Wendy's Co (WEN) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the 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 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, adjusted earnings per share, adjusted tax rate, free cash flow and systemwide sales.

Investors should refer to our reconciliation 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 third 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 will hand things over to Todd.

Thanks, Peter, and good morning, everyone.

Let's start by taking a look at our third quarter highlights.

We have now delivered 19 consecutive quarters of positive same-restaurant sales in North America, a streak that is unmatched in the current QSR hamburger category.

Same-restaurant sales increased 2% on a 1-year basis and 3.4% on a 2-year basis.

These results include the impact from the unfortunate weather events that took place this quarter, which we estimate negatively affected our North America same-restaurant sales by approximately 30 to 40 basis points.

Before moving on, I want to say that our thoughts and prayers are with those who have been impacted by the recent hurricanes.

We've heard many stories from our franchisees and restaurant teams about how they have helped their local communities and for that, we are grateful.

We continue to execute towards our global expansion plans by opening 42 new restaurants in the quarter and have opened 110 restaurants year-to-date, which is almost 30 more restaurants than we had opened this time last year.

Global systemwide sales growth continues to outpace same-restaurant sales behind our restaurant development achievements with a 3.4% increase in constant currencies in the third quarter.

39% of the global system is now Image Activated, and we remain on track to achieve our 2017 target of approximately 42%.

We continue to make progress in adjusted EBITDA margin, which highlights our improved quality of earnings driven by higher franchise revenues and savings in G&A.

We are pleased to report a year-over-year increase of 400 basis points, bringing us to 31.5% in the third quarter.

In addition to adjusted EBITDA margin, free cash flow has also benefited greatly from our higher quality of earnings; and year-to-date, we have generated $123 million, which is more than 4x greater than a year ago.

Based on the encouraging results experienced during our test, we are starting to broaden our delivery offerings throughout the U.S. With DoorDash as our partner, we are targeting to have delivery available in 48 markets by the end of the year, which would encompass approximately 2,500 restaurants.

We are excited about expanding access to our brand further and continue to find new ways to provide convenience to our customers.

We continue to stick to our playbook of utilizing a balanced marketing approach and remain focused on driving profitable customer count growth.

As a result, according to the NPD group, we have held or gained traffic share in the QSR hamburger category for the past 8 consecutive quarters.

And our same-restaurant sales have outperformed the QSR sandwich category for 37 out of 39 weeks this year.

We started off the quarter by bringing back the $0.50 Frosty promotion for a second year.

This promotion continues to show the advantages of a strong price-pointed offering by driving traffic and contributing to check growth.

In conjunction with the $0.50 Frosty, we introduced the Bacon Queso trio, which was a great opportunity to show off our ability to innovate with on-trend flavors and also highlight our fresh, never-frozen beef and our improved chicken offerings.

Next up was the Giant Junior Bacon Cheeseburger $5 meal deal.

By adding this bundled offering to our menu while still keeping the 4 for $4 active, we gave our customers the flexibility to trade up for $1 and receive double the beef, double the bacon and double the cheese.

We also continued our partnership as the official hamburger of the NCAA by hosting highly visible tailgate events at college football games across the nation reminding fans that they should never settle for frozen beef.

Moving now to restaurant development.

During the third quarter, the global system opened 42 new restaurants with 29 opening in North America and 13 in our international markets.

Our year-to-date progress is even more noteworthy at 110 total openings and 49 net.

We're adjusting our 2017 net new unit outlook for North America and now expect to achieve between 0.5% and 1% growth, which is slightly lower than our original expectations of approximately 1%.

The adverse weather events experienced in the third quarter affected some of our key development areas, and at least 20 restaurant openings have shifted from 2017 to 2018.

Our outlook for international net new growth remains at 14%.

We continue to make progress towards our Image Activation goals with 39% of the Wendy's system now Image Activated.

1 out of 6 franchisees have already updated at least 60% of their restaurants, and 6 of our largest markets are also at least 60% Image Activated.

We applaud our franchise partners that are leading the way with this important initiative in making our restaurants a place our customers love to go.

Lastly, Image Activation provided a tailwind of 70 basis points to our North America same-restaurant sales in the quarter, and we expect IA to provide a tailwind of 70 basis points for the full year.

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 of $12 billion in systemwide sales.

In North America, systemwide sales growth outpaced same-restaurant sales by 1 full percentage point, driven by the positive benefits from our new restaurant development.

Internationally, we showed great year-over-year improvement of 13.4%, driven primarily by solid net new unit growth along with organic same-restaurant sales growth.

Japan, Chile and Indonesia all recorded very strong total sales growth, and their positive contributions more than offset the suppressed sales in the Caribbean, which were impacted by this year's storms.

We estimate the negative impact to be about 3% in the quarter, and we expect these headwinds to continue to impact our international business into the foreseeable future through the long road ahead for Puerto Rico.

Year-to-date through the third quarter, on a global basis, systemwide sales have grown 3.7%, which is 70 basis points ahead of our growth at this point last year.

We continue to be excited about the great work being done by all of our restaurant teams across the globe.

Buy and Flips continue to be a key strategic initiative for us as we strengthen the system by ensuring restaurants are in the hands of strong operators that are committed to long-term growth.

In the third quarter, the company did not facilitate any Buy and Flip transactions, but we have completed 410 so far this year and are now increasing our full year expectations to 500 to 550.

Buy and Flips as well as system optimization have allowed us to add about 60 new franchisees to our North American system since 2014.

