.

One, on the daypart, I still think the opportunity is still ahead of us on that afternoon daypart that we talked about and the snacking daypart where there's opportunities to grow.

We've tested a lot of things.

We're looking at a lot of different things.

And I think we will have some opportunities in the future to attract more customers at that daypart.

As you know, lunch is still our biggest daypart.

Dinner follows that.

So we've got spaces to still continue to fill in the rest of the restaurant across the afternoon and the late evening.

If you think about the pace of closures, largely hard -- it's hard to predict.

We do a lot of work with our franchise community around the joint capital planning and get some visibility to where the closures are.

You've seen recently the pace of closures start to slow relative to our past.

And a lot of that's a function of having a stronger restaurant economic model and all the improvements made at the restaurant-level economic margins.

But it's one that we'll continue to watch.

And a lot of times, when we need to close a restaurant, it is a -- more of a function that the trade area moved away versus the economics.

But there are cases where it is the economics.

And the good news is when we close a restaurant, we're closing restaurants at about $1.1 million AUV, and we're opening new ones, especially if it's a relocation, at about $1.8 million.

So it creates a healthier, stronger system.

Your next question comes from Dennis Geiger of UBS.

Wondering if you could speak a bit more about the potentially changing commodity value environment and its impact on Wendy's relative to the competition.

I guess specifically, you've done a very good job enhancing your value platform, keeping 4 for $4 fresh.

But is it fair to say that a return to at least modest inflation could benefit you perhaps more than some of your key competitors given perceptions of quality and the premium menu offerings?

Yes.

What should happen in theory is that the food away from home and food at home gap is going to narrow.

And that could definitely benefit us in the mid- to long term, especially as we said now a couple of times on the call, we have worked very hard to actually really create and improve our value perception and really have worked very hard to be disciplined on price, i.e., having conserved our pricing powder.

So once the whole environment is becoming a little bit more inflationary, the gaps are getting smaller, there might be more traffic that goes into the restaurant space, which will overall benefit the category and us.

Your next question comes from Nick Setyan of Wedbush Securities.

So I appreciate the changing or the evolving kind of emphasis on the business on international and then obviously as more of the system becomes franchised.

But can we -- it would be really helpful to maybe understand what the comps internationally were.

And also given the fact that revenues are still -- greater than 50% of the revenues are still company-owned, would you be willing to tell us what the comp on the company-owned side was in Q1?

I guess 2 questions, Nick.

So we haven't disclosed publicly comps on the international business.

So -- but if you look at the first quarter, it's really driven primarily by the net new development in the system revenue growth.

So that's where we're going to leave it for now.

And as we progress in our journey on international and as it becomes a more material part of our business, we'll have to think how about we disclose and talk about it a little different.

But we're still early, early, early, right, in that international game, and we're seeing some nice wins and some nice tailwinds from that business.

But we know we have a long way to go.

On the -- and I assume you're asking about company comps in North America on same-restaurant sales?

Correct.

I'll turn now to GP.

He can walk you through the details on that.

Yes.

So the restaurant comps for company restaurants, we grew in the first quarter 0.8%, so it was lagging basically the total system.

On a 2-year basis, actually very good, right?

On a 2-year basis, company grew 5.6%, better than total system.

And where we have headed, we had a growth in check behind mix, no pricing, and a slight decline in traffic as we lapped obviously very strong traffic numbers in the first quarter of last year.

But if you look at the 2-year same-restaurant sales comp in the company arena, it's really on the heels of customer counts.

That's a function of disciplined pricing and a lot of IA activity that we had in the base in the quarter prior.

Got it.

And then just going back to the beef commentary, is it a fair assumption to kind of think of Q2 as a little bit higher in terms of COGS and then maybe coming down the second half of the year?

That's probably fair.

I mean, it's early, and we'll have to continue to watch where it is.

And -- but that's the normal cycle when you think about getting into the demands of summer beef pricing.

And just to be clear, I -- when I said commodity inflation earlier in the commentary, I said 1% to 1.5%.

It's actually 1.5% to 2%.

So I had GP taking a look at me, and I knew that I had a nightmare that was a little too light.

So I want to make sure you guys had that for your model.

Thank you.

That was our final question for today.

We thank you for participating in The Wendy's Company First Quarter 2017 Earnings Conference Call.

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