Half of these additions have come from succession planning by our legacy franchisees, and the other half are franchisees that are completely new to the Wendy's system.

This healthy turnover has left us with a stronger base of franchisees that has financial and operational capabilities that will allow us for further expansion and growth.

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 are proud of our fresh and honest ingredients, helping create food our customers love.

The launch of our new chicken tenders with the Side of S'Awesome sauce as well as the introduction of our fresh baked cookies shows our dedication to continually innovating around our food.

In addition to introducing new innovative products, we will always remain focused on our core offerings and are pleased with the progress being made in some of our key brand health metrics.

Great tasting hamburgers, using real ingredients and having fresh food are all metrics that are resonating with our customers more and more.

As we have discussed over the past couple of quarters, we are very focused on improving our customer satisfaction scores and creating an experience that brings our customers back.

After implementing our new Voice of the Customer program a little over a year ago, we have seen high single-digit improvement in our overall satisfaction scores and have also seen year-over-year improvement in our consistency gap.

We are confident this program along with our customer experience evaluations and playbook will continue to help us make progress in this very important area.

A lot of our future growth and success is dependent on our franchisees, so it is imperative to ensure that they are aligned behind our growth initiatives and remain optimistic about the future at Wendy's.

At Investor Day in February, we shared the results of the 2016 FBR franchise survey and how we stacked up against our peers.

The 2017 survey results are now final and across the same 5 key metrics -- general satisfaction, financial opportunity, a sense of community, training and support, and leadership -- we are once again outperforming our peers.

This year, our outperformance has increased even further, and we have been named one of FBR's top 40 food and beverage franchise brands.

We are proud of the progress we have made thus far, but we are always focused on fostering strong relationships with our franchisees.

And the most compelling way to do that is by continuing to focus on the restaurant economic model.

Now, I'll pass the presentation over to GP to take you through our third quarter financial highlights.

Thanks, Todd.

Our third quarter results demonstrate the strength and resiliency of our highly franchised business model even while facing difficult industry dynamics and uneven prior year comparisons.

We're encouraged by our systemwide sales growth, higher adjusted EBITDA margins and significant enhanced cash flow generation; but acknowledge there's still work to be done.

Starting with company restaurant margins.

In the third quarter, our margins decreased 170 basis points year-over-year to 16.7%.

The decrease was primarily the result of short-term pressures from beef and bacon prices as well as our investment in chicken quality that was made earlier this year.

G&A expense was $53 million in quarter 3 compared to $58.9 million in 2016.

The 10.1% year-over-year decrease was mainly due to lower professional fees and savings from our system optimization initiatives.

Adjusted EBITDA was $96.9 million in the third quarter of 2017, a 3.3% decrease compared to the third quarter of last year.

Our 400 basis point improvement in adjusted EBITDA margin exemplifies our higher quality of earnings resulting from our system optimization initiatives.

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

Free cash flow continues to be strong with the year-to-date coming in at $123 million, which is an increase of 330.6% versus the prior year.

The significant improvement was driven by a reduction in capital expenditures as well as an increase in cash flow from operations.

We remain encouraged by our adjusted EBITDA margin improvement as well as the fact that we were able to overcome the sold restaurant EBITDA from system optimization through higher royalties and net rental income as well as savings in G&A.

However, headwinds in franchise fees driven by the sale of 156 company restaurants and 18 Buy and Flips transactions in 2016, as well as lower company restaurant margins caused a slight year-over-year decrease in adjusted EBITDA.

Moving now to adjusted earnings per share.

We ended the quarter down $0.02 when compared to 2016, driven by slightly lower adjusted EBITDA and unfavorability in the tax rate.

The year-over-year increase in the tax rate was driven by a favorable change in valuation allowances in the prior year.

Returning cash to shareholders remains a top priority for us.

Year-to-date, we have repurchased about 6 million shares for about $91 million, with 2.5 million shares for $38.4 million occurring in the third quarter.

We ended quarter 3 with $187 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 remain confident in our capital structure as it gives us the flexibility to accommodate all aspects of our capital allocation strategy, which includes investing in our business to drive future growth, a strong dividend and share repurchases.

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

On a trailing 12-month basis, our leverage ratio currently sits comfortably at 5.3x.

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

After analyzing year-to-date results and refining our forecast for the remainder of the year, we are tightening the range for North America same-restaurant sales to approximately 2% to 2.5%.

Company restaurant margins are now expected to be 17.5% to 18% for full year 2017, which is down slightly from our prior guidance of 18% to 18.5%.

With commodities and labor expectations remaining unchanged, the downward pressure on margin is due to lower-than-expected same-restaurant sales at company restaurants.

Despite the headwinds on company restaurant margins, we are reaffirming our adjusted EBITDA guidance range, which has been increased twice since our Investor Day in February and continues to reflect the positive benefit from our higher quality of earnings.

Our adjusted tax rate expectations have increased from 32%-to-34% to 34%-to-36%, primarily due to an unexpected state tax ruling resulting in additional deferred tax expense this year.

Due to the increased tax rate, we are updating our adjusted earnings per share guidance to $0.43 to $0.45.

We are also updating our ranges for capital and free cash flow.

With better visibility into full year results, we now expect capital to come in between $80 million and $85 million and free cash flow to end up between $170 million and $180 million.

We look forward to finishing 2017 strong and carrying momentum into 2018.

And with that, I'll 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 Monday, November 13, GP, Lauren Cutright and I will be in Boston for a 1-day roadshow hosted by Chris O'Cull of Stifel.

And on Tuesday, November 14, we will travel to New York to participate in the Morgan Stanley Global Consumer and Retail Conference.

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

And finally on Thursday, February 22, we plan to release our preliminary 2017 earnings along with our updated 2018 and long-term outlook 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 Matthew DiFrisco with Guggenheim.

My question is with respect to the pipeline and how we should think about '18 as far as early indications as sort of that 1% pace of growth.

Should the extra 0.5 point or so, or are those stores, those 20 or so stores that are moving into '18, is that incremental to the '18 pipeline?

Or are there similar guys who are going to be opening -- who are going to open up those stores are also on deck to be opening up '18, so there's only so much they can open, so not necessarily fully incremental to shift into '18.

Yes, Matt.

The pipeline for 2018 on new unit development remains strong.

As we did say on the call, we had some impacts, especially in Florida and Houston with the hurricanes and some of those units shifting into 2018.

Still a little early in the game to really understand, are those truly incremental to '18?

Or do things just shift between '18 and '19 when we look at the capacity from a human capital perspective to get all these projects done during the course of next year?

We'll give you a full visibility once we have that all locked down on our call in February when we put 2018 guidance.

We'll be in a better position with the joint capital planning with the franchise community to give you a firm estimate on that.

Understood.

And then can you just give us a little color on what was the improvement, or I guess the narrowing of the CapEx?

Was it just simply having a closer look at what these things -- what the cost of things were?

Or were them some items that perhaps in the comp environment or in the commodity cost environment you're deferring to next year as far as CapEx?

It's really a function of taking a closer look.

As you know, we had a very wide range of $10 million in the guidance.

We kind of narrowed it and no essential purchase are falling off.

We're doing what we need to do.

It's just a matter of having more visibility.

Your next question is from Andrew Strelzik with BMO Capital Markets.

Just one quick housekeeping item.

Given your company ownership of stores in Florida, was there a disproportionate impact on the -- relative to margins?

How much of the hurricanes actually impacted the company on margins in the quarter?

Andrew, this is Gunther.

We said like hurricanes from a top line point of view impacted us about 30 to 40 basis points of headwind.

So from a top line point of view, company was on the high end of it of about 40 basis points.

There was a small impact on margin year-over-year, but was actually too immaterial to call out separately.

The real driver of margin in the third quarter was commodities.

As you know, we have 230 basis points of adverse commodity, which really translates into about 7.5% commodity inflation.

We really did a good job on labor, like labor is 30 basis points adverse to prior year.

That actually really is a net inflation of 1%.

Labor inflation actually was about 4% in the quarter.

Our labor mitigation strategies actually is helping us to contain the labor headwinds that we have.

That's very helpful.

And then if I could just add one more.

The 7,500 global unit count target that you guys reiterated today, implies more than 4% development from 2018 to 2020 roughly.

So what's your level of confidence in actually achieving that?

And when do you anticipate we might start to see that bigger acceleration start to show up in the numbers recognizing that the commentary around development certainly today was very positive?

Andrew, a couple of points on this.

For the time being, you can still assume that 7,500 restaurants is the right planning number for 2020.

Again, we have different levels of growth, right?

So we have a little bit more of 2% CAGR in North America, and we have about an 18% development CAGR international, right?

So it's different components of growth.

And for the time being, the numbers stand, and we are pushing hard to get to those objectives.

We, obviously, are going to take the opportunity at the call in February to update those calls if we see fit.

Your next question comes from Will Slabaugh with Stephens.

I wanted to ask about the impact of the $5 Giant JBC deal.

How does it impact your traffic and ticket versus expectations?

And maybe more importantly, how did that $5-price-point affect those buying the 4 for $4?

And was there any notable cannibalization of your higher-priced combo meals on that?

Yes, Will, thanks for the question.

The $5 Giant JBC meal performed right to our expectations.

So we had hoped to trade up some consumers from the 4 for $4 really helped us on the penny profit front.

We did see that.

We knew that there could be some potential trade down from premium, but it was very minimal.

So net-net, it performed exactly how we would've expected.

And it's just part of the arsenal, right?

As you think about how do we continue to make sure we have a strong barbell strategy, we continue to look at things like $0.50 Frosty, 4 for $4, introduce things like the $5 meal.

We continue to move folks up and across that value menu.

But we know that we got to continue to keep strong messaging on the premium, too, along the way, which we did in the quarter with a Bacon Queso trio performance.

Got it.

And just a follow-up if I could on the comment you made around company store margins.

How much was the chicken quality investment versus beef and bacon pricing impact in the cost of goods year-over-year?

Will, the chicken impact was about 35 basis points of a headwind for us.

Your next question is from Jon Tower with Wells Fargo.

Just curious if you could talk about what's going on with the Buy and Flips and specifically, upping the number for this year?

Is there a good chance that next year we see lower than that targeted 200 stores that you talked about in the past?

Jon, as we said on the call, we didn't have any Buy and Flips in the third quarter.

We've upped the number now to 500 to 550 Buy and Flips on a full year basis.

And we've got to continue to work where we got franchisees that are looking at their succession planning and the timing of when they would want to move on out of the system and on the other things.

That's really what drove the increase this year, and we don't see it having any impact on the continued guidance moving forward.

As you know, we have a long tenured franchise system, and this is part of the healthy and natural turnover that we're seeing.

So we've continued to see a couple hundred Buy and Flips into the foreseeable future, and that's our planning expectation as of now.

Okay.

And then just the tailwind from the Image Activation came down slightly for this year.

Does that have to do with the -- similar to the new opening issues that you had for the year delays because of construction costs or anything like that?

Not delays on construction costs, just timing of when those reimages had opened during the course of the year.

They just opened a little bit later than we had originally planned, but that's just working through normal zoning and work with the locales.

We are getting the same lift as we always have; it's really just the timing.

So there's no deterioration in the program.

There's no deterioration in the performance.

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

Just a quick question, sort of a thought question on the industry.

I guess I'm sort of disappointed with the consumer strength lately in the fast food zone, given the fact that so many of the big chains, including Wendy's are playing your A game with the value, the food news, the restaurant reimaging.

God knows the franchisees are spending money.

And right now you have less of that deflation of food at supermarket headwind excuse: wages are going up, so people should be able to spend.

But the industry same-store sales growth is a whopping 1% with negative traffic.

So just wondering if you have any thoughts about that.

And then I have a follow-up on your free cash flow.

Yes.

So you're finally starting to see food at home, inflation start to tick up.

So it, actually, finally went inflationary in the most recent period, as you know, David.

So that gap is just starting to tighten, so you wouldn't see the full impacts of that delta really taking impact in the third quarter.

That said, with a lot of the traditional QSR folks playing a good game, you did see QSR traffic start to pick up late in the quarter.

So that is an encouraging sign.

But you do see across mid-scale, casual, and fine dining that traffic continues to be challenged.

And I think that's just a testament to the traditional QSR guys being in the right segment for the consumer needs: speed, convenience, affordability.

We continue to all up our quality games.

We continue to up our asset games with the reimaging of the restaurants.

We continue to up our game on the service experience in the restaurant.

A lot of the growth is driven by deal, but it is driven that way because the consumer economic model continues to be under pressure.

But we're seeing signs where that's starting to improve, too.

So that doom and gloom that you articulated, I think we're starting to see some of that pick up little bit in the QSR segment of the restaurant space.

I don't think you see it broadly across total restaurants.

Yes.

And on your free cash flow targets, they certainly through 2020 imply significant growth.

I think it's something near $100 million now for the midpoint.

How do you see that stepping up year by year?

Do you see that sort of ramping up later in that 3-year cycle or more evenly through the years?

I leave it there.

David, you're absolutely right; between now, 2017, and 2020, we are going to add another $100 million of free cash flow.

It's split basically $20 million in gradual reduction in capital and $80 million as a result of higher earnings.

And again, what is driving our earnings is still another 600 basis points in margin expansion, which is driven by G&A initiatives and obviously, unit growth and SRS growth.

We have not given, as you know, guidance for the years in between.

I can offer a little bit of a picture for 2018 that might help, right?

The tailwinds for '18 is clearly earnings growth, which is driven by our G&A reductions, which we have disclosed the pacing on this, as I said SRS growth and unit growth.

Definitely, you can expect in 2018 a gradual reduction in CapEx.

And don't forget, we also have year 2 of our core working capital initiative that we are kicking off really in the fourth quarter of this year, which majority of the effect will bleed into 2018.

Again, through transparency, headwinds are going to be the -- G&A restructuring plan is going to be an adverse effect on our cash flows in '18.

And again, we have disclosed that; it's in the range of $12 million to $13 million for 2018.

So that hopefully gives you enough picture in terms of what should happen from a pacing point of view.

Your next question is from Sara Senatore with Bernstein.

This is [Ashley Onafa] representing Sara.

Can you talk about your 2020 targets in the context of this quarter slightly lower results than what we might have anticipated?

So to the extent that you're holding the line on your EBITDA margin target, what are the offsets if restaurant margins stay lower for longer?

So overall, the way we have constructed the EBITDA guidance is we clearly had a small tailwind by taking the restaurant margin guidance down and taking the SRS guidance down slightly.

We were able to offset this but basically include increasing our Buy and Flip activities from 475 to about 500 to 550, so the line construct while we remain confident that we get to our EBITDA guidance for this year.

And then for longer term off of that base, nothing has fundamentally changed at all, Ashley.

So we still feel very comfortable that we have the initiatives in place to continue to spend restaurant margins.

We've got the pipeline in place to continue to drive new restaurant development, as GP said earlier, across North America and international.

And we have confidence that we have plans with QSR being the place to be to continue to drive that 2% to 3% sales growth for the long run.

Your next question is from Jason West with Crédit Suisse.

Just going back to the company operations, did you guys break out the same-store sales for company versus franchise stores in the quarter?

Yes.

So from a company perspective, we were down 0.5% in the company restaurants.

So if you look at it on a 2-year basis, system was 3.4%; company, on a 2-year, was 2.2%.

So there's a delta of about 120 basis points.

IA contributed a little bit.

We had a 70-basis point tailwind for the system, only a 40-basis-point system for the company as we're much further along on our IA journey with 75% of the company restaurants now IAed.

You'll also see some differences between franchise and company on pricing and on just the geography of where our restaurants are located.

We're a small sample size, at a little over 330 restaurants today.

But we know we've got some opportunities in a couple of markets in our company restaurants and need to continue to up our game and continue to perform well in those markets, too.

Okay.

Got it.

And the margin compression on the company side, mostly commodity-related.

What is the expectation?

You said commodity inflation was 7.5% in the third quarter.

I don't remember what you'd said the last 2 quarters.

So what does that imply for the fourth quarter then?

Yes, Jason.

We did not change our commodity outlook, so we still expect an inflation of about 3% to 4%.

It makes sense on the year-to-date basis.

We're sitting at about 3.3% inflation, so you can expect quarter 4 about in the same range.

Last thing, I guess with the industry environment being sort of deal-oriented.

You guys did take some price, I think, in the last quarter.

I mean did you feel like there was a bit of negative reaction to that in traffic?

Or do you think that wasn't really the issue here with the comps?

Great question on pricing.

No, we executed the pricing, as we look at it, it's definitely performed exactly in line with expectations.

We, obviously, had a little bit of traffic headwinds but overall, it created the net benefit that we expected to have.

So on a go-forward basis, obviously, pricing is an option we're continuing to look at, but for the time being that pricing went to plan.

Your next question is from Jeffrey Bernstein with Barclays.

Two questions.

One, just as you think about the QSR burger category, I know you talked about what you claimed, I guess, was difficult industry dynamics.

I'm just wondering if you could provide any color in terms of the market share change for Wendy's in the third quarter, maybe how that compares to the category and just the ability you think for the big 3 to all sustain comp momentum.

I think, GP, you mentioned you expect to finish 2017 strong.

I wasn't sure what -- if that was a reference to kind of the early part of the fourth quarter thus far.

And then I had one follow-up.

Yes, Jeff.

No, if you think about some of the business trends that we're seeing recently, we talked a little bit earlier that QSR is the place to be.

So we're seeing some growth in QSR in total, and it's not all equal across each of the subsets in the QSR category.

So with the work that all of the big 3 have been doing, you're seeing the burger category grow a little bit faster than folks like retail and subs deli and allows us to continue to gain some share in the hamburger subset.

That's in total for the industry.

Relative to Wendy's, we continue to hold our own, and we're very focused on category traffic share.

And we just said as part of our prepared remarks, that we're now 8 consecutive quarters of gaining or holding our category traffic share in the burger segment.

So we feel good that we continue to hold our own.

We continue to bring in more customers and continue to retain them for the long run.

Got it.

In terms of the sequential trend to the third quarter and into the fourth, is there any color you could provide on that?

We've heard some talk about a reacceleration, or a nice uptick going into the fourth quarter; and then more recently, perhaps, others saying softer in October and into November.

Jeff, the way we have thought about the guidance is, as you said, we have slightly lowered it to 2% to 2.5%.

So it really is an implied guidance for the fourth quarter of about 1% to 3%.

That's the range we have, and that's the range we're comfortable operating in.

And Jeff, and we've been pragmatic.

As you start to look at not just 2-year comps but look at 3-year comps as we start to really think about what we've been building sequentially, fourth quarter over fourth quarter over fourth quarter continues to be positive growth on positive growth on positive growth, so we're planning smartly, too.

Got it.

The other question which is on value.

I'm just wondering, qualitatively, how you think about best competing against your largest QSR burger peer that seemingly is getting more aggressive in terms of promoting value starting in coming months, especially as you now perhaps battling elevated commodity inflation.

I'm just wondering how you think about it within your barbell strategy going into '18.

Yes.

It's still a critical part of making sure that we continue to make our brand accessible to our customers, right?

When we think about how we want to win, right, we got to continue to tell our brand story, which is all about fresh, and we continue to stay consistent with that.

Now, move from 3 in 10 customers really understanding we have fresh in our restaurants to over 5 -- 5 in 10 today.

We know we got to win on food.

We continue to invest in the quality of our food, but we do know that you have to help our customers with value.

And those 3 things have to work hand-in-hand on both the high and the low.

And we need to continue to create some variety that works both for the consumer as well as the franchisees from a profitability perspective on the value side.

And that's why you see a nice mixed bag of things that we continue to do around keeping 4 for $4 fresh and ownable with how we continue to evolve that during the course of the year: bringing things in like $0.50 Frosty to drive urgency into the restaurants but drive some nice average checks; and then look at unique ways to continue to give offerings to trade folks up from those value items into things like the $5 giant JBC.

So it does take variety.

It does take consistency.

But it is a core part of our strategy to make sure we have a consistent high-low message out there to connect to all consumers.

Your next question is from John Ivankoe with JPMorgan.

First, just a follow-up on the value theme, and then I'll go with a different direction as well.

Obviously, McDonald's launching national value next year typically has had a lot of reaction in the market when that has happened.

Is there anything that you're doing tactically that we should be aware of to respond to that?

I mean I know you have a long-term strategy and what the brand's pillars are.

But should we expect some reaction and some preparation in terms of something that what could be a traffic-disruptive event for the entire industry?

No, I think, John, we want to continue to play our game, and it needs to balance on the high and the low, and you don't want to swing the pendulum one side too far to the other.

We want to continue to compete in value, but we like the win on the quality of the experience, the quality of the food and the quality of the total experience in our restaurants so the consumer says, any time they come to Wendy's, "It was worth what I paid." And we think we've got great tools.

We've tested a lot of different things.

We got a lot in the toolbox that we continue to bring forward.

But we do think staying -- keeping 4 for $4 fresh and ownable to Wendy's, finding some nice $5 price-pointed items like you're seeing now with the chicken tender $5 meal out in the marketplace, things like $0.50 Frosty.

Those all help.

But also bringing other things that can be nice check builders; like a $0.99 add-on cookie is another good opportunity to provide good value to the consumer while trading folks up on checks.

So I think it's the combination of all of those things, and we need to stay balanced on both the high and the low moving forward.

And do you think the industry needs to reestablish like $1 sandwiches or $2 slightly premium sandwiches?

I mean, does the pendulum swing back to where we're promoting $1 burgers, for example, on TV?

Yes.

No, I think going that low when you think about the margin implications to the franchise community versus the consumer get and the lift that you might get, I don't know if that's the right way to go and take folks that low.

What we've seen is a really nice response to bundled meals, right?

We said this for a long time: lunch is the biggest day-part in the QSR business.

We really need to continue to deliver solutions for a full lunch in that $4 to $6 price point.

That's why we continue to bring offerings there.

Our opportunity is how do you continue to drive continued throughput at that biggest day-part to satisfy the need of speed convenience with that affordability at that day-part, and technology can play a role to unlock more of that.

Very helpful.

And the other theme is on CapEx.

$80 million to $85 million in fiscal '17.

I think the guidance for '20, if I'm remembering correctly, is $60 million to $65 million.

What is the path to get there?

And is this -- can you have kind of a fluid active process to where you look at that CapEx number of something that could flex down to the extent that business conditions kind of present themselves?

Or just what's your thought as you get more into being just an overall capital-like company, how much that CapEx number could come down in the out years and potentially benefit shareholder returns?

John, our target for 2020 is $65 million.

And what we have said is kind of really a gradual reduction.

It's not kind of step changes as we're optimizing what we're spending our capital on.

Remember, there are kind of 3 capital buckets.

The first one is development capital.

So as we keep getting buildings down that cost less that will hopefully help us get that capital bucket down.

The second one is IT spending as we have actually had a lot of foundational investment in the base.

And we are going a little to be in a more maintenance mode; that's contributed to the reduction.

And there's a little bit more to be had on maintenance capital since we are 75% Image Activated in company restaurants.

So think about a gradual reduction over the next 3 years.

And I know at one point, we were talking about Build-to-Suits in Canada.

Is that still an active program?

And is that part of the $65 million in fiscal '20?

That's correct.

It's still an active program, and it's part of the $65 million.

Your next question comes from Jake Bartlett with SunTrust.

I wanted to dig in a little bit more to the third quarter and just you're -- in prior quarters, you had really kept pace with the other larger burger competitors.

And I just wanted to dig in a little bit more and try to understand why you think you stepped back a little bit and they gave some share?

Maybe within that question in the context of your High-Low strategy, it felt like you're really more low by the end of the quarter, and I'm wondering whether that might have had some impacts.

If you could comment, that would be helpful.

Yes, if you think about within the quarter, we continue to hold share, and specialty traffic share in the category, which is really important.

And we feel good that we had a nice balance.

And I think you always got to look at it in the context of 2-year comps.

So our 2-year at 3.4% is in line with one of our competitors and slightly behind one other.

But there's very few winners and a lot of losers right now in the restaurant space.

And we feel good that we continue to compete, and we continue to put growth on top of growth.

And we're very proud of putting together 19 consecutive same-restaurant sales quarter against a difficult consumer environment on many of those quarters.

But we are attracting more customers more often into our restaurants over the last 4 years.

And that's an important bellwether to continue to make sure we have a strong restaurant economic model for many years into the future.

Okay.

And I think there is probably some concern among investors that all 3 of the larger players can't be successful at once.

And how do you answer that kind of question more directly in terms of your ability to compete on whatever value has to come down the road, but also kind of maintaining the High-Low strategy?

The consumer has a lot of choices out there.

And if you go back in history, there are several times as you can point to, where all of the big 3 have grown actually more than 3% in that particular quarter, and that has happened 3, 4 times in the recent past.

So that's the first answer when you think about it.

Second answer is we're in the QSR, traditional QSR space.

Speed, convenience, affordability, as I said earlier, are so important to the consumer today.

And you're not just competing on price.

You're competing on value: value of the food, value of the experience in the restaurant, the environment that we're creating.

And we're all investing in that, and we all have scale to withstand some of the pressures that a lot of others have, whether it be labor pressure or commodity pressure to continue to make sure we create experiences that bring our customers back into our restaurants.

And we feel that we're really well positioned on all of those fronts, and we can really fall back on to the quality of our food, right?

Quality is our Recipe has been our [building] since day 1. We continue to invest back and renovate into our core food offerings.

And we continue to scream from the rooftops, fresh, made-to-order, full customization are things that can set us apart.

Great.

And then lastly, maybe an early look on your expectations for commodity costs in '18.

And I believe '17 is kind of, I think, playing out for a number of players a little bit higher than originally expected, but what's your early read on '18?

And what do you think that will mean for the kind of competition among value or the value end of the spectrum?

Jake, quarter 3 was definitely a spike and it's probably a onetime bubble with the 7.5% inflation that we had seen mainly behind beef and bacon.

We've clearly seen in the meantime that, that has come down.

It's a little bit too early to actually talk to us -- talk about 2018.

Again, we're going to watch this in the next couple of months; and when we out, end of February, with our guidance for '18, it will become a little bit clear.

But clearly, I would say what we saw in quarter 3 is not the norm.

I think it was the exception.

Your next question comes from John Glass with Morgan Stanley.

First, just on Image Activation, would you just remind us what the year 1 lift you're seeing currently when you image activate a store, and what the years 2 and 3 comp trajectory looks like?

Just so I understand what the tail-off progression is.

Yes, John, so it's been very consistent.

We've got many years of performance.

And now with 39% of the system reimaged, we consistently see lifts in that 7% to 10% range in year 1. And then what you see in year 2 and beyond, now that we've got a lot of history, is those restaurants grow in line with the rest of the system.

So we've attracted lapsed.

We've attracted new, and then we've retained those customers into years 2, 3 and 4.

That's helpful.

And then taking it in a totally different direction, talk about maybe just international and your confidence, for example, in 2018 kind of the growth rate of international.

Where are the markets that you're seeing greatest numbers in development?

Maybe the comp trajectory; they open at much lower average unit volumes, for example, in the U.S. and then grow fast or not.

And just maybe at a high-level across all markets on an average, what the economics look like to you, so make sure we understand that, as that becomes a bigger piece of your business over the next couple of years.

First off, if you look at the average AUVs across international, they are much lower than what you would have in North America.

They're about 1.1 million as of the end of last year.

But all markets aren't created equal, right?

You've got some lower AUV markets across Asia.

You've got some very high AUV markets across the islands and to the Southern Cone of South America.

So it's really a function of where we're growing with great partners.

Where we're seeing the growth right now is in a couple of markets.

And it's been really a testament to the narrow and deep strategy that the team has been executing.

So in Japan, we're seeing a lot of growth and some nice same-restaurant sales growth beyond the new development growth.

We're up to 24 restaurants now in Japan, and that's a testament to our partner of converting those first kitchens into Wendy's first kitchens.

And just as a reminder, there's 136 first kitchens out there that they're working to convert over time.

Now, we're seeing some really nice growth in the beef eating market.

So we got great franchisee that supports us both in Argentina and Chile, and we're seeing some nice growth in Chile both from a development and same-restaurant sales basis.

And then in Indonesia, we're up to 75 restaurants.

So much lower AUVs but a great economic model.

And clearly the brand's resonating with our customers in those markets.

So the strategy is really focused on kind of the 7 core markets that we articulated at Investor Day.

And you're seeing the benefits of it, because you're seeing the growth across those markets.

And I think it's also worth noting that we are slightly ahead on plan.

Remember at Investor Day, we said we would grow units this year by 12.5%.

We actually increased that to 14% and 500 restaurants.

And the way to look at the economics from a royalty standpoint on average?

So royalties on average should be in line with the 4% system.

It varies a little lower, a little higher depending on market and how we're actually trying to work growth.

But on average, it's pretty darn close to the average that we have.

Your next question is from Matt McGinley with Evercore ISI.

I have a question on the margin guidance as it relates to the lower-than-expected comp comment that GP made.

You didn't change the labor or commodity outlook, but you lowered the overall restaurant margin guide.

And I'm not sure if the comment on the comp was kind of a rearview mirror comment about the margin decline that you had in the third quarter based on the comp, or if that was a prospective comment about trends continue to remain tough into the fourth quarter.

No, just a look at our latest outlook on our company business.

And if you look at the comment we made earlier being down 0.5% on company restaurants in Q3, that was not to our plan.

That provided pressure on deleveraging on our restaurants, and that just translated through into our full year margin guidance.

Okay, but you would expect less margin pain in the fourth quarter based on the full year guide, right?

Absolutely, Matt.

And a lot of that is a function of, we did get hit hard not on just the deleveraging with the sales being down, but as GP said earlier, we did see this big spike in beef and bacon in the third quarter.

So you'll see that moderate into the fourth quarter.

Got it.

And on the free cash flow guidance, you're obviously well on your way to getting that guide based on your year-to-date results.

But you narrowed it a little bit and you raised it a little bit on a free cash flow standpoint.

But there's always these year-end nuances of working capital that could add volatility, and I think you had a little bit of that last year.

So I guess, the question is, how good is the visibility on that range and is there upside or downside risk to that 170 to 180 range?

Matt, you are right.

It's a little bit of volatility at year-end.

But the way we are thinking about this, we have strong tailwinds on earnings, right, with the implied guidance we have for the fourth quarter, we're going to have strong EBITDA growth and therefore, income growth in the fourth quarter.

And we have our core working capital initiatives starting in the fourth quarter that's going to contribute and help.

Clearly, we have still -- if you do the year to go on capital, we have a good amount of capital to spend.

Net-net, we think the estimate that we have is pragmatic, and we have a very good chance in visibility to catch to it.

Your next question is from Michael Gallo with CL King.

I just want to delve in a little bit on delivery.

It seems like you've really accelerated the cadence of the rollout at least from what you conveyed last quarter where it was really just being tested in a few markets.

So I was wondering if you could give us an update on kind of what you're seeing and what makes you excited enough to put it in 2,500 restaurants by year-end.

We are excited.

So what we've seen in our continued results in Columbus and Dallas really gave us the encouragement to go bigger and partner with DoorDash on delivery.

As we said on the call, 48 markets here by the end of the year, almost 2,500 restaurants that will be participating in delivery, function of seeing nice higher average checks.

Still early, so I won't give out the specifics, but we're seeing some significantly higher checks.

But we're also seeing a great partner in DoorDash getting deliveries to the consumer in less than 30 minutes from the time they order.

So as they deliver one order per delivery, high integrity of the food, too.

So the consumer has been very pleased with our food.

It's prepared fresh made-to-order when they come to the restaurant.

It's delivered quickly.

And you're seeing that in the results.

So we're at 4.6 out of 5 stars.

And I think we're one of the highest rated QSR experiences in DoorDash.

So that gave us all the encouragement.

Still see a lot of incrementality, especially in the dinner and evening day-parts.

But we do see a lot of transaction lifts in help and support at that busy lunch day-part too.

So all of those lined us up to have the encouragement to go faster and bigger with a good partner.

And should we think about that going most of the system some time in 2018?

Really a function of making sure that we got delivery partners in all of the markets.

So we'll go fast where DoorDash is today.

We'll have to supplement in markets where they're not with other folks.

But we will work hard to continue to expand the access to our brand and to our food wherever we can with the right partners.

Your next question is from Greg Badishkanian with Citi.

This is actually Fred Wightman on for Greg.

In that 30 to 40-basis-point impact you highlighted on same-store sales, is that just from lost operating days?

Does it include an estimate for disruptions?

And then are those markets sort of back at a normalized run rate yet?

[Greg], it's actually complete analysis.

It takes into account that we had the closures of 1 to 3 days depending what restaurant you looked at.

And then also post-reopening, we are comparing, basically, actual business performance with the respective trends.

And any incrementality we might have (technical difficulty) is being netted off with the negative impact on closures.

Our next question comes from the line of Dennis Geiger with UBS.

I'm wondering if you could talk a bit more about mobile kiosks, loyalty initiatives.

And anything new you've seen thus far, including in the test, perhaps?

And beyond that, anything you could share with your thoughts on sort of ranking same-store sales drivers into '18, or perhaps highlight which you're most excited about?

Yes.

So still in the early innings of rolling out the technology into our restaurants.

So we're almost to 100 kiosks in restaurants, still on track to have 300 by the end of the year.

Probably a little slower than we would have hoped, but we are seeing nice results.

We do see a much higher average check than the traditional dine-in order.

When you get people into a kiosk, it's easy to suggestive sell and trade folks up.

It does unlock throughput at lunch.

And it's creating a great customer experience based on the feedback that we're hearing as they've ordered through the kiosk.

What we've done is made sure that the kiosk order design is exactly the same as our mobile ordering design.

We got about 200 locations across 12 states up on mobile ordering, but still on track to have 75% of the system enabled to go on mobile ordering by the end of the year, and the majority of the system ready to go by the end of Q1 next year.

And still small sample size, but we do see much higher average checks on the mobile ordering.

And again, it can unlock more throughput in our restaurants and provide more access to the brand.

As we think about going into 2018, technology needs to play a big role to better connect to the consumer, whether it's kiosk, mobile ordering, mobile offers, the work that we're doing on the loyalty program, as well as delivery, I think the combination of all of those get us excited that we can continue to connect to the customers.

The work that we continue to do on fresh beef and the work we continue to do on renovating our food, to have the preferred quality food in the QSR segment is one that will continue to keep the pressure on.

And we feel good that we've got the partnership with our franchise community to really help us bring The Wendy's Way to life to ensure that the consumer does have food I love, and it's a great place to go, and it's an experience that brings me back.

So all 3 of those elements actually drive that behavior worth what I pay, so they continue to come back more and more.

So it's a combination of all of those things that make us feel good that we've got a strong plan, we're building a stronger system and we're working as one to continue to execute to bring in more customers more often.

We have time for one additional question.

Our last question will come from the line of Gregory Francfort with Bank of America.

I just have 2 quick ones.

One is just going back to the mobile ordering.

Are you seeing customers use that more for in-store orders or drive-thru?

I guess, how are customers behaving with using mobile ordering in terms of the operational flow of the stores?

Yes.

Sample size is so small, and we got so few mobile orders, it is -- right now, we're seeing kind of balance between delivery and -- drive-thru and dine-in.

But to be honest, the number of orders, because we haven't created the awareness yet, is quite small, so it's hard to really interpolate anything from that.

Understood.

And then maybe going back to Michael's question on delivery.

Maybe not necessarily what the average checks you've seen, but what sort of average check levels do you think you need for the orders to be economical to you and also your partners?

And then how do you get check up to those levels in what has traditionally been maybe a lower price point segment?

How do you build that check?

Is it through tying bundles together?

Is it through advertising?

I'm just trying to think of how this plays out in terms of delivery for the quick service segment.

That's the beauty that we like with a partner like DoorDash.

It really hasn't impacted us at all operationally from the restaurant.

And the structure that we have on the commissions with them is very reasonable, especially as these are highly incremental purchases that the consumers have.

And so we feel good about that.

We feel good about making sure we got a price point that works ultimately for the consumer.

So it works for the consumer economic model.

It works for the restaurant-level economic model and creates a great experience because we're delivering the food quickly with high integrity as they would expect along the way.

So when you start to think about what average check it takes to actually feel good about things, we're not really focused on that.

We're focused on the incrementality of the business and the overall economic equation for both the restaurant and the consumer.

And that's working for us right now in test, and that's why we're rolling it out now.

The opportunity is, you end up bringing more folks that are sitting around the home.

So food at home is our biggest competitor; rather than just having 1 or 1.5 orders per order, you end up having 3 or 4 orders per order because it's being delivered.

And you drive the economy of one delivery for a family, which is a big part of the equation.

Thank you for participating in today's conference.

This does conclude the call.

You may now disconnect